17262 Federal Register / Vol. 62, No. 68 / Wednesday, April 9, 1997 / Notices

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

2 17 CFR 240.19b–4.

3On March 27, 1997, Nasdaq filed Amendment

No. 1 to the proposed rule change. On April 1,

1997, Nasdaq filed Amendment No. 2 to the

proposed rule change. Amendment No. 1 and

Amendment No. 2 make technical and conforming

changes to the proposed rule filing. See letter from

Robert E. Aber, Vice President and General Counsel,

Nasdaq to Katherine England, Assistant Director,

Commission, dated March 27, 1997 and letter from

Robert E. Aber, Vice President and General Counsel,

Nasdaq to Katherine England, Assistant Director,

Commission, dated April 1, 1997.

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–38469; International Series

Release No. 1070; File No. SR–NASD–97–

16]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the National Association of Securities

Dealers, Inc. Relating to Revision of

the Listing Standards for The Nasdaq

Stock Market, Inc.

April 2, 1997.

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

Securities Exchange Act of 1934

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

notice is hereby given that on March 3,

1997,3 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

(‘‘Commission’’) the proposed rule

change as described in Items I, II and III

below, which Items have been prepared

by the self-regulatory organization. The

Commission is publishing this notice to

solicit comments on the proposed rule

change from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

Nasdaq proposes to amend Rules

4200, 4300, 4310, 4320, 4400, 4420,

4450, 4460, 4470 and 4480 of the NASD

to revise the listing standards for

Nasdaq. Below is the text of the

proposed rule change. Proposed new

language is in italic; proposed deletions

are in brackets.

All references to ‘‘the Association’’ in

Rules 4300 through 4480 inclusive

should be replaced with ‘‘Nasdaq,’’

except in Rule 4300, Rule 4310(c)(16),

Rule 4320(e)(15), Rule 4400, Rule

4420(f) and Rule 4420(g) which are

amended as indicated, below.

4200. Definitions.

For purposes of the Rule 4000 Series,

unless the context requires otherwise:

(a)—(f) No change.

[(g) ‘‘Capital and surplus’’ means total

stockholders’ equity as presented in

accordance with generally accepted

accounting principles as reflected on the

issuer’s statement of financial condition

or comparable statement.]

(h)—(j) Renumbered as (g)—(i).

(j) ‘‘Independent director’’ means a

person other than an officer or

employee of the company or its

subsidiaries or any other individual

having a relationship which, in the

opinion of the company’s board of

directors, would interfere with the

exercise of independent judgment in

carrying out the responsibilities of a

director.

(k)—(aa) No change.

(bb) ‘‘Round lot holder’’ means a

holder of a normal unit of trading.

(bb)—(dd) Renumbered as (cc)—(ee).

4300. Qualification Requirements For

Nasdaq Stock Market Securities

The Nasdaq Stock Market [The

Association, as operator of The Nasdaq

Stock Market,] is entrusted with the

authority to preserve and strengthen the

quality of and public confidence in its

market. The Nasdaq Stock Market

stands for integrity and ethical business

practices in order to enhance investor

confidence, thereby contributing to the

financial health of the economy and

supporting the capital formation

process. Nasdaq issuers, from new

public companies to companies of

international stature, by being included

in Nasdaq, are publicly recognized as

sharing these important objectives of the

Nasdaq Stock Market.

No further change.

4310. Qualification Requirements for

Domestic and Canadian Securities

To qualify for inclusion in Nasdaq, a

security of a domestic or Canadian

issuer shall satisfy all applicable

requirements contained in paragraphs

(a) or (b), and (c) hereof.

(a) No change.

(b) No change.

(c) In addition to the requirements

contained in paragraph (a) or (b) above,

and unless otherwise indicated, a

security shall satisfy the following

criteria for inclusion in Nasdaq:

[(1) For initial and continued

inclusion, the issue shall have two

registered and active market makers,

one of which may be a market maker

entering a stabilizing bid.]

(1) For initial inclusion, the issue

shall have three registered and active

market makers, and for continued

inclusion, the issue shall have two

registered and active market makers,

one of which may be a market maker

entering a stabilizing bid.

[(2) For initial inclusion, the issuer

shall have total assets of at least $4

million. For continued inclusion, the

issuer shall have total assets of at least

$2 million. An issuer’s total assets will

be determined on the basis of a balance

sheet prepared in accordance with

generally accepted accounting

principles. Assets that are temporary or

restricted in their use will be excluded

from the determination of total assets.]

[(3) For initial inclusion, the issuer

shall have capital and surplus of at least

$2 million. For continued inclusion, the

issuer shall have capital and surplus of

at least $1 million. Only issues of

common and preferred stock will be

included in capital and surplus.

Debentures and redeemable securities

with the redemption provision within

the sole control of the holder will be

excluded from the determination of

capital and surplus.]

(2)(A) For initial inclusion, the issuer

shall have:

(i) net tangible assets of $4 million;

(ii) market capitalization of $50

million; or

(iii) net income of $750,000 in the

most recently completed fiscal year or in

two of the last three most recently

completed fiscal years.

(B) For continued inclusion, the issuer

shall maintain:

(i) net tangible assets of $2 million;

(ii) market capitalization of $35

million; or

(iii) net income of $500,000 in the

most recently completed fiscal year or in

two of the last three most recently

completed fiscal years.

(3) For initial inclusion, the issuer

shall have an operating history of at

least one year or market capitalization

of $50 million.

(4) For initial inclusion, common or

preferred stock shall have a minimum

bid price of [$3] $4 per share. For

continued inclusion the minimum bid

price per share shall be $1 [, provided

however that an issuer shall not be

required to maintain the $1 per share

minimum bid price if it maintains

market value of public float of $1

million and $2 million in capital and

surplus].

(5) No change.

(6) In the case of common stock, there

shall be at least 300 round lot holders

of the security. An account of a member

that is beneficially owned by a customer

(as defined in Rule 0120) will be

considered a holder of a security upon

appropriate verification by the member.

(7) In the case of common stock, there

shall be at least [100,000] 1,000,000

publicly held shares for initial inclusion

and 500,000 publicly held shares for

continued inclusion. For initial

inclusion such shares shall have a

market value of at least [$1] $5 million.
Federal Register / Vol. 62, No. 68 / Wednesday, April 9, 1997 / Notices 17263

For continued inclusion such shares

shall have a market value of at least

[$200,000] $1 million. Shares held

directly or indirectly by any officer or

director of the issuer and by any person

who is the beneficial owner of more

than 10 percent of the total shares

outstanding are not considered to be

publicly held.

(8)(A) No change.

(B) A failure to meet the continued

inclusion requirements for minimum

bid price and market value of public

float shall be determined to exist only

if the deficiency for the applicable

criterion continues for a period of [10]

30 consecutive business days. Upon

such failure, the issuer shall be notified

promptly and shall have a period of 90

calendar days from such notification to

achieve compliance with the applicable

continued inclusion standard.

Compliance can be achieved by meeting

the applicable standard for a minimum

of 10 consecutive business days during

the 90 day compliance period.

(9)—(15) No change.

(16) Except in unusual circumstances,

the issuer shall make prompt disclosure

to the public through the news media of

any material information that would

reasonably be expected to affect the

value of its securities or influence

investors’ decisions and shall, prior to

the release of the information, provide

notice of such disclosure to Nasdaq’s

Market Watch Department [the

Association’s Market Surveillance

Department].*

*This notice shall be made to the

Market Watch [Market Surveillance]

Department at 9513 Key West Avenue,

Rockville, Maryland 20850–3389. The

telephone number is 1–800–537–3929,

(301) 590–6411, or from 7 p.m. to 8 a.m.

Eastern Time, (301) 590–6413. The fax

number is (301) 590–6482.

(17)—(24) No change.

(25) Corporate Governance

Requirements—Nasdaq shall review the

issuer’s past corporate governance

activities when the issuer’s securities

were traded on or after withdrawal from

Nasdaq or a securities exchange which

imposes corporate governance

requirements. Based on such review,

Nasdaq may take any appropriate

action, including placing of restrictions

on or additional requirements for

listing, or the denial of listing of a

security if Nasdaq determines that there

have been violations or evasions of such

corporate governance standards.

Determinations under this

subparagraph shall be made on a caseby-case basis as necessary to protect

investors and the public interest.

(A) Distribution of Annual and Interim

Reports

(i) Each issuer shall distribute to

shareholders copies of an annual report

containing audited financial statements

of the company and its subsidiaries. The

report shall be distributed to

shareholders a reasonable period of

time prior to the company’s annual

meeting of shareholders and shall be

filed with Nasdaq at the time it is

distributed to shareholders.

(ii) Each issuer which is subject to

SEC Rule 13a–13 shall make available

copies of quarterly reports including

statements of operating results to

shareholders either prior to or as soon

as practicable following the company’s

filing of its Form 10–Q with the

Commission. If the form of such

quarterly report differs from the Form

10–Q, the issuer shall file one copy of

the report with Nasdaq in addition to

filing its Form 10–Q pursuant to Rule

4310(c)(14). The statement of operations

contained in quarterly reports shall

disclose, as a minimum, any substantial

items of an unusual or nonrecurrent

nature and net income before and after

estimated federal income taxes or net

income and the amount of estimated

federal taxes.

(iii) Each issuer which is not subject

to SEC Rule 13a–13 and which is

required to file with the Commission, or

another federal or state regulatory

authority, interim reports relating

primarily to operations and financial

position, shall make available to

shareholders reports which reflect the

information contained in those interim

reports. Such reports shall be made

available to shareholders either before

or as soon as practicable following filing

with the appropriate regulatory

authority. If the form of the interim

report provided to shareholders differs

from that filed with the regulatory

authority, the issuer shall file one copy

of the report to shareholders with

Nasdaq in addition to the report to the

regulatory authority that is filed with

Nasdaq pursuant to Rule 4310(c)(14).

(B) Independent Directors

Each issuer shall maintain a

minimum of two independent directors

on its board of directors.

(C) Audit Committee

Each issuer shall establish and

maintain an Audit Committee, a

majority of the members of which shall

be independent directors.

(D) Shareholder Meetings

Each issuer shall hold an annual

meeting of shareholders and shall

provide notice of such meeting to

Nasdaq.

(E) Quorum

Each issuer shall provide for a

quorum as specified in its by-laws for

any meeting of the holders of common

stock; provided, however, that in no

case shall such quorum be less than

331⁄3 percent of the outstanding shares

of the company’s common voting stock.

(F) Solicitation of Proxies

Each issuer shall solicit proxies and

provide proxy statements for all

meetings of shareholders and shall

provide copies of such proxy solicitation

to Nasdaq.

(G) Conflicts of Interest

Each issuer shall conduct an

appropriate review of all related party

transactions on an ongoing basis and

shall utilize the company’s Audit

Committee or a comparable body of the

board of directors for the review of

potential conflict of interest situations

where appropriate.

(H) Shareholder Approval

(i) Each issuer shall require

shareholder approval of a plan or

arrangement under subparagraph a.

below or, prior to the issuance of

designated securities under

subparagraph b., c., or d. below:

a. when a stock option or purchase

plan is to be established or other

arrangement made pursuant to which

stock may be acquired by officers or

directors, except for warrants or rights

issued generally to security holders of

the company or broadly based plans or

arrangements including other

employees (e.g. ESOPs). In a case where

the shares are issued to a person not

previously employed by the company,

as an inducement essential to the

individual’s entering into an

employment contract with the company,

shareholder approval will generally not

be required. The establishment of a plan

or arrangement under which the amount

of securities which may be issued does

not exceed the lesser of 1% of the

number of shares of common stock, 1%

of the voting power outstanding, or

25,000 shares will not generally require

shareholder approval;

b. when the issuance will result in a

change of control of the issuer;

c. in connection with the acquisition

of the stock or assets of another

company if:

1. any director, officer or substantial

shareholder of the issuer has a 5% or

greater interest (or such persons

collectively have a 10% or greater

interest), directly or indirectly, in the
17264 Federal Register / Vol. 62, No. 68 / Wednesday, April 9, 1997 / Notices

company or assets to be acquired or in

the consideration to be paid in the

transaction or series of related

transactions and the present or

potential issuance of common stock, or

securities convertible into or exercisable

for common stock, could result in an

increase in outstanding common shares

or voting power of 5% or more; or

2. where, due to the present or

potential issuance of common stock, or

securities convertible into or exercisable

for common stock, other than a public

offering for cash:

A. the common stock has or will have

upon issuance voting power equal to or

in excess of 20% of the voting power

outstanding before the issuance of stock

or securities convertible into or

exercisable for common stock; or

B. the number of shares of common

stock to be issued is or will be equal to

or in excess of 20% of the number of

shares or common stock outstanding

before the issuance of the stock or

securities; or

d. in connection with a transaction

other than a public offering involving:

1. the sale or issuance by the issuer

of common stock (or securities

convertible into or exercisable for

common stock) at a price less than the

greater of book or market value which

together with sales by officers, directors

or substantial shareholders of the

company equals 20% or more of

common stock or 20% or more of the

voting power outstanding before the

issuance; or

2. the sale or issuance by the

company of common stock (or securities

convertible into or exercisable common

stock) equal to 20% or more of the

common stock or 20% or more of the

voting power outstanding before the

issuance for less than the greater of

book or market value of the stock.

(ii) Exceptions may be made upon

application to Nasdaq when:

a. the delay in securing stockholder

approval would seriously jeopardize the

financial viability of the enterprise; and

b. reliance by the company on this

exception is expressly approved by the

Audit Committee or a comparable body

of the board of directors.

A company relying on this exception

must mail to all shareholders not later

than ten days before issuance of the

securities a letter alerting them to its

omission to seek the shareholder

approval that would otherwise be

required and indicating that the Audit

Committee or a comparable body of the

board of directors has expressly

approved the exception.

(iii) Only shares actually issued and

outstanding (excluding treasury shares

or shares held by a subsidiary) are to be

used in making any calculation

provided for in this subparagraph

(25)(H)(i)d.1. Unissued shares reserved

for issuance upon conversion of

securities or upon exercise of options or

warrants will not be regarded as

outstanding.

(iv) Voting power outstanding as used

in this Rule refers to the aggregate

number of votes which may be cast by

holders of those securities outstanding

which entitle the holders thereof to vote

generally on all matters submitted to the

company’s security holders for a vote.

(v) An interest consisting of less than

either 5% of the number of shares of

common stock or 5% of the voting

power outstanding of an issuer or party

shall not be considered a substantial

interest or cause the holder of such an

interest to be regarded as a substantial

security holder.

(vi) Where shareholder approval is

required, the minimum vote which will

constitute shareholder approval shall be

a majority of the total votes cast on the

proposal in person or by proxy.

(26) Listing Agreement

Each issuer shall execute a Listing

Agreement in the form designated by

Nasdaq.

(27) Peer Review

(A) Each issuer must be audited by an

independent public accountant that:

(i) has received an external quality

control review by an independent public

accountant (‘‘peer review’’) that

determines whether the auditor’s system

of quality control is in place and

operating effectively and whether

established policies and procedures and

applicable auditing standards are being

followed; or

(ii) is enrolled in a peer review

program and within 18 months receives

a peer review that meets acceptable

guidelines.

(B) The following guidelines are

acceptable for the purposes of

subparagraph (c)(27):

(i) The peer review should be

comparable to AICPA standards

included in Standards for Performing on

Peer Reviews, codified in the AICPA’s

SEC Practice Section Reference Manual;

(ii) The peer review program should

be subject to 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; and

(iii) The administering entity and the

independent oversight body of the peer

review program must, as part of their

rules of procedure, require the retention

of the peer review working papers for 90

days after acceptance of the peer review

report and allow Nasdaq access to those

working papers.

(d) No change.

4320. Qualification Requirements for

Non-Canadian Foreign Securities and

American Depositary Receipts

To qualify for inclusion in Nasdaq, a

security of a non-Canadian foreign

issuer, an American Depositary Receipt

(ADR) or similar security issued in

respect of a security of a foreign issuer

shall satisfy the requirements of

paragraphs (a), (b) or (c), and (d) and (e)

of this Rule.

(a)—(d) No change.

(e) In addition to the requirements

contained in paragraphs (a), (b) or (c),

and (d), the security shall satisfy the

following criteria for inclusion in

Nasdaq:

(1) [For initial and continued

inclusion, the issue shall have two

registered and active market makers.]

For initial inclusion, the issue shall

have three registered and active market

makers, and for continued inclusion,

the issue shall have two registered and

active market makers. A failure to meet

the continued inclusion requirement for

number of market makers shall be

determined to exist only if the

deficiency continues for a period of 10

consecutive business days. Upon such

failure the issuer shall be notified

promptly and shall have a period of 30

calendar days from such notification to

achieve compliance with the market

maker requirements.

(2) [For initial inclusion, the issuer

shall have total assets of at least U.S. $4

million. For continued inclusion, the

issuer shall have total assets of at least

U.S. $2 million.]

(A) For initial inclusion, the issuer

shall have:

(i) net tangible assets of U.S. $4

million;

(ii) market capitalization of U.S. $50

million; or

(iii) net income of U.S. $750,000 in

the most recently completed fiscal year

or in two of the last three most recently

completed fiscal years.

(B) For continued inclusion, the issuer

shall maintain:

(i) net tangible assets of U.S. $2

million;

(ii) market capitalization of U.S. $35

million; or

(iii) net income of U.S. $500,000 in

the most recently completed fiscal year

or in two of the last three most recently

completed fiscal years.

(C) An issuer’s [total] net tangible

assets will be determined on the basis

of a balance sheet prepared in

accordance with U.S. generally accepted
Federal Register / Vol. 62, No. 68 / Wednesday, April 9, 1997 / Notices 17265

accounting principles or those

accompanied by detailed schedules

quantifying the differences between U.S.

generally accepted accounting

principles and those of the issuer’s

country of domicile. [Assets that are

temporary or restricted in their use will

be excluded from the determination of

total assets.]

[(3) For initial inclusion, the issuer

shall have capital and surplus of at least

U.S. $2 million. For continued

inclusion, the issuer shall have capital

and surplus of at least U.S. $1 million.

Only issues of common, preferred or

equivalent stock will be included in

capital and surplus. Debentures and

redeemable securities with the

redemption provision within the sole

control of the holder will be excluded

from the determination of capital and

surplus.]

[(4)] (3) In the case of a convertible

debt security, for initial inclusion, there

shall be a principal amount outstanding

of at least U.S. $10 million. For

continued inclusion, there shall be a

principal amount outstanding of at least

U.S. $5 million.

[(5)] (4) In the case of foreign shares,

there shall be at least 300 round lot

holders of the security. An account of a

member that is beneficially owned by a

customer (as defined in Rule 0120) will

be considered a holder of a security

upon appropriate verification by the

member.

[(6)] (5) In the case of foreign shares,

there shall be at least [100,000]

1,000,000 publicly held shares for initial

inclusion and 500,000 publicly held

shares for continued inclusion. Shares

held directly or indirectly by any officer

or director of the issuer and by any

person who is the beneficial owner of

more than 10 percent of the total shares

outstanding are not considered to be

publicly held.

(7)—(15) renumbered as

subparagraphs (6)—(14)

(15)[16] Except in unusual

circumstances, the issuer shall make

prompt disclosure to the public in the

United States through international wire

services or similar disclosure media of

any material information that would

reasonably be expected to affect the

value of its securities or influence

investor’ decisions and shall, prior to

the release of the information, provide

notice of such disclosure to Nasdaq [the

Association].*

*This notice shall be made to the

Market Watch [Market Surveillance]

Department at 9513 Key West Avenue,

Rockville, Maryland 20850–3389. The

telephone number is 1–800–537–3929,

(301) 590–6411, or from 7 p.m. to 8 a.m.

Eastern Time, (301) 590–6413. The fax

number is (301) 590–6482.

(17)—(21) renumbered as

subparagraphs (16)—(20)

(21) Corporate Governance

Requirements—No provisions of this

subparagraph shall be construed to

require any foreign issuer to do any act

that is contrary to a law, rule or

regulation of any public authority

exercising jurisdiction over such issuer

or that is contrary to generally accepted

business practices in the issuer’s

country of domicile. Nasdaq shall have

the ability to provide exemptions from

the applicability of these provisions as

may be necessary or appropriate to

carry out this intent.

Nasdaq shall review the issuer’s past

corporate governance activities when

the issuer’s securities were traded on or

after withdrawal from Nasdaq or a

securities exchange which imposes

corporate governance requirements.

Based on such review, Nasdaq may take

any appropriate action, including

placing of restrictions on or additional

requirements for listing, or the denial of

listing of a security if Nasdaq

determines that there have been

violations or evasions of such corporate

governance standards. Determinations

under this subparagraph shall be made

on a case-by-case basis as necessary to

protect investors and the public interest

(A) Distribution of Annual and Interim

Reports

(i) Each issuer shall distribute to

shareholders copies of an annual report

containing audited financial statements

of the company and its subsidiaries. The

report shall be distributed to

shareholders a reasonable period of

time prior to the company’s annual

meeting of shareholders and shall be

filed with Nasdaq at the time it is

distributed to shareholders.

(ii) Each issuer which is subject to

SEC Rule 13a–13 shall make available

copies of quarterly reports including

statements of operating results to

shareholders either prior to or as soon

as practicable following the company’s

filing of its Form 10–Q with the

Commission. If the form of such

quarterly report differs from the Form

10–Q, the issuer shall file one copy of

the report with Nasdaq in addition to

filing its Form 10–Q pursuant to Rule

4310(c)(14). The statement of operations

contained in quarterly reports shall

disclose, as a minimum, any substantial

items of an unusual or nonrecurrent

nature and net income before and after

estimated federal income taxes or net

income and the amount of estimated

federal taxes.

(iii) Each issuer which is not subject

to SEC Rule 13a–13 and which is

required to file with the Commission, or

another federal or state regulatory

authority, interim reports relating

primarily to operations and financial

position, shall make available to

shareholders reports which reflect the

information contained in those interim

reports. Such reports shall be made

available to shareholders either before

or as soon as practicable following filing

with the appropriate regulatory

authority. If the form of the interim

report provided to shareholders differs

from that filed with the regulatory

authority, the issuer shall file one copy

of the report to shareholders with

Nasdaq in addition to the report to the

regulatory authority that is filed with

Nasdaq pursuant to Rule 4310(c)(14).

(B) Independent Directors

Each issuer shall maintain a

minimum of two independent directors

on the board of directors.

(C) Audit Committee

Each issuer shall establish and

maintain an Audit Committee, a

majority of the members of which shall

be independent directors.

(D) Shareholder Meetings

Each issuer shall hold an annual

meeting of shareholders and shall

provide notice of such meeting to

Nasdaq.

(E) Quorum

Each issuer shall provide for a

quorum as specified in its by-laws for

any meeting of the holders of common

stock; provided, however, that in no

case shall such quorum be less than 33

1⁄3 percent of the outstanding shares of

the company’s common voting stock.

(F) Solicitation of Proxies

Each issuer shall solicit proxies and

provide proxy statements for all

meetings of shareholders and shall

provide copies of such proxy solicitation

to Nasdaq.

(G) Conflicts of Interest

Each issuer shall conduct an

appropriate review of all related party

transactions on an ongoing basis and

shall utilize the company’s Audit

Committee or a comparable body of the

board of directors for the review of

potential conflict of interest situations

where appropriate.

(H) Shareholder Approval

(i) Each issuer shall require

shareholder approval of a plan or

arrangement under subparagraph a.
17266 Federal Register / Vol. 62, No. 68 / Wednesday, April 9, 1997 / Notices

below or, prior to the issuance of

designated securities under

subparagraph b., c., or d. below: a. when

a stock option or purchase plan is to be

established or other arrangement made

pursuant to which stock may be

acquired by officers or directors, except

for warrants or rights issued generally to

security holders of the company or

broadly based plans or arrangements

including other employees (e.g. ESOPs).

In a case where the shares are issued to

a person not previously employed by the

company, as an inducement essential to

the individual’s entering into an

employment contract with the company,

shareholder approval will generally not

be required. The establishment of a plan

or arrangement under which the amount

of securities which may be issued does

not exceed the lesser of 1% of the

number of shares of common stock, 1%

of the voting power outstanding, or

25,000 shares will not generally require

shareholder approval;

b. when the issuance will result in a

change of control of the issuer;

c. in connection with the acquisition

of the stock or assets of another

company if:

1. any director, officer or substantial

shareholder of the issuer has a 5% or

greater interest (or such persons

collectively have a 10% or greater

interest), directly or indirectly, in the

company or assets to be acquired or in

the consideration to be paid in the

transaction or series of related

transactions and the present or

potential issuance of common stock, or

securities convertible into or exercisable

for common stock, could result in an

increase in outstanding common shares

or voting power of 5% or more; or

2. where, due to the present or

potential issuance of common stock, or

securities convertible into or exercisable

for common stock, other than a public

offering for cash:

A. the common stock has or will have

upon issuance voting power equal to or

in excess of 20% of the voting power

outstanding before the issuance of stock

or securities convertible into or

exercisable for common stock; or

B. the number of shares of common

stock to be issued is or will be equal to

or in excess of 20% of the number of

shares or common stock outstanding

before the issuance of the stock or

securities; or

d. in connection with a transaction

other than a public offering involving:

1. the sale or issuance by the issuer

of common stock (or securities

convertible into or exercisable for

common stock) at a price less than the

greater of book or market value which

together with sales by officers, directors

or substantial shareholders of the

company equals 20% or more of

common stock or 20% or more of the

voting power outstanding before the

issuance; or

2. the sale or issuance by the

company of common stock (or securities

convertible into or exercisable common

stock) equal to 20% or more of the

common stock or 20% or more of the

voting power outstanding before the

issuance for less than the greater of

book or market value of the stock.

(ii) Exceptions may be made upon

application to Nasdaq when:

a. the delay in securing stockholder

approval would seriously jeopardize the

financial viability of the enterprise; and

b. reliance by the company on this

exception is expressly approved by the

Audit Committee or a comparable body

of the board of directors.

A company relying on this exception

must mail to all shareholders not later

than ten days before issuance of the

securities a letter alerting them to its

omission to seek the shareholder

approval that would otherwise be

required and indicating that the Audit

Committee or a comparable body of the

board of directors has expressly

approved the exception.

(iii) Only shares actually issued and

outstanding (excluding treasury shares

or shares held by a subsidiary) are to be

used in making any calculation

provided for in this subparagraph

(21)(H)(i)d.1. Unissued shares reserved

for issuance upon conversion of

securities or upon exercise of options or

warrants will not be regarded as

outstanding.

(iv) Voting power outstanding as used

in this Rule refers to the aggregate

number of votes which may be cast by

holders of those securities outstanding

which entitle the holders thereof to vote

generally on all matters submitted to the

company’s security holders for a vote.

(v) An interest consisting of less than

either 5% of the number of shares of

common stock or 5% of the voting

power outstanding of an issuer or party

shall not be considered a substantial

interest or cause the holder of such an

interest to be regarded as a substantial

security holder.

(vi) Where shareholder approval is

required, the minimum vote which will

constitute shareholder approval shall be

a majority of the total votes cast on the

proposal in person or by proxy.

(22) Listing Agreement

Each issuer shall execute a Listing

Agreement in the form designated by

Nasdaq.

(23) Peer Review

(A) Each issuer must be audited by an

independent public accountant that:

(i) has received an external quality

control review by an independent public

accountant (‘‘peer review’’) that

determines whether the auditor’s system

of quality control is in place and

operating effectively and whether

established policies and procedures and

applicable auditing standards are being

followed; or

(ii) is enrolled in a peer review

program and within 18 months receives

a peer review that meets acceptable

guidelines.

(B) The following guidelines are

acceptable for purposes of

subparagraph (e)(23):

(i) The peer review should be

comparable to AICPA standards

included in Standards for Performing on

Peer Reviews, codified in the AICPA’s

SEC Practice Section Reference Manual;

(ii) The peer review program should

be subject to 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; and

(iii) The administering entity and the

independent oversight body of the peer

review program must, as part of their

rules of procedure, require the retention

of the peer review working papers for 90

days after acceptance of the peer review

report and allow Nasdaq access to those

working papers.

(f) No change.

4400. Nasdaq National Market—Issuer

Designation Requirements

Pursuant to SEC Rule 11Aa2–1, those

securities for which transaction

reporting is required by an effective

transaction reporting plan are

designated as national market system

securities. A transaction reporting plan

has been filed with the Commission

under which securities satisfying the

requirements of this Rule 4400 Series

are covered by the transaction reporting

plan and transactions in such securities

are subject to the transaction reporting

provision of the Rule 4630 Series. [The

Association has filed with the

Commission a transaction reporting

plan under which securities satisfying

the requirements of this Rule 4400

Series are covered by the transaction

reporting plan and transactions in such

securities are subject to the transaction

reporting provisions of the Rule 4630

Series.]

4420. Quantitative Designation Criteria

In order to be designated, an issuer

shall be required to substantially meet

the criteria set forth in paragraphs (a),

(b), (c), (d), [or (e)] (e), (f), or (g) below.

Initial Public Offerings substantially
Federal Register / Vol. 62, No. 68 / Wednesday, April 9, 1997 / Notices 17267

meeting such criteria are eligible for

immediate inclusion in the Nasdaq

National Market upon prior application

and with the written consent of the

managing underwriter that immediate

inclusion is desired. [All other

qualifying issues, excepting special

situations, are included on the next

inclusion date established by Nasdaq.]

(a) [Alternative 1] Entry Standard 1

(1) The issuer of the security had

annual pre-tax income of at least

[$750,000] $1,000,000 [and net income

of at least $400,000] in the most recently

completed fiscal year or in two of the

last three most recently completed fiscal

years.

(2) There are at least [500,000]

1,100,000 publicly held shares.

(3) The market value of publicly held

shares is at least [$3] $8 million.

(4) The bid price per share [on each

of the five business days prior to the

date of application by the issuer] is $5

or more.

(5) The issuer of the security has net

tangible assets of at least [$4] $6 million.

(6) The issuer has a minimum of [800]

400 round lot shareholders [if the issuer

has between 500,000 and 1 million

shares publicly held, or a minimum of

400 shareholders if the issuer has either

(A) over 1 million shares publicly held

or (B) over 500,000 shares publicly held

and average daily trading volume in

excess of 2,000 shares per day for the six

months preceding the date of

application].

(7) There are [A] at least [two] three

registered and active [dealers act as

Nasdaq] market makers with respect to

the security [on each of the five business

days preceding the date of application

by the issuer].

(b) [Alternative 2] Entry Standard 2

(1) The issuer of the security has net

tangible assets of at least [$12] $18

million.

(2) There are at least [1 million]

1,100,000 publicly held shares.

(3) The market value of publicly held

shares is at least [$15] $18 million.

(4) The bid price per share [on each

of the five business days prior to the

date of application by the issuer] is [$3]

$5 or more.

(5) There are [A] at least [two] three

registered and active [dealers act as

Nasdaq] market makers with respect to

the security [on each of the five business

days preceding the date of application

by the issuer].

(6) The issuer has a [three-year] twoyear operating history.

(7) The issuer has a minimum of 400

round lot shareholders.

(c) Entry Standard 3

An issuer designated under this

paragraph need not also be in

compliance with the quantitative

criteria for initial inclusion in the Rule

4300 series.

(1) There are at least 1,100,000

publicly held shares.

(2) The market value of publicly held

shares is at least $20 million.

(3) The bid price per share is $5 or

more.

(4) There are at least four registered

and active market makers with respect

to the security.

(5) The issuer has a minimum of 400

round lot shareholders.

(6) The issuer has:

(A) a market capitalization of $75

million; or

(B) total assets and total revenue of

$75 million each for the most recently

completed fiscal year or two of the last

three most recently completed fiscal

years.

[(c)] (d) Warrants

(1) No change.

(2) No change.

[(d)] (e) Computations

The computations required by

paragraph (a)(1), (a)(5), and (b)(1) shall

be taken from the issuer’s most recent

financial information filed with Nasdaq.

The computations required in

paragraphs (a)(2), (a)(3), (b)(2),[ and]

(b)(3), (c)(1), and (c)(2) shall be as of the

date of application of the issuer.

Determinations of beneficial ownership

for purposes of paragraphs (a)(2) [and],

(b)(2), and (c)(1) shall be made in

accordance with SEC Rule 13d–3. In the

case of American Depositary Receipts,

the computations required by

paragraphs (a)(1), (a)(5), and (b)(1) shall

relate to the foreign issuer and not to

any depositary or any other person

deemed to be an issuer for purposes of

Form S–12 under the Securities Act of

1933.

[(e)] (f) Other Securities

(1) Nasdaq [The corporation] will

consider designating any security not

otherwise covered by the criteria in

paragraphs (a), (b), [or] (c), or (d) of this

Rule, provided the instrument is

otherwise suited to trade through the

facilities of Nasdaq. Such securities will

be evaluated for designation against the

following criteria:

(A) The issuer shall have assets in

excess of $100 million and stockholders’

equity of at least $10 million. In the case

of an issuer which is unable to satisfy

the income criteria set forth in

paragraph (a)(1), Nasdaq [the

Corporation] generally will require the

issuer to have the following: (i) assets in

excess of $200 million and stockholders’

equity of at least $10 million; or (ii)

assets in excess of $100 million and

stockholders’ equity of at least $20

million.

(B)—(D) No change.

(2) No change.

(3) No change.

[(f)] (g) Nasdaq will consider

designating as Nasdaq National Market

securities Selected Equity-linked Debt

Securities (SEEDS) that generally meet

the criteria of this paragraph [(f)] (g).

SEEDS are limited-term, nonconvertible debt securities of an issuer

where the value of the debt is based, at

least in part, on the value of another

issuer’s common stock or nonconvertible preferred stock (or

sponsored American Depositary

Receipts (ADRs) overlying such equity

securities).

(1)—(2) No change.

(3) No change.

(A)—(B) No change.

(C) be issued by:

(i) No change.

(ii) a non-U.S. company (including a

company that is traded in the United

States through sponsored ADRs) (for

purposes of this paragraph (g) [(f)], a

non-U.S. company is any company

formed or incorporated outside of the

United States) if:

a. the Association or its subsidiaries

has a comprehensive surveillance

sharing agreement in place with the

primary exchange in the country where

the security is primarily traded (in the

case of an ADR, the primary exchange

on which the security underlying the

ADR is traded);

b. the combined trading volume of the

non-U.S. security (a security issued by

a non-U.S. company) and other related

non-U.S. securities occurring in the U.S.

market and in markets with which the

Association or its subsidiaries has in

place a comprehensive surveillance

sharing agreement represents (on a share

equivalent basis for any ADRs) at least

50% of the combined world-wide

trading volume in the non-U.S. security,

other related non-U.S. securities, and

other classes of common stock related to

the non-U.S. security over the six month

period preceding the date of

designation; or

c.—d. No change.

(4) No change.

(5) Prior to the commencement of

trading of a particular SEEDS designated

pursuit to this subsection, the

Association or its subsidiaries will

distribute a circular to the membership

providing guidance regarding member

firm compliance responsibilities

(including suitability recommendation
17268 Federal Register / Vol. 62, No. 68 / Wednesday, April 9, 1997 / Notices

and account approval) when handling

transactions in SEEDS.

4450. Quantitative Maintenance

Criteria

After designation as a Nasdaq

National Market security, a security

must substantially meet the criteria set

forth in paragraphs (a) or (b), and (c),

(d), (e), and (f) below to continue to be

designated as a national market system

security. A security maintaining its

designation under paragraph (b) need

not also be in compliance with the

quantitative maintenance criteria in the

Rule 4300 series.

(a) Maintenance Standard 1—

Common Stock, Preferred Stock, Shares

or Certificates of Beneficial Interest of

Trusts and Limited Partnership Interests

in Foreign or Domestic Issues

(1) [200,000] 750,000 shares publicly

held;

(2) Market value of publicly held

shares of [$1] $5 million;

(3) The issuer has net tangible assets

of at least $4 million; [:]

[(A) $1 million;

(B) $2 million if the issuer has

sustained losses from continuing

operations and/or net losses in two of its

three most recent fiscal years; or

(C) $4 million if the issuer sustained

losses from continuing operations and/

or net losses in three of its four most

recent fiscal year;]

(4) 400 shareholders [or 300

shareholders] of round lots; and

(5) Minimum bid price per share of $1

[or, in the alternative, market value of

public float of $3 million and $4 million

of net tangible assets].

(b) Maintenance Standard 2—

Common Stock, Preferred Stock, Shares

or Certificates of Beneficial Interest of

Trusts and Limited Partnership Interests

in Foreign or Domestic Issues

(1) The issuer has:

(A) a market capitalization of $50

million; or

(B) total assets and total revenue of

$50 million each for the most recently

completed fiscal year or two of the last

three most recently completed fiscal

years.

(2) 1,100,000 shares publicly held;

(3) Market valve of publicly held

shares of $15 million;

(4) Minimum bid price per share of

$5;

(5) 400 shareholders of round lots;

and

(6) At least four registered and active

market makers.

[(b)] (c) Other Securities Designated

Pursuant to Rule 4420 [(e)] (f)

The aggregate market value or

principal amount of publicly-held units

must be at least $1 million.

[(c)] (d) Rights and Warrants

Common stock of issuer must

continue to be designated.

[(d)] (e) Market Makers

At least two [authorized] registered

and active market makers, except that

an issue must have at least four

registered and active market makers to

satisfy Maintenance Standard 2 under

paragraph (b) of this rule.

[(e)] (f) Bankruptcy and/or Liquidation

Should an issuer file under any of the

sections of the Bankruptcy Act or

announce that liquidation has been

authorized by its board of directors and

that it is committed to proceed, Nasdaq

may suspend or terminate the issuer’s

securities unless it is determined that

the public interest and the protection of

investors would be served by continued

designation.

4460. Non-Quantitative Designation

Criteria for Issuers Excepting Limited

Partnerships

(a)–(b) No change.

(c) Independent Directors

Each NNM issuer shall maintain a

minimum of two independent directors

on its board of directors. [For purposes

of this section, ‘‘independent director’’

shall mean a person other than an

officer or employee of the company or

its subsidiaries or any other individual

having a relationship which, in the

opinion of the board of directors, would

interfere with the exercise of

independent judgement in carrying out

the responsibilities of a director.]

(d)–(g) No change.

(h) Conflicts of Interest

Each NNM issuer shall conduct an

appropriate review of all related party

transactions on an ongoing basis and

shall utilize the company’s Audit

Committee or a comparable body of the

board of directors for the review of

potential conflict of interest situations

where appropriate.

(i) Shareholder Approval

(1) No change.

(2) Exceptions may be made upon

application to Nasdaq [the Association]

when:

(A) No change.

(B) reliance by the company on this

exception is expressly approved by the

Audit Committee [of the Board] or a

comparable body of the board of

directors.

(C) in connection with the acquisition

of the stock or assets of another

company if:

(i) No change.

(ii) where, due to the present or

potential issuance of common stock, or

securities convertible into or exercisable

for common stock, other than a public

offering for cash[,];

a. [if] the common stock has or will

have upon issuance voting power equal

to or in excess of 20% of the voting

power outstanding before the issuance

of stock or securities convertible into or

exercisable for common stock[,]; or

b. the number of shares of common

stock to be issued is or will be equal to

or in excess of 20% of the number of

shares or common stock outstanding

before the issuance of the stock or

securities; or

(D) No change.

(3)–(6) No change.

(j)–(l) No change.

(m) Peer Review

(1) Each issuer must be audited by an

independent public accountant that:

(A) has received an external quality

control review by an independent public

accountant (‘‘peer review’’) that

determines whether the auditor’s system

of quality control is in place and

operating effectively and whether

established policies and procedures and

applicable auditing standards are being

followed; or

(B) is enrolled in a peer review

program and within 18 months receives

a peer review that meets acceptable

guidelines.

(2) The following guidelines are

acceptable for purposes of paragraph

(m):

(A) The peer review should be

comparable to AICPA standards

included in Standards for Performing on

Peer Reviews, codified in the AICPA’s

SEC Practice Section Reference Manual;

(B) The peer review program should

be subject to 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; and

(C) The administering entity and the

independent oversight body of the peer

review program must, as part of their

rules of procedure, require the retention

of the peer review working papers for 90

days after acceptance of the peer review

report and allow Nasdaq access to those

working papers.

4470. Non-Quantitative Designation

Criteria for Issuers That Are Limited

Partnerships

(a)–(h) No change.

(i) Conflict of Interest

Each NNM issuer which is a limited

partnership shall conduct an
Federal Register / Vol. 62, No. 68 / Wednesday, April 9, 1997 / Notices 17269

4These requirements are contained in NASD Rule

4300 Series and Rule 4400 Series.

5See NASD Rule 6550 (requiring that transactions

in OTCBB-eligible securities be reported pursuant

to the requirements of the Rule 6600 Series).

6See Nasdaq Bulletin dated November 15, 1996,

attached as Exhibit 2 to the rule filing, for a detailed

chart comparing the current listing standards to the

proposed rule change.

7On SmallCap, the alternative requirement is $1

million in market value of public float and $2

million in capital and surplus. On the National

Market, the alternative requirement is $3 million in

market value of public float and $4 million in net

tangible assets.

8See Exchange Act Release No. 28391 (September

5, 1990), 55 FR 36372.

appropriate review of all related party

transactions on an ongoing basis and

shall utilize the Audit Committee or a

comparable body of the board of

directors for the review of potential

material conflict of interest situations

where appropriate.

4480. Termination Procedure

(a) No change.

(b) An issuer that is subject to

termination of its designation may

request a review by a Panel authorized

to hear appeals [Committee of the Board

of Governors]. If a review is requested,

the issuer is entitled to submit materials

and arguments in connection with such

review.

(c) The Panel [Committee] may grant

or deny continued designation on the

basis of the written submission by the

issuer and whatever other date it deems

relevant.

(d) Determinations by the Panel

[Committee] may be appealed to the

Nasdaq Listing and Hearing Review

Committee [Association’s Board of

Governors] by any aggrieved person. An

appeal to the Nasdaq Listing and

Hearing Review Committee [Board] shall

not operate as a stay of the decision of

the Panel unless the Nasdaq Listing and

Hearing Review Committee [Board] in

its discretion determines to grant such

stay.

(e) The Rule 9700 series sets forth

procedures applicable to the review of

the termination of an issuer’s

designation.

(e) Renumbered as (f).

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission,

Nasdaq included statements concerning

the purpose of and basis for the

proposed rule change and discussed any

comments it received on the proposed

rule change. The text of these statements

may be examined at the places specified

in Item IV below. Nasdaq has prepared

summaries, set forth in Sections (A), (B),

and (C) below, of the most significant

aspects of such statements.

A. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

Background

Nasdaq qualification requirements for

listing of securities on the National

Market and SmallCap Market were last

revised in 1989 and 1991, respectively.4

Since that time, Nasdaq has witnessed

significant growth in terms of the size

and number of listings, and volume of

transactions. Accompanying this growth

has been an increase in participation of

individual investors, and heightened

public awareness and expectations for

Nasdaq listed companies. Nasdaq

recognizes that along with this growth

and the changes in the market, a

commensurate level of quality and

investor protection must be assured.

Nasdaq believes it is extremely

important to place an emphasis not only

on ensuring that all Nasdaq companies

warrant listing by virtue of their

compliance with the applicable

qualification requirements, but also that

the qualification requirements

themselves are in fact appropriate and

designed to foster the protection of

investors and enhance the credibility of

the market.

Given Nasdaq’s objective of providing

necessary safeguards to public investors

in Nasdaq securities, and given the

growth and changes in the market, the

structural enhancements to Nasdaq now

underway, and the time that has passed

since the listing standards were last

changed, Nasdaq determined to

undertake a thorough review of its

qualifications requirements. In

conducting this review, Nasdaq

carefully sought to balance its role in

facilitating legitimate capital formation

for issuers with Nasdaq’s responsibility

to provide the appropriate protection to

public investors in its markets, and to

maintain the trust and confidence

reposed in Nasdaq generally. Such

capital formation continues to be an

important source of new jobs and

investment opportunities in the United

States today.

While Nasdaq recognizes that certain

companies may not be able to meet the

more stringent standards proposed

herein, it is important to note that

companies not in compliance will have

the opportunity to achieve compliance

with the applicable standards during a

reasonable interval of time. In addition,

for those companies who are unable to

effect compliance with the new

standards, a meaningful alternative is

now available through their eligibility

for quotation in the OTC Bulletin Board

(‘‘OTCBB’’). The OTCBB is a quotation

medium used by NASD members to

reflect quotations in non-Nasdaq

securities. Securities quoted in the

OTCBB are subject to real-time trade

reporting,5 thus providing a level of

transparency not present when the

listing standards were last revised.

Summary of Proposed Rule Change 6

Elimination of the Alternative to the

$1 Minimum Bid Price. Under the

existing standards, issuers with

securities trading below $1 may remain

listed on the Nasdaq National and

SmallCap Markets if they meet an

alternative test.7 Nasdaq is proposing to

eliminate the alternative test for several

reasons. First, it will remove the

incentive to engage in large, below

market private placements (generally

pursuant to Regulation S) which cause

dilution and concomitant harm to

Nasdaq investors. It will also provide a

safeguard against certain market activity

associated with low-priced securities.

Further, when the alternative test was

adopted, it was intended to address

‘‘temporary adverse market conditions’’

resulting in a bid price below $1.8

Contrary to this intent, issuers have

used the alternative test as a permanent

means of meeting the listing standards.

Finally, Nasdaq believes that a $1

minimum bid price would serve to

increase investor confidence and the

credibility of its market commensurate

with its increased prominence.

After careful consideration of

comments received on this provision of

the proposal, and as discussed further

below, Nasdaq believes that the

proposal should be modified to provide

for a reasonable expansion in the time

period that an issuer’s stock price

remains below $1 before it is deemed a

deficiency.

Corporate Governance Standards for

SmallCap Issuers. Nasdaq is proposing

to extend the important shareholder

protection benefits of its corporate

governance requirements to the

SmallCap Market. These are the same

requirements that currently apply to

National Market issuers, and include,

among other things: (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
17270 Federal Register / Vol. 62, No. 68 / Wednesday, April 9, 1997 / Notices

9 It is contemplated that, as is currently the case

with respect to National Market issuers, Nasdaq

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.

10As 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 NASD Rule 4200(w).

11See Securities Act Release No. 6695 (April 1,

1987), 52 FR 11665.

12See Exchange Act Release No. 31197

(September 17, 1992), 57 FR 45287, n. 26.

13See 12 CFR 363, Appendix A.

corporate actions.9 These requirements

provide investors with a means to

become more actively involved in

corporate affairs. The shareholder

approval requirement should prevent

the further potential for dilutive stock

issuances in the SmallCap Market

without the prior knowledge of

investors. The audit committee,

independent director and annual

meeting requirements will provide

vastly enhanced safeguards to the

investing public.

Increase in the Quantitative

Standards for Both the SmallCap and

National Markets. Increases to the

quantitative standards are believed to be

wholly appropriate given the passage of

time since the standards were last

adjusted, the opportunities for

improvement gleaned from experience

over that period, and the concomitant

increases in the growth of the market

and the rate of inflation. These increases

are believed capable of further

strengthening the financial criteria

consistent with the goal of enhancing

the quality of Nasdaq companies, while

preserving the ability of qualified

Nasdaq companies to raise capital.

Market Capitalization Test for

National Market. Consistent with the

abiding interest of Nasdaq in facilitating

capital formation for high-technology

industries and the corresponding

opportunity for growth in employment,

it was determined that there was a need

to recognize and appropriately respond

to the unique operating characteristics

of certain industries represented in this

market. Nasdaq has therefore proposed

an accommodation for companies that

may fail to comply with the National

Market 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.

Specifically, an issuer that is unable

to meet either of two alternative net

tangible asset tests, as amended by the

proposed rule change,10 could be

afforded designation as a National

Market issuer provided it initially had a

market capitalization of $75 million, or

total assets and total revenue of $75

million each. For continued listing,

these issuers would have to maintain a

market capitalization of $50 million, or

total assets and total revenue of $50

million.

The changes provide access for

Nasdaq National Market 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. Nasdaq solicited

comment to further its evaluation of a

requirement that auditors of Nasdaq

listed companies be subject to a practice

monitoring program under which the

auditor’s quality control system would

be reviewed by an independent peer

auditor on a periodic basis. Currently,

companies whose shares are publicly

traded are not required to have auditors

who are subject to such peer review.

Although neither the New York Stock

Exchange nor the American Stock

Exchange have a peer review

requirement, certain banking agencies

such as the Federal Deposit Insurance

Corporation (‘‘FDIC’’) have successfully

implemented a peer review requirement

for certain financial institutions. In

addition, the Commission has generally

expressed support for the concept of

peer review.11 Although it withdrew its

mandatory peer review proposal, the

Commission nonetheless confirmed its

belief that ‘‘the peer review process

contributes significantly to improving

the quality control systems of

accounting firms auditing Commission

registrants and enhances the

consistency and quality of practice

before the Commission.’’ 12

Consistent with this, Nasdaq also

received strong support from

commenters on this requirement.

Accordingly, Nasdaq has determined to

include a peer review requirement as

part of the proposed changes to the

listing criteria.

The language of the proposed rule is

similar to the peer review requirement

of the FDIC.13 Specifically, all

independent public accountants

auditing Nasdaq listed companies must

have received, 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,

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, 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. Nasdaq also is proposing

changes to specify that the shareholder

number requirements in the SmallCap

Market are based on the number of

‘‘round lot’’ holders of an issuer’s

shares. This conforms with the

standards on the National Market and

other exchanges, and ensures that

issuers maintain a broad and significant

shareholder base justifying a listing on

a national securities market.

In addition, Nasdaq is proposing to

conform the stock price compliance

mechanism for initial listing under the

National Market standards with that of

the SmallCap Market by specifying that

the applicable price is the bid price, and

by removing the provisions under the

National Market 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.’’ This clarifies and ensures that

issuers must 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, where possible, certain

provisions and cross-references have

been conformed and renumbered,

outdated references and a definition

have been deleted, and headings have

been renamed for clarity.

Impact Analysis

Nasdaq analyzed the impact the new

listing standards would have on both

the SmallCap and National Market by

applying the proposed standards to

current Nasdaq issuers, using financial

data from periodic filings to the

Commission, and relevant price and

volume data. With respect to the listing

standards for initial entry for each

market, Nasdaq applied the proposed

criteria to issuers successfully listing
Federal Register / Vol. 62, No. 68 / Wednesday, April 9, 1997 / Notices 17271

14 15 U.S.C. 78o–3.

15See letter from Jeffrey Adduci, President,

Regional Investment Bankers Association to Perry

Peregoy, Vice President, Nasdaq, dated December

19, 1996.

from June 30, 1994 to August 30, 1996.

With respect to maintenance standards,

Nasdaq applied the proposed criteria to

all current Nasdaq issuers. This resulted

in the following estimated impact.

With respect to the SmallCap Market

entry criteria, of the 457 issuers

successfully listing from June 30, 1994

to August 30, 1996, 229 or 50% would

not have qualified for listing. With

respect to the SmallCap Market

maintenance criteria, of the 1,318

issuers currently listed on SmallCap,

394 or 30% would no longer be eligible

for continued listing.

With respect to the National Market

entry criteria, of the 1,151 issuers

successfully listing from June 30, 1994

to August 30, 1996, 176 or 15% would

not have qualified for listing. With

respect to the National Market

maintenance criteria, of the 3,910

issuers currently listed on National

Market, 171 or 4% would no longer be

eligible for continued listing.

Nasdaq believes the analysis

overstates the impact of the proposed

listing standards on issuers for several

reasons. For example, certain of the

standards, such as public float, are

within the control of the issuer and may

be adjusted to meet the new standards

within a relatively short time frame.

Further, a majority of the issuers failing

the new criteria only failed one of the

standards. Given time, many of these

issuers may be able to come into

compliance, by, for example, raising

additional capital. Past experience

supports this belief. In 1991, Nasdaq

performed a similar analysis which

predicted that 526 issuers would not

qualify upon application of the new

standards. In fact, after undertaking

corrective corporate actions, only 125

issuers (24%) were unable to qualify.

Implementation

Nasdaq recognizes the potential

impact the proposed standards would

have on existing issuers and issuers

applying for initial listing. Therefore,

Nasdaq believes the new standards

should be made effective six months

after the proposed rule change is

approved by the Commission to provide

current issuers with adequate time to

enact the corporate actions necessary to

comply with the new rules.

For issuers applying for initial listing

after the date the proposed rule change

is submitted to the SEC, the new listing

standards would be retroactively

applied once the proposed rule change

was approved. This provides advance

notice to issuers applying for listing that

they would be subject to higher listing

standards upon approval of the rule, so

such issuers would not be prejudiced.

These issuers will be afforded ninety

days after the SEC approves the

proposed rule change to meet the new

listing entry criteria. In addition, an

issuer will be deemed to have satisfied

the new listing entry criteria once the

proposed rule change is approved by the

Commission, if the issuer is in

compliance with the new listing

standards at any time after the issuer

commenced trading, but prior to

Commission approval. This removes an

incentive to apply prior to approval of

the new criteria for the purpose of

circumventing the new standards. Thus,

it avoids a rush to apply and provides

for the orderly processing of listing

applications by Nasdaq staff.

For initial listing of an issuer that

applied before the proposed rule change

is submitted to the Commission, but

which is still pending as of that date,

the issuer would have 90 days from the

date the proposed rule change is

submitted to commence trading on

Nasdaq under the existing listing entry

criteria. These issuers would not be

required to meet the new listing entry

criteria after approval by the

Commission, but like all other listed

issuers, would have to meet the new

maintenance criteria six months after

approval by the Commission. These

procedures are similar to those used

when the listing standards were last

revised.

Basis

Nasdaq believes that the proposed

rule change is consistent with the

provisions of Section 15A(b)(6) of the

Act 14 in that it is designed to prevent

fraudulent and manipulative acts and

practices, to promote just and equitable

principles of trade, and in general, to

protect investors and the public interest.

Nasdaq believes that the extension of

the corporate governance requirements

to the SmallCap market will permit

greater participation by investors in

corporate affairs. The elimination of the

alternative to the $1 minimum bid price

requirement is an important step to

provide a safeguard against certain

market activity associated with low

priced securities, to remove the

incentive for large, below market

issuances, and to generally enhance the

credibility of the market. The increase

in the quantitative standards for both

the National Market and SmallCap

Market is necessary and appropriate to

strengthen the qualification

requirements for Nasdaq issuers, and is

consistent with a nationwide securities

marketplace. Finally, the peer-review

requirement for auditors of Nasdaq

companies will provide further

safeguards for investors by ensuring that

an auditing firm’s quality control

systems are subject to an industryaccepted level of review.

In sum, the proposed rule change has

been designed to ensure the protection

of investors and the public interest

while maintaining the proper balance

between small entrepreneurial

companies’ access to capital and

investors’ access to quality companies.

Nasdaq has carefully considered public

feedback while developing this proposal

and appropriate modifications were

made where necessary.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

Nasdaq states that it does not believe

that the proposed rule change will result

in any burden on competition that is not

necessary or appropriate in furtherance

of the purposes of the Act, as amended.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received from

Members, Participants or Others

In November of 1996, Nasdaq sought

public comment on the proposed rule

change. In an effort to seek the broadest

possible solicitation of comments from

investors, Nasdaq widely distributed a

Nasdaq Bulletin and a Nasdaq Notice to

NASD Members to investors, issuers,

NASD member firms, and other

interested parties. In addition, the entire

proposal was posted on the Nasdaq

website (www.nasdaq.com), which also

solicited comments via E-mail. In total,

227 comments were received. A copy of

the Nasdaq Bulletin is attached to the

rule filing as Exhibit 2. Copies of the

comments received are attached to the

rule filing as Exhibit 3.

Of the 227 comments received, 143

were from private investors. 109

comments expressed an opinion

regarding the overall proposal, of which

32 were in favor and 77 were opposed.

Of those comments expressing general

opposition, many were in the form of a

brief E-mail, and at least fifteen were

reproductions of a letter submitted by a

trade association.15 The single issue

evoking the most significant negative

comment, mostly from investors,

concerned the elimination of an

alternative to the $1 bid price

requirement. Commenters expressed

strong support for the proposals to

extend corporate governance

requirements to the SmallCap Market

and to establish a peer review
17272 Federal Register / Vol. 62, No. 68 / Wednesday, April 9, 1997 / Notices

16Contrary to statements mischaracterizing the

OTCBB, as contained in letters from the Regional

Investment Bankers Association and others echoing

statements therein, NASD rules in fact permit

market makers to insert unlimited quotation

updates throughout the day for domestic equity

securities quoted in the OTCBB. These quotes are

in turn disseminated to the public on a real-time

basis. See NASD Rules 6520 and 6540(b)(1). The

‘‘twice-daily update restriction’’ referred to in these

letters only applies to certain unregistered foreign

securities subject to a limitation involving an

exemption from registration under Exchange Act

Rule 12g3–2(b). Furthermore, transactions in

domestic and Canadian securities quoted in the

OTCBB are now subject to real-time last sale trade

reporting and dissemination, thus providing a level

of transparency not present when the listing

standards were last revised.

17NASDR is also a wholly owned subsidiary of

the NASD.

18These include the recent expulsion of Stratton

Oakmont, Inc., a firm with an extensive and serious

regulatory history. Major enforcement cases have

also been brought against: Sterling Foster; H.J.

Meyers & Co. (f/k/a Thomas James Associates, Inc.);

A.R. Baron & Co., Inc.; and Lew Lieberbaum &

Company, Inc.

requirement for auditors of Nasdaq

issuers.

Of those comments expressing

opposition to the proposed rule change,

three general themes emerged:

• The bid price is not within the

direct control of the issuer.

• The proposal singles out small

issuers.

• More emphasis should be placed on

regulating the activity of broker-dealers

who engage in fraudulent activity,

rather than stigmatizing issuers.

First, with respect to comments

opposing the proposed rule change on

the basis that the bid price is not within

the direct control of the issuer, Nasdaq

notes that elimination of the alternative

to the minimum bid price requirement

is intended to address the following: (1)

The concern that securities trading

below $1 are more susceptible to certain

activity by stock promoters; (2) the

elimination of the incentive for large,

below market issuances which may

harm Nasdaq investors; (3) the

curtailing of its use as a permanent

solution to bid price deficiencies; and

(4) the enhancement of the credibility of

the market. Some issuers argued that a

stock’s bid price is not within their

direct control, and thus the $1

minimum bid price may unfairly

penalize these issuers. Market

anomalies such as year-end tax selling

or short-term price swings could trigger

a bid price deficiency resulting in the

initiation of de-listing proceedings for

what may otherwise be a viable

company with long-term prospects. In a

related vein of comments, many

investors argued that, as current

investors in low-priced stocks, they

would be harmed if these companies

were to lose their Nasdaq listing.

Nasdaq continues to believe that the

minimum bid price would be an

important component to the listing

standards, and would benefit, in the

long run, all market participants,

including both present and future

investors. However, in response to

concerns that bid price is not within the

direct control of the issuer, Nasdaq is

proposing to expand from 10 to 30

consecutive business days the time

period that an issuer’s stock price, and

its related market value of public float,

must remain below the applicable

standard before it is deemed a

deficiency. Once an issuer’s stock falls

below $1 for 30 consecutive business

days, it will continue to have 90 days

to come back into compliance with the

maintenance standards. Compliance can

be achieved with respect to the bid price

or market value deficiency by meeting

the applicable maintenance standard for

any consecutive 10 business days

during the 90 day compliance period.

Secondly, with respect to comments

opposing the proposed rule change on

the basis that it singles out small

issuers, Nasdaq recognizes that some

companies may be unable to satisfy the

revised listing standards. As discussed

in the section on implementation above,

companies that are at risk of not

complying with the new maintenance

standards would have a period of time

to come into compliance. Companies

that are ultimately delisted would be

eligible for quotation in the OTCBB,

which currently provides real-time

quote and real-time last sale price

information for issuer’s securities.16

Moreover, Nasdaq is currently in the

process of requesting an exemption from

the Securities and Exchange

Commission under SEC Rule 15c2–11,

similar to an exemption obtained in

1992 after standards were last increased.

This would, under most circumstances,

permit member firms to continue

providing liquidity by quoting issuers in

the OTCBB without interruption

immediately following a de-listing from

Nasdaq.

Finally, commenters stated that more

emphasis should be placed on

regulating the activity of broker-dealers

who engage in fraudulent activity,

rather than stigmatizing issuers. Nasdaq

agrees that a strong regulatory and

enforcement program is an

indispensable element in the operation

of any securities marketplace. Nasdaq

consulted with its sister corporation

responsible for regulating the activities

of broker-dealers, NASD Regulation, Inc.

(‘‘NASDR’’),17 in developing these

revised listing standards. Further,

Nasdaq continues to work with NASDR

on formulating regulatory initiatives to

enhance the oversight and regulation of

activities of NASD member firms

generally. It should be noted that

NASDR has brought a record number of

disciplinary actions this past year.18

Nonetheless, Nasdaq believes that these

efforts can and should be complemented

with appropriately designed listing

standards to further the NASD’s

obligation as a self-regulatory

organization to provide the necessary

protection that investors and the

marketplace have come to expect and

deserve.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within 35 days of the date of

publication of this notice in the Federal

Register or within such longer period (i)

as the Commission may designate up to

90 days of such date if it finds such

longer period to be appropriate and

publishes its reasons for so finding or

(ii) as to which the self-regulatory

organization consents, the Commission

will:

(A) By order approve such proposed

rule change, or

(B) institute proceedings to determine

whether the proposed rule change

should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing.

The Commission requests comments on

the proposed listings standards in light

of the goals of the Exchange Act; the

impact of the proposals on small

businesses; and on any alternatives to

the proposal that could achieve the

objectives identified by the NASD and

Nasdaq. Commenters are encouraged to

provide data where possible.

Persons making written submissions

should file six copies thereof 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 at

the Commission’s Public Reference

Room. Copies of such filing will also be
Federal Register / Vol. 62, No. 68 / Wednesday, April 9, 1997 / Notices 17273

19 17 CFR 200.30–3(a)(12).

1See Report of the Arbitration Policy Task Force

on Securities Arbitration Reform, at 73.

2Under the simplified arbitration procedures for

matters between a public customer and an

associated person or member, cases are resolved

without a hearing (so-called ‘‘paper cases’’) by a

single public arbitrator. A public customer may,

however, demand a hearing, or the arbitrator may

call a hearing, in which case the arbitrator will hold

a hearing and the parties will have the benefit of

all of the available forms of discovery. See Rule

10302. Under the standard arbitration procedures

for all matters involving public customers, cases in

which the claims are more than $10,000 but less

than $30,000 may be heard by a single public

arbitrator. These cases are not decided on the

papers; rather, the arbitrator holds a hearing.

However, any party may demand a three person

panel. See Rule 10308.

3NASDR will shortly be filing a proposed rule

change to amend Rule 10308 to implement the list

selection process for the selection of arbitrators

recommended by the Task Force. The list selection

rule filing will further substantially amend Rule

10308, but will not be implemented until NASD has

developed the technology and procedures to

administer the process and developed a pool of

arbitrators sufficient to provide lists of arbitrators in

accordance with the requirements of the rule.

Accordingly, NASD is amending Rule 10308 in the

interim until the list selection rule is filed,

approved and implemented.

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 April 30, 1997.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.19

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–9004 Filed 4–8–97; 8:45 am]

BILLING CODE 8010–01–P

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–38466; File No. SR–NASD–

97–22]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the National Association of Securities

Dealers, Inc. To Amend the Damage

Ceilings for Claims Under the Standard

Arbitration and Simplified Arbitration

Procedures

April 2, 1997.

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

Securities Exchange Act of 1934

(‘‘Act’’), 15 U.S.C. 78s(b)(1), notice is

hereby given that on March 27, 1997,

the National Association of Securities

Dealers, Inc. (‘‘NASD’’ or ‘‘Association’’)

filed with the Securities and Exchange

Commission (‘‘Commission’’) the

proposed rule change as described in

Items I, II, and III below, which Items

has been prepared by the self-regulatory

organization. The Commission is

publishing this notice to solicit

comments on the proposed rule change

from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

NASD Regulation, Inc. (‘‘NASDR’’) is

proposing to amend the Code of

Arbitration Procedure (‘‘Code’’) of the

NASD to: (1) Raise the ceiling for

disputes to be eligible for resolution by

a single arbitrator under simplified

arbitration procedures from $10,000 to

$25,000; and (2) raise the ceiling for

disputes eligible for resolution by a

single arbitrator under standard

arbitration procedures from $30,000 to

$50,000.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission, the

self-regulatory organization included

statements concerning the purpose of

and basis for the proposed rule change

and discussed any comments it received

on the proposed rule change. The text

of these statements may be examined at

the places specified in Item IV below.

The self-regulatory organization has

prepared summaries, set forth in

Sections A, B, and C below, of the most

significant aspects of such statements.

A. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

1. Purpose

In its January 1996 Report on

Securities Arbitration Reform, the

NASD’s Arbitration Policy Task Force

(‘‘Task Force’’) recommended that the

ceiling for cases eligible for resolution

by a single arbitrator under simplified

arbitration procedures should be raised

from $10,000 to $30,000. The Task

Force also recommended that the ceiling

for cases eligible for resolution by a

single arbitrator under standard

arbitration procedures should be raised

from $30,000 to $50,000. The Task

Force recommended that these changes

apply to all NASD arbitrations—public

customer and intra-industry. The Task

Force stated, and NASDR concurs, that

raising the threshold, which will cause

a larger percentage of cases to be

resolved under the simplified

arbitration procedures, will ‘‘strike an

appropriate balance between the desire

for faster and less expensive arbitration

on the one hand and more expansive

procedures on the other.’’ 1

NASDR has consulted with the

Securities Industry Conference on

Arbitration (‘‘SICA’’) and the New York

Stock Exchange (‘‘NYSE’’) on the

appropriate threshold for simplified and

single-arbitrator proceedings. While

SICA and the NYSE agree with the Task

Force’s rationale, they are concerned

that setting the threshold for simplified

arbitrations too high could disadvantage

customer claimants by limiting their

procedural rights 2 under the Code in

cases that have significant economic

value to the customer. In view of these

concerns, NASD is instead proposing to

set the threshold for simplified

arbitration at $25,000, instead of

$30,000. SICA approved of the adjusted

thresholds at its October 17, 1996

meeting.

Accordingly, NASD is proposing to

amend Rules 10202, Composition of

Panels (former Section 9) and 10308,

Designation of Number of Arbitrators

(formerly Section 19) 3 of the Code to

establish the threshold for single

arbitrator cases at $50,000. NASDR is

also proposing to amend Rules 10203,

Simplified Industry Arbitration

(formerly Section 10) and 10302,

Simplified Arbitration (formerly Section

13) of the Code to establish the

threshold for simplified arbitrations at

$25,000. In addition, NASD is proposing

to amend each of those rules to state

that the threshold amount is ‘‘exclusive

of attendant costs and interest.’’

Under the proposed rule change to

Rules 10302(d) and 10308(b), claims

involving public customers and

exceeding $25,000, exclusive of

attendant costs and interest, will be

heard by a three member arbitration

panel, rather than a panel of no less

than three and no more than five

arbitrators. Under the proposed rule

change to Rule 10302 (f) and (h)(3), the

Director of Arbitration will ‘‘appoint,’’

rather than ‘‘select,’’ the public

arbitrator for simplified arbitration. The

proposed rule change amends Rule

10308(a) to state that a majority of the

arbitrators on a three member arbitration

panel (for claims that are less than or

equal to $50,000 but where a party or

arbitrator requested a panel of three

arbitrators) shall be public arbitrators,

rather than stating that a majority of the

three arbitrator panel ‘‘shall not be from

the securities industry.’’ The proposed

rule change also includes several

technical changes designed to correct

inconsistencies in the rule language and

which were also adopted by SICA.

2. Statutory Basis

The NASD believes that the proposed

rule change is consistent with the

provisions of Section 15A(b)(6) of the