Document ID: SEC-2006-0827-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2006-06-28T04:00Z

[Federal Register: June 28, 2006 (Volume 71, Number 124)]
[Notices]               
[Page 36847-36848]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28jn06-132]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54028; File No. SR-NASD-2005-067]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Granting Approval to Proposed Rule Change and 
Amendment Nos. 1, 2, and 3 Thereto Relating to Amendments to NASD Rule 
6530 To Clarify the Review Process for OTCBB Eligibility Determinations 
and To Implement Fees for Such Review

June 21, 2006.
    On May 24, 2005, the National Association of Securities Dealers, 
Inc. (``NASD''), through its subsidiary, the Nasdaq Stock Market, Inc. 
(``Nasdaq''), filed with the Securities and Exchange Commission 
(``Commission''), pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend NASD Rules 6530 and 7010 to clarify the 
availability of a process to review a determination of an issuer's 
eligibility under NASD Rule 6530 for continued quotation of its 
securities on the Over-the-Counter Bulletin Board (``OTCBB'') and seek 
review of such determination. On September 27, 2005, Nasdaq filed with 
the Commission Amendment No. 1 to the proposed rule change.\3\ On 
December 8, 2005, NASD filed with the Commission Amendment No. 2 to the 
proposed rule change,\4\ and on February 23, 2006, NASD filed with the 
Commission Amendment No. 3 to the proposed rule change.\5\ The proposed 
rule change, as amended, was published for comment in the Federal 
Register on March 31, 2006.\6\ No comments were received on this 
proposal. This order approves the proposed rule change, as amended.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, NASD removed the record-keeping fee it 
had originally proposed to establish in NASD Rule 7010.
    \4\ In Amendment No. 2, NASD amended the filing to reflect the 
Commission's approval of a separate proposed rule change in which 
NASD amended its Plan of Allocation and Delegation of Functions by 
NASD to Subsidiaries, as well as certain corresponding NASD rules, 
to permit NASD to assume direct authority for OTC equity operations, 
including the OTCBB, rather than continuing to delegate this 
authority to Nasdaq. See Securities Exchange Act Release No. 52508 
(September 26, 2005); 70 FR 57346 (September 30, 2005) (SR-NASD-
2005-089).
    \5\ In Amendment No. 3, which replaced and superseded the prior 
filings in their entirety, NASD clarified the availability of the 
hearing process set forth in proposed NASD Rule 6530(f) in the event 
that an OTCBB security is subject to removal from the OTCBB under 
NASD Rule 6530(e)(1) and made clarifying changes relating to the 
application of the NASD Rule 9700 Series to hearings conducted to 
determine the security's eligibility for quotation on the OTCBB.
    \6\ See Securities Exchange Act Release No. 53546 (March 24, 
2006), 71 FR 16350 (``Notice'').
---------------------------------------------------------------------------

I. Description of the Proposal

    Recently, the Commission approved NASD Rule 6530(e), which limits 
the eligibility for quotation on the OTCBB of the security of an issuer 
that is repeatedly late or otherwise delinquent in filing periodic 
reports to the issuer's respective regulator.\7\ Specifically, NASD 
Rule 6530(e) provides that an NASD member will not be permitted to 
quote a security on the OTCBB: (1) If the issuer has failed to file a 
complete required report with the Commission or other respective 
regulator by the due date for such report (even if it later files 
within the grace period allowed by NASD Rule 6530(a)) three times in 
the prior two-year period; or (2) if the security has been removed from 
the OTCBB due to the issuer's failure to file a complete required 
report two times in the prior two-year period. Following the removal of 
an issuer's security pursuant to NASD Rule 6530(e), such security shall 
not be eligible for quotation on the OTCBB by an NASD member until such 
time as the issuer has timely filed in a complete form all required 
periodic due in a one-year period.
---------------------------------------------------------------------------

    \7\ See Securities Exchange Act Release No. 52786 (November 16, 
2005), 70 FR 70907 (November 23, 2005) (SR-NASD-2005-011).
---------------------------------------------------------------------------

    NASD's proposed revisions to NASD Rule 6530 would set forth 
procedures for an aggrieved party to request a review by a hearing 
panel, pursuant to the NASD Rule 9700 Series, of a determination by 
NASD that an issuer is ineligible for continued quotation on the OTCBB. 
The proposed rule change also would set forth the process for an 
aggrieved party to request review of the hearing panel's decision. In 
addition, the proposal would require an aggrieved party to pay a fee of 
$4,000 when requesting either a review by the hearing panel or a review 
of the hearing panel's decision. Finally, the proposal would codify the 
notification requirements to which NASD would adhere in the event that 
an issuer's security approaches the point of removal from quotation on 
the OTCBB for failure to comply with the provisions of NASD Rule 6530.

II. Discussion and Commission Findings

    The Commission finds that the proposed rule change, as amended, is 
consistent with the provisions of section

[[Page 36848]]

15A(b)(6) of the Act,\8\ which requires, among other things, that NASD 
rules must be 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 interests.\9\
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78o-3(b)(6).
    \9\ In approving this proposed rule change, as amended, the 
Commission notes that it has considered the proposed rule's impact 
on efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
---------------------------------------------------------------------------

    Under the proposal, upon determining that an issuer's security 
would become ineligible for quotation under NASD Rule 6530, NASD would 
send a notice to the address appearing on the issuer's most recent 
periodic report at least seven calendar days prior to the security's 
removal from the OTCBB, even if there is no applicable grace 
period.\10\ The notice would indicate the removal date for the issuer's 
security after any applicable grace period, unless the condition 
causing the ineligibility has been cured by the expiration of any 
applicable grace period.\11\ The Commission believes that the proposed 
notice is reasonably designed to inform issuers of the imminent removal 
of their securities from OTCBB quotation.
---------------------------------------------------------------------------

    \10\ Under NASD Rule 6530(e), the securities of an issuer are 
removed from the OTCBB the third time that the issuer fails to file 
a required report by the due date (including, if applicable, any 
extension permitted by Rule 12b-25 of the Exchange Act (17 CFR 
240.12b-25)) in a two-year period, without the benefit of the grace 
period for the third delinquency. Prior to removal of the security 
from the OTCBB, however, NASD would provide seven calendar days to 
allow an aggrieved party to request a review of such determination 
by a hearing panel. As such, where an issuer's security would be 
removed for the issuer's failure to file a required report by the 
due date for the third time in a two-year period, NASD would provide 
seven calendar days (not the 30 or 60 day grace period provided in 
NASD Rule 6530(a)) to allow an aggrieved party time to request a 
hearing. See Securities Exchange Act Release No. 52786 (November 16, 
2005), 70 FR 70907 (November 23, 2005) (SR-NASD-2005-011). NASD's 
proposal to amend NASD Rule 6530(e) and (f) would codify this 
procedural framework.
    \11\ If an issuer's security becomes ineligible for failure to 
file by the due date for the third time in a two-year period, the 
issuer would not be able to cure the condition causing the 
ineligibility. See Securities Exchange Act Release No. 52786 
(November 16, 2005), 70 FR 70907 (November 23, 2005) (SR-NASD-2005-
011).
---------------------------------------------------------------------------

    The proposed rule change codifies the right of an aggrieved party 
to request a review of a determination by NASD that an issuer's 
security is ineligible for continued quotation on the OTCBB, pursuant 
to the procedures set fourth in the NASD Rule 9700 Series as modified 
by the proposed rule change. The proposal also implements at $4,000 fee 
for such review.\12\ The proposed rule change specifies that the 
hearing panel is limited to determining whether the issuer's security 
is eligible for continued quotation and/or whether the issuer filed a 
complete report by the applicable due date, taking into account any 
extensions permitted under Rule 12b-25 under the Act.\13\
---------------------------------------------------------------------------

    \12\ Although NASD currently permits aggrieved parties to 
request a review of a determination of ineligibility pursuant to the 
NASD Rule 9700 Series, the proposed rule change would provide for 
that right in the rule governing OTCBB-eligible securities, NASD 
Rule 6530.
    \13\ The proposed rule specified that hearings will be conducted 
via telephone, and that NASD will provide the aggrieved party with 
at least five business days notice of the hearing unless the 
aggrieved party waives such notice.
---------------------------------------------------------------------------

    The Commission believes that scope of the review is reasonably 
limited and tailored to reflect the requirements of NASD Rule 6530. In 
particular, the only matters subject to review are whether the OTCBB 
issuer filed a complete report by the applicable due date, taking into 
account any extensions pursuant to Rule 12b-25 under the Act, and 
whether the issuer's security is eligible for continued quotation.\14\ 
The Commission further believes that providing for an aggrieved party's 
right to request review in NASD Rule 6530 will promote clarity and 
transparency of that process.
---------------------------------------------------------------------------

    \14\ In the case of OTCBB issuers who file regulatory reports 
with a regulator other than the Commission (e.g., Federal banking 
regulators), the Commission notes that NASD generally receives 
notice of a regulatory filing from the applicable market maker or 
the issuer itself. Accordingly, these issuers can help to alleviate 
any confusion regarding whether a filing has been timely made by 
providing NASD with a copy of the applicable filing made with the 
appropriate regulator on or before its due date.
---------------------------------------------------------------------------

    A request for a hearing under the proposed rule would temporarily 
stay a security's removal until the hearing panel makes its 
determination. An aggrieved party's request for review by the hearing 
panel would not prevent the issuer's delinquency from being counted as 
an occurrence for the purposes of NASD Rule 6530(e)(1), although the 
issuer's security would remain eligible for continued and uninterrupted 
quotation until such time as the hearing panel issues its opinion. In 
addition, the proposal would clarify that an aggrieved party may appeal 
the hearing panel's decision pursuant to NASD Rule 9760. Unlike the 
initial request for hearing panel review, the request for an appeal of 
the hearing panel's decision would not stay the security's removal.\15\ 
The issues on appeal would be limited to whether the issuer's security, 
at the time of the initial review by the hearing panel, was eligible 
for quotation on the OTCBB and/or whether the issuer filed a complete 
report by the applicable due date, taking into account any extensions 
pursuant to Rule 12b-25 under the Act. The Commission believes that the 
proposed rule change is reasonably designed to provide appropriate 
procedures for an aggrieved party to seek a review by the hearing panel 
and to appeal the hearing panel's decision.
---------------------------------------------------------------------------

    \15\ The proposed rule change further notes that review of the 
hearing panel decision will be based on the written record, unless 
further hearings are ordered. If further hearings are ordered, they 
will be conducted via telephone.
---------------------------------------------------------------------------

    The Commission notes that NASD currently does not provide for a fee 
to offset the costs to conduct hearings regarding a security's 
eligibility for quotation on the OTCBB pursuant to the NASD Rule 9700 
Series. The proposed rule change would implement a $4,000 fee for 
aggrieved parties who request review by a hearing panel, as well as a 
$4,000 fee for aggrieved parties who seek review of the hearing panel's 
decision.\16\ Given the increasing number of hearings relating to OTCBB 
eligibility,\17\ the Commission believes that it is reasonable for NASD 
to adopt a fee to offset the costs associated with the conduct of the 
hearings and appeals process under the NASD Rule 9700 Series for 
parties aggrieved by a determination made under NASD Rule 6530.
---------------------------------------------------------------------------

    \16\ In comparison, NASD Rule 4805(c) requires Nasdaq-listed 
issuers to submit a $4,000 fee for a hearing on the written record 
and a $5,000 fee for an oral hearing to cover the cost of holding 
the hearing, and NASD Rule 4807(a) requires Nasdaq-listed issuers to 
submit a fee of $4,000 to cover the cost of review by the Nasdaq 
Listing and Hearing Review Council.
    \17\ See Notice, supra note 6, at 16352 n.19 (noting that the 
number of hearing requests received by NASD from OTCBB issuers 
increased from 14 requests in 2003 to 124 requests in 2005).
---------------------------------------------------------------------------

III. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\18\ that the proposed rule change (SR-NASD-2005-067), as amended, 
be, and it hereby is, approved.
---------------------------------------------------------------------------

    \18\ 15 U.S.C. 78s(b)(2).
    \19\ 17 CFR 200.30-3(a)(12).

    For the commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 06-5756 Filed 6-27-06; 8:45 am]

BILLING CODE 8010-01-M