[Federal Register Volume 62, Number 68 (Wednesday, April 9, 1997)]
[Notices]
[Pages 17262-17273]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-9004]



[[Page 17262]]

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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''),<SUP>1 and Rule 19b-4 <SUP>2 thereunder, notice is hereby 
given that on March 3, 1997,<SUP>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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On 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.
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    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.

[[Page 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 
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 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 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. 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

[[Page 17264]]

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

[[Page 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.

[[Page 17266]]

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

[[Page 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] two-year 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, non-convertible 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 non-convertible 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

[[Page 17268]]

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

[[Page 17269]]

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.<SUP>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.
---------------------------------------------------------------------------

    \4\ These requirements are contained in NASD Rule 4300 Series 
and Rule 4400 Series.
---------------------------------------------------------------------------

    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,<SUP>5 
thus providing a level of transparency not present when the listing 
standards were last revised.
---------------------------------------------------------------------------

    \5\ See NASD Rule 6550 (requiring that transactions in OTCBB-
eligible securities be reported pursuant to the requirements of the 
Rule 6600 Series).
---------------------------------------------------------------------------

Summary of Proposed Rule Change <SUP>6
---------------------------------------------------------------------------

    \6\ See 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.
---------------------------------------------------------------------------

    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.<SUP>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.<SUP>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.
---------------------------------------------------------------------------

    \7\ On 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.
    \8\ See Exchange Act Release No. 28391 (September 5, 1990), 55 
FR 36372.
---------------------------------------------------------------------------

    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

[[Page 17270]]

corporate actions.<SUP>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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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,<SUP>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.
---------------------------------------------------------------------------

    \10\ As 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).
---------------------------------------------------------------------------

    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.<SUP>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.'' <SUP>12
---------------------------------------------------------------------------

    \11\ See Securities Act Release No. 6695 (April 1, 1987), 52 FR 
11665.
    \12\ See Exchange Act Release No. 31197 (September 17, 1992), 57 
FR 45287, n. 26.
---------------------------------------------------------------------------

    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.<SUP>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.
---------------------------------------------------------------------------

    \13\ See 12 CFR 363, Appendix A.
---------------------------------------------------------------------------

    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

[[Page 17271]]

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 <SUP>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 industry-
accepted level of review.
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    \14\ 15 U.S.C. 78o-3.
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    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.<SUP>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

[[Page 17272]]

requirement for auditors of Nasdaq issuers.
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    \15\ See letter from Jeffrey Adduci, President, Regional 
Investment Bankers Association to Perry Peregoy, Vice President, 
Nasdaq, dated December 19, 1996.
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    Of those comments expressing opposition to the proposed rule 
change, three general themes emerged:
    <bullet> The bid price is not within the direct control of the 
issuer.
    <bullet> The proposal singles out small issuers.
    <bullet> 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.<SUP>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.
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    \16\ Contrary 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.
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    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''),<SUP>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.<SUP>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.
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    \17\ NASDR is also a wholly owned subsidiary of the NASD.
    \18\ These 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.
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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

[[Page 17273]]

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.<SUP>19
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-9004 Filed 4-8-97; 8:45 am]
BILLING CODE 8010-01-P