[Federal Register Volume 62, Number 66 (Monday, April 7, 1997)]
[Notices]
[Pages 16635-16638]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-8792]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38456; File No. SR-NASD-92-7]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Approving and Notice of Filing and Order Granting 
Accelerated Approval of Amendment Nos. 3 and 4 to Proposed Rule Change 
Relating to the OTC Bulletin Board Service

March 31, 1997.

I. Introduction

    On March 12, 1992, the National Association of Securities dealers, 
Inc. (``NASD'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act''), \1\ a proposal to obtain permanent 
approval of the OTC Bulletin Board Service (``OTCBB Service,'' 
``OTCBB'' or ``Service''). The Commission noticed and solicited 
comments regarding the proposal in the Federal Register.\2\ On October 
6, 1994 and on November 8, 1994, the NASD filed Amendment Nos. 1 and 2 
to the proposal. The Commission noticed and solicited comment regarding 
Amendments 1 and 2.\3\ On March 14, 1997, the NASD filed Amendment No. 
3 to the proposed rule change. Amendment No. 3 supersedes Amendment 
Nos. 1 and 2. On March 21, 1997, the NASD filed Amendment No. 4 to the 
proposal.\4\ This Order approves the proposed rule change as amended by 
Amendment Nos. 3 and 4 on an accelerated basis.
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    \1\ 15 U.S.C. Sec. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 30766 (June 1, 1992), 57 
FR 24281.
    \3\ Securities Exchange Act Release No. 34956 (November 9, 
1994), 59 FR 59808. The amendments would have narrowed the universe 
of securities eligible for quotation on the Service. Specifically, 
the NASD proposed to narrow the subset of foreign equity securities, 
including those represented by American Depositary Receipts, that 
would have been OTCBB-eligible to those securities registered with 
the Commission pursuant to Section 12 of the Act. This requirement 
would have become effective on July 5, 1994. Any foreign equity 
security quoted in the OTCBB as of the close of business on July 1, 
1994 that was not registered pursuant to Section 12 of the Act could 
remain OTCBB-eligible provided that the issuer maintained an 
exemption from Section 12 registration pursuant to Rule 12g3-2(b) 
under the Act.
    \4\ The NASD submitted a technical amendment on March 27, 1997, 
stating that the change to Paragraph 6540(b)(1)(c) would not be 
implemented until April 1, 1998. See Note 7 infra.
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II. Background

    On June 1, 1990, the NASD, through Nasdaq, initiated operation of 
the OTC

[[Page 16636]]

Bulletin Board Service, which the Commission had approved on a 
temporary basis: \5\ The OTCBB Service provides a real-time quotation 
medium that NASD member firms can use to enter, update, and retrieve 
quotation information (including unpriced indications of interest) for 
equity securities traded over-the-counter that are neither listed on 
The Nasdaq Stock Market<SUP>SM nor on a primary national securities 
exchange (collectively referred to as ``OTC Equities'').\6\ 
Essentially, the Service supports NASD members' market making in OTC 
Equities through displaying quotations entered through authorized 
Nasdaq Workstation units. Real-time access to quotation information 
captured in the Service is available to subscribers of Level \2/3\ 
Nasdaq service as well as subscribers of vendor-sponsored services that 
now carry OTCBB service data.
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    \5\ Securities Exchange Act Release No. 27975 (May 1, 1990), 55 
FR 19124. On March 12, 1992, the NASD filed with the Commission a 
proposal to obtain permanent approval of the Service. See Securities 
Exchange Act Release No. 30766 (June 1, 1992), 57 FR 24281. Since 
that time, the Commission has extended operation of the Pilot 
Program on several occasions. The most recent extension expires 
March 31, 1997.
    \6\ With the Commission's January 1994 approval of File No. SR-
NASD-93-24, the universe of securities eligible for quotation in the 
OTCBB now includes certain equities listed on regional stock 
exchanges that do not qualify for dissemination of transaction 
reports via the facilities of the Consolidated Tape Association. 
Securities Exchange Act Release No. 33507 (January 24, 1994), 59 FR 
4300 (order approving File No. SR-NASD-93-24).
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    The OTCBB disseminates quotations in electronic form for securities 
that, for many years, had quotations published only through reports 
known as the ``pink sheets.'' Consistent with the goals and objectives 
respecting the development of a national market system, the OTCBB was 
initiated to allow the market makers in non-Nasdaq securities to enter 
and update quotation information on a real-time basis. This capability 
has enhanced the availability of market information for non-Nasdaq 
securities of domestic companies. Similarly, the OTCBB has provided 
order entry firms with real-time access to the trading interest in 
domestic securities being displayed by market makers in OTC equity 
securities. This access has assisted them in negotiating the execution 
of customer orders at the best available price. In addition, the 
inclusion on the OTCBB of the telephone numbers of participating market 
makers has expedited the retail firms' processing of market orders. The 
OTCBB also has strengthened the NASD's ability to monitor quotations in 
these OTC equity securities.

III. Description of Amendment Nos. 3 and 4

    Amendment No. 3 proposes to require that foreign securities and 
ADRs be registered with the Commission pursuant to Section 12 of the 
Act to remain eligible for quotation on the OTCBB. The proposed 
requirement would be effective on April 1, 1998.\7\ Amendment No. 4 
amends the text of the proposed rule change and clarifies that the NASD 
will remove any foreign security from the OTCBB if it is brought to its 
attention that the security is no longer registered with the Commission 
pursuant to Section 12 of the Act. Proposed new language is in italics; 
proposed deletions are in brackets.
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    \7\ Under the temporary approval, foreign securities that are 
included on the OTCBB need not be registered with the Commission as 
long as they are in compliance with Rule 12g3-2(b) under the Act. 
Amendment No. 3 will provide a one-year sunset period for this part 
of the Pilot Program.
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6530. OTCBB-Eligible Securities

    The following categories of securities shall be eligible for 
quotation in the Service:
    (a) No change
    [(b) any foreign equity security or American Depositary Receipt 
(ADR) that is not listed on Nasdaq or a registered national securities 
exchange in the U.S., except that foreign equity securities or ADRs 
that are (1) listed on one or more regional stock exchanges and (2) do 
not qualify for dissemination of transaction reports via the facilities 
Consolidate Tape shall be considered eligible.]
    (b) any foreign equity security or American Depositary Receipt 
(ADR) that:
    (1) prior to April 1, 1998, is not listed on Nasdaq or a registered 
national securities exchange in the U.S., except that a foreign equity 
security or ADR shall be considered eligible if it is:
    (A) listed on one or more regional stock exchanges and;
    (B) does not qualify for dissemination of transaction reports via 
the facilities of the Consolidated Tape.
    (2) after March 31, 1998, is registered with the Securities and 
Exchange Commission pursuant to Section 12 of the Securities Exchange 
Act of 1934 and is not listed on Nasdaq or a registered national 
securities exchange in the U.S., except that a foreign equity security 
or ADR shall be considered eligible if it is:
    (A) listed on one or more regional stock exchanges and;
    (B) does not qualify for dissemination of transaction reports via 
the facilities of the Consolidated Tape.
* * * * *

6540. Requirements Applicable to Market Makers

    (a) No change
    (b) No change
    (1) Permissible Quotation Entries
    (A) No change
    (B) No change
    (C) A priced bid and/or offer entered into the Service for a 
[foreign equity security, and ADR, or a]* Direct Participation Program 
security shall be non-firm.\2\ Moreover, a market maker is only 
permitted to update quotation entries in such securities twice daily, 
i.e., once between 8:30 a.m. and 9:30 a.m. Eastern Time, and once 
between noon and 12:30 p.m. Eastern Time.

    \2\ The non-firm or indicative nature of a priced entry [in a 
foreign or ADR issue] is specifically identified on the montage of 
market maker quotations accessible through the Nasdaq Workstation 
service for this subset of OTCBB-eligible securities.
* * * * *
    *The text in brackets in paragraph 6540(b)(1)(c) and the 
footnote will be amended effective April 1, 1998.\8\
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    \8\ See Letter from Robert E. Aber, Vice President and General 
Counsel, Nasdaq, to Katherine England, Assistant Director, Division 
of Market Regulation, SEC (March 27, 1997).
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IV. Comments Received

    The Commission received twenty-four letters in response to its 
request for comments on the proposal and Amendment Nos. 1 and 2. Two 
comment letters supported permanent approval of the Service.\9\ Twenty-
two letters commented about Amendment Nos. 1 and 2 to the proposal. 
Although these amendments are superseded by Amendment Nos. 3 and 4, 
most of the commenters expressed views regarding the eligibility of 
foreign equity securities on the Service.
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    \9\ Letter from William F. Ross, Public Securities, Inc., to 
Jonathan G. Katz, Secretary, SEC (September 30, 1993); Letter from 
Arthur J. Pacheco and John L. Watson III, Security Traders 
Association, to Jonathan G. Katz, Secretary, SEC (June 23, 1992).
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    Nineteen commenters urged the Commission not to narrow the group of 
securities eligible for quotation on the Service.\10\ These commenters 
argued

[[Page 16637]]

against limiting the Service to foreign equity securities registered 
pursuant to Section 12 of the Act. The commenters stated that the 
proposed amendment would adversely affect the market for Level I ADRs, 
which permits many foreign issurers to develop a U.S. equity market. 
They argued that the proposed amendment would hurt the liquidity of the 
market for Level I ADRs and impair the access of foreign issuers to the 
U.S. equity trading markets.
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    \10\ Letter from Thomas D. Sanford, Vice President, The Bank of 
New York, to Jonathan G. Katz, Secretary, SEC (May 6, 1996); Letter 
from Zhi-jiong Xu, Vice Chairman and Chief Accountant, Shanghai 
Erfanji Co., Ltd. to Jonathan G. Katz, Secretary, SEC (October 10, 
1995); Letter from P.F. Haesler and C.R. Rosset, Holderbank, to 
Jonathan G. Katz, Secretary, SEC (June 19, 1995); Letter from Todd 
M. Roberts, Roberts, Sheridan & Kotel, to Jonathan G. Katz, 
Secretary, SEC (April 18, 1995); Letter from Dr. Serfas Karran, 
Dresdner Bank, to Jonathan G. Katz, Secretary, SEC (March 8, 1995); 
Letter from Sergio Luiz Goncalves Pereira, Director of Economy and 
Finance and Market Relations, Telebras, to Jonathan G. Katz, SEC 
(March 8, 1995); Letter from Peter B. Tisne, Emmet, Marvin & Martin, 
LLP, to Jonathan G. Katz, Secretary, SEC (March 16, 1995); Letter 
from Alan Mercer, Peregrine Investments Holdings Limited, to 
Jonathan G. Katz, Secretary, SEC (March 21, 1995); Letter from P. 
Barnes-Wallis, Director of Public Affairs, Rolls-Royce plc, to 
Jonathan G. Katz, Secretary, SEC (March 9, 1995); Letter from Murilo 
Bueno Kammer, General Director, Iochpe-Maxion, to Jonathan G. Katz, 
Secretary, SEC (March 17, 1995); Letter from Yauaki Hirata, Director 
of Finance, Kobe Steel, Ltd., to Jonathan G. Katz, Secretary, SEC 
(March 14, 1995); Letter from John T. Hung, Executive Director, 
Wheelock and Company Limited, to Jonathan G. Katz, Secretary, SEC 
(March 21, 1995); Letter from EVN Energie vernunftig nutzen, to 
Jonathan G. Katz, Secretary, SEC (March 17, 1995); Letter from Ralph 
Marinello, Vice President, Citibank, to Jonathan G. Katz, Secretary, 
SEC (April 27, 1995); Letter from Song Zhuangfei, Chairman of the 
Board and General Manager, Shanghai Tyre & Rubber Co., Ltd., to 
Jonathan G. Katz, Secretary, SEC (February 1995); Letter from 
Shanghai Aklai Chemical Co., Ltd., to Jonathan G. Katz, Secretary, 
SEC (October 7, 1995); Letter from Shenzhen Special Economic Zone 
Real Estate & Properties (Group) Co. Ltd., to Jonathan G. Katz, 
Secretary, SEC (February 1995); Letter from Robert Courtney Mangone, 
Fox & Horan, to Jonathan G. Katz, SEC (February 27, 1995); Letter 
from Thomas D. Sanford, Vice President, The Bank of New York, to 
Brandon Becker and Linda Quinn, SEC (November 15, 1994); Letter from 
Scott A. Ziegler, Ziegler, Ziegler & Altman, to Jonathan G. Katz, 
Secretary, SEC (December 11, 1994).
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    The American Stock Exchange, Inc. (``Amex'') and the New York Stock 
Exchange, Inc. (``NYSE'') submitted comment letters objecting to the 
inclusion of unregistered foreign securities on the Service.\11\ Both 
the Amex and the NYSE urged the Commission not to grant permanent 
approval to the Service, and to disapprove the NASD's proposal to 
grandfather and make eligible for quotation those securities whose 
issuers had perfected their Rule 12g3-2(b) exemption by July 1, 1994. 
The NYSE asserted its belief that the Commission should act promptly to 
remove foreign securities from the Service. The Amex also objected to 
the grandfathering of foreign unregistered securities, and asserted 
that the Service provides a significant disincentive to listing and 
registration for foreign issuers. In addition, the Amex argued against 
allowing foreign unregistered securities to be quoted on the Service 
because foreign issuers would be able to obtain much of the visibility 
of an exchange or Nasdaq listing without the burdens of registration.
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    \11\ Letter from James F. Duffy, Executive Vice President and 
General Counsel, Amex, to Jonathan G. Katz, Secretary, SEC (December 
9, 1994); Letter from James E. Buck, Senior Vice President and 
Secretary, NYSE, to Jonathan G. Katz, Secretary, SEC (March 18, 
1993).
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V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment Nos. 3 and 4 to File No. SR-NASD-92-7. 
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 in the Commission's Public 
Reference Room. Copies of the filing will also be available for 
inspection and copying at the principal office of the NASD. All 
submissions should refer to the file number in the caption above and 
should be submitted by April 28, 1997.

VI. Commission's Findings and Order Granting Accelerated Approval

    The Commission finds that approval of the proposed rule change is 
consistent with the Act and the rules and regulations thereunder, and, 
in particular, with the requirements of Section 15A(b)(6), which 
provides that the rules of the NASD must be designed to prevent 
fraudulent and manipulative acts and practices and to promote just and 
equitable principles of trade, and of Section 15A(b)(11) of the Act, 
which provides that the rules of the NASD relating to quotations must 
be designed to produce fair and informative quotations, prevent 
fictitious or misleading quotations, and promote orderly procedures for 
collecting, distributing, and publishing quotations.
    The Commission believes that permanent approval of the NASD's 
proposal is appropriate at this time. The OTCBB has fulfilled the 
NASD's objectives of increasing the visibility, liquidity, and 
surveillance of non-Nasdaq OTC equity securities.\12\ As currently 
configured, the OTCBB provides firm quotations and 90 second trade 
reporting for domestic securities, which has brought much needed 
transparency to the market for these securities. The enhanced 
transparency facilitates price discovery and the execution of 
customers' orders at the best available price. Additionally, continued 
operation of the Service will materially assist the NASD's surveillance 
of its members' trading in OTC Equities that are eligible and quoted in 
the Service, and in regional exchange securities that are not reported 
to the Consolidated Tape and that are quoted in the OTCBB by NASD 
members.
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    \12\ At its inception, the OTCBB rules did not require firm 
quotations, two-sided quotations, or trade reporting. The NASD has 
made improvements to the OTCBB since then. Pursuant to NASD rules, 
all quotations for domestic securities must be two-sided and firm; 
trades are reported within 90 seconds.
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    The domestic issues included on the OTCBB do not meet Nasdaq 
inclusion standards and are less widely held, more illiquid, and do not 
have the operating history of Nasdaq companies.\13\ While the potential 
for trading abuses is greater for these types of securities, these 
abuses can be reduced by according more transparency to these 
securities. Nevertheless, the operation of the OTCBB places a 
concomitant responsibility on the NASD to surveil adequately the quotes 
and prices disseminated over the Service. Indeed, the additional 
transparency from the OTCBB should assist the NASD in its surveillance 
efforts.
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    \13\ Issuers whose securities are included in the OTCBB 
generally are required to register and report pursuant to Section 12 
of the act when the issuer has more than 500 record holders of its 
equity securities and $10 million in total assets.
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    With respect to foreign issuers on the OTCBB, the Commission 
believes a different analysis is warranted. Since the OTCBB's 
inception, the inclusion of unregistered foreign securities and ADRs on 
the Service has raised concern. As part of the Pilot Program, the 
Commission permitted the inclusion of quotations on the OTCBB of 
foreign securities that were not registered under the Act although in 
compliance with Rule 12g3-2(b), because the OTCBB was viewed as merely 
providing transparency to trading in foreign issues already occurring 
in the over-the-counter market. In contrast, securities listed on an 
exchange or quoted on Nasdaq must be registered securities. 
Registration requires, in part, that the issuer provide financial 
information in accordance with U.S. accounting standards. The quotation 
of foreign securities on the OTCBB has raised

[[Page 16638]]

concerns that the OTCBB would provide an active secondary trading 
market in unregistered securities. To address these concerns, the 
quotation of foreign securities on the OTCBB was limited to ``non-
firm'' quotations that could be updated a maximum of two times per day. 
Thus, each quotation in a foreign security on the OTCBB is ``stale'' 
and serves more as an indication of a market maker's interest in 
dealing in the security than as an actual bid and offer in the 
security. In addition, while market makers must report trades in 
foreign securities to the NASD, the NASD uses this information for 
surveillance purposes only and does not make this information public.
    The Commission believes that is appropriate to require that foreign 
securities be registered pursuant to Section 12 of the Act to be 
eligible for inclusion in the OTCBB. As a general matter, transparency 
benefits the markets. However, in the context of the inclusion of 
unregistered foreign securities on the OTCBB, the benefits may be 
outweighed by the potential from including unregistered securities on a 
visible U.S. market operated by a self-regulatory organization. 
Although the OTCBB provides some increase in transparency for foreign 
securities, this transparency is limited by the restriction to non-firm 
quotations updated twice daily. At the same time, the OTCBB may be 
inconsistent with the full disclosure goals of the securities laws in 
allowing a regulated public marketplace for unregistered securities. 
The Commission believes that the NASD could increase transparency with 
less customer confusion by requiring transaction reporting for foreign 
securities traded over-the-counter in the U.S. Transaction reporting 
information has the potential to greatly enhance the amount of market 
information available to investors and better enable investors to 
monitor the executions they receive in foreign securities. In the 
meantime, the Commission believes that it is preferable for the NASD to 
require foreign issuers that trade on the OTCBB to be registered. Under 
the NASD's amendment, this requirement will apply one year from the 
date of this Order. The one-year sunset provision for unregistered 
foreign issuers on the OTCBB will give issuers an opportunity to 
consider whether to register so that they can continue to have their 
securities included on the OTCBB in the U.S. or to make other 
arrangements. It also will provide the public with one-year's notice of 
the fact that these issuers will no longer be quoted on the OTCBB. The 
requirement that foreign securities be registered will be effective on 
April 1, 1998.\14\
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    \14\ The Commission expects that the NASD will act with 
diligence in attempting to ensure that this change as amended is 
enforced, and that the NASD will remove those securities from the 
OTCBB upon gaining knowledge that a foreign issuer included on the 
OTCBB is not registered and reporting under Section 12 of the Act, 
and the rules thereunder.
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    The Commission finds good cause for approving Amendment Nos. 3 and 
4 to the proposed rule change prior to the 30th day after the date of 
publishing notice of the filing thereof. The Commission finds that 
approval of this proposed rule change is appropriate because the 
Commission has considered the comments received from interested parties 
and believes that the continued operation of the Service, as amended by 
this Order, is in the public interest. In particular, the Commission 
notes that the OTCBB has been operating continuously since June 1, 1990 
on a pilot basis, and the Commission finds that a one-year phase-out of 
the system for unregistered foreign securities would prove less 
disruptive to trading than an immediate removal of unregistered foreign 
issuers from the OTCBB.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change SR-NASD-92-7 be, and hereby is, approved 
as amended. The change to Paragraph 6540(b)(1)(c) and the footnote will 
be effective on April 1, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-8792 Filed 4-4-97; 8:45 am]
BILLING CODE 8010-01-M