Document ID: SEC-2005-0390-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2005-12-15T05:00Z

[Federal Register: December 15, 2005 (Volume 70, Number 240)]
[Notices]               
[Page 74392-74395]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15de05-105]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52899; File No. SR-NASD-2005-136]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change To Allow Nasdaq To Issue Public Reprimand Letters

December 6, 2005.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on November 17, 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'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by Nasdaq. Nasdaq filed this 
proposal pursuant to section 19(b)(3)(A) of the Act \3\ and Rule 19b-
4(f)(6) thereunder \4\ as non-controversial, and therefore the proposed 
rule change is effective immediately upon filing. 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\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to modify NASD Rules 4801, 4803, 4804 and 4811 to 
permit Nasdaq to issue public reprimand letters to listed companies for 
certain rule violations when a determination is made that delisting is 
not an appropriate sanction. Nasdaq would implement the proposed rule 
change upon notice by the Commission.
    The text of the proposed rule change is below. Proposed new 
language is in italics; proposed deletions are in brackets.\5\
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    \5\ The proposed rule change is marked to show changes from the 
rules as they appear in the electronic NASD Manual available at 
http://www.nasd.com.

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* * * * *
4801. Definitions
    (a)-(j) No change.
    (k) The term ``Staff Determination'' shall mean either:
    (1) a written determination by the Listing Department to limit or 
prohibit the initial or continued listing of an issuer's securities 
pursuant to Rule 4804[.]; or
    (2) a public reprimand letter in a case where the Listing 
Department has determined that the issuer has violated a Nasdaq 
corporate governance or notification listing standard (other than one 
required by Rule 10A-3 of the Securities Exchange Act of 1934) and that 
delisting is not an appropriate sanction. In determining whether to 
issue a public reprimand letter, the Listing Department shall consider 
whether the violation was inadvertent, whether the violation materially 
adversely affected shareholders' interests, whether the violation has 
been cured, whether the issuer reasonably relied on an independent 
advisor and whether the issuer has demonstrated a pattern of 
violations.
* * * * *
4803. Staff Review of Deficiency
    (a) Whenever staff of the Listing Department determines that an 
issuer does not meet a listing standard set forth in the Rule 4000 
Series, staff shall immediately notify the issuer. The issuer shall 
make a public announcement through the news media disclosing the 
receipt of this notice, including the Rule(s) upon which it was based. 
Prior to the release of the public announcement, the issuer shall 
provide such disclosure to Nasdaq's MarketWatch Department, the Listing 
Department, and the Hearings Department. The public announcement

[[Page 74393]]

shall be made as promptly as possible, but not more than four business 
days following receipt of the notice from the Listing Department.
    (1) In the case of
    (A) all quantitative deficiencies from standards that do not 
provide a compliance period;
    (B) deficiencies from the standards of Rules 4350(c) or (d) or 
4360(c) or (d) where the cure period of the Rule is not applicable; or
    (C) deficiencies from the standards of Rules 4350(f), (h), (i), 
(k), or (n), 4360(f) or (i), or 4351;

staff's notice shall provide the issuer with fifteen calendar days to 
submit a plan to regain compliance with the listing standard; provided, 
however, that the issuer shall not be provided with an opportunity to 
submit such a plan if review under the Rule 4800 Series of a prior 
Staff Determination (other than a Staff Determination that serves as a 
public reprimand letter as described in Section 4801(k)(2)) with 
respect to the issuer is already pending. Subject to the restrictions 
of paragraph (b), staff may extend this deadline upon good cause shown. 
Upon receipt of the issuer's plan, staff in the Listing Department may 
request such additional information from the issuer as is necessary to 
make a determination regarding the likelihood that the plan will allow 
the issuer to meet the listing standard at issue.
    (2)-(3) No change.
    (b) Unless review under the Rule 4800 Series of a prior Staff 
Determination (other than a Staff Determination that serves as a public 
reprimand letter as described in section 4801(k)(2)) with respect to 
the issuer is already pending, the Listing Department may grant the 
issuer additional time to regain compliance with a listing standard 
described in paragraph (a)(1); provided, however, that the additional 
time provided by all such exceptions shall not exceed 105 calendar days 
from the date of staff's notification pursuant to paragraph (a). The 
Listing Department shall prepare a written record describing the basis 
for granting any exception, and shall provide the issuer with written 
notice as to the terms of the exception. If the issuer does not regain 
compliance within the time period provided by all applicable 
exceptions, the Listing Department shall immediately issue a Staff 
Determination pursuant to Rule 4804(a). If the Listing Department 
determines not to grant the issuer additional time to regain 
compliance, the Listing Department shall immediately issue a Staff 
Determination pursuant to Rule 4804(a) that includes a description of 
the basis for denying the exception.
4804. Written Notice of Staff Determination
    (a) If the Listing Department reaches a determination to limit or 
prohibit the initial or continued listing of an issuer's securities or 
to issue a public reprimand letter, it shall prepare and provide to the 
issuer a Staff Determination that shall describe the specific grounds 
for the determination, identify the quantitative standard or 
qualitative consideration set forth in the Rule 4000 Series that the 
issuer has failed to satisfy, and provide notice that upon request the 
issuer shall be provided an opportunity for a hearing under this Rule 
4800 Series.
    (b) An issuer that receives a Staff Determination [to prohibit 
continued listing of the issuer's securities] under Rule 4804(a) shall 
make a public announcement through the news media disclosing the 
receipt of the Staff Determination, including the Rule(s) upon which 
the Staff Determination was based. Prior to the release of the public 
announcement, an issuer shall provide such disclosure to Nasdaq's 
MarketWatch Department, the Listing Department, and the Hearings 
Department. The public announcement shall be made as promptly as 
possible, but not more than four business days following receipt of the 
Staff Determination.
    (c) If review under the Rule 4800 Series of a Staff Determination 
described in Rule 4801(k)(1) is pending and the Listing Department 
identifies the existence of one or more additional deficiencies with 
respect to the issuer, the Listing Department shall prepare and provide 
to the issuer a Staff Determination with respect to such additional 
deficiencies. If the new Staff Determination is issued prior to a Panel 
hearing with respect to the original Staff Determination, the new Staff 
Determination shall notify the issuer that it should present its views 
with respect to the additional deficiencies at the Panel hearing. If 
the new Staff Determination is issued after a Panel hearing with 
respect to the original Staff Determination, the new Staff 
Determination shall inform the issuer that it should present its views 
with respect to the additional deficiencies in writing within the 
period specified in the Staff Determination, to allow review of the 
additional deficiencies as provided under Rule 4802(d).
    (d) If review under the Rule 4800 Series of a public reprimand 
letter is pending and the Listing Department identifies the existence 
of one or more additional deficiencies with respect to the issuer, the 
Listing Department shall review the additional deficiencies as provided 
in Rule 4803.
* * * * *
4811. Record on Review; Contents of Decisions
    (a)-(d) No change.
    (e) If a Panel Decision, Listing Council Decision, or decision of 
the NASD Board concludes that the issuer has failed to satisfy the 
quantitative standards or qualitative considerations set forth in the 
Rule 4000 Series, the decision shall either:
    (1) grant an exception to the Rule 4000 Series as permitted by Rule 
4802(b);
    (2) limit or prohibit the initial or continued listing of the 
issuer's securities; or
    (3) serve as a public reprimand letter in a case where the 
Adjudicatory Body determines that the issuer has violated a Nasdaq 
corporate governance or notification listing standard (other than one 
required by Rule 10A-3 of the Securities Exchange Act of 1934) and that 
delisting is not an appropriate sanction. In determining whether to 
issue a public reprimand letter, the Adjudicatory Body shall consider 
whether the violation was inadvertent, whether the violation materially 
adversely affected shareholders' interests, whether the violation has 
been cured, whether the issuer reasonably relied on an independent 
advisor and whether the issuer has demonstrated a pattern of 
violations.
    (f) An issuer that receives an Adjudicatory Body decision that 
serves as a public reprimand letter as described in Rule 4811(e)(3) 
shall make a public announcement through the news media disclosing the 
receipt of the decision, including the Rule(s) upon which the decision 
was based. Prior to the release of the public announcement, an issuer 
shall provide such disclosure to Nasdaq's MarketWatch Department, the 
Listing Department, and the Hearings Department. The public 
announcement shall be made as promptly as possible, but not more than 
four business days following receipt of the decision.
* * * * *

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

[[Page 74394]]

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

1. Purpose
    Nasdaq is proposing to allow the issuance of a public reprimand 
letter to a listed company upon a determination that the company has 
violated a Nasdaq corporate governance or notification listing standard 
and that delisting is not an appropriate sanction. The Commission 
recently approved a proposed rule change to Nasdaq's procedures 
associated with denying or limiting companies' initial or continued 
listing on Nasdaq.\6\ Under these new procedures, the staff of Nasdaq's 
Listing Qualifications Department (``Listing Department'') provides 
written notice to an issuer of a deficiency when a determination has 
been made that a listing requirement has not been satisfied. Depending 
upon the nature of the deficiency, the notice takes the form of a Staff 
Determination, which initiates proceedings to deny or limit listing, or 
a deficiency letter that provides the issuer with 15 days to submit a 
plan to regain compliance with the listing standard.\7\ If an issuer 
receives a Staff Determination, it may then request a hearing before a 
Listing Qualifications Panel (``Panel''). Upon receiving a decision 
from the Panel (``Panel Decision''), the issuer may appeal the decision 
to the Nasdaq Listing and Hearing Review Council (``Listing Council''). 
The final decision of the Listing Council (``Listing Council 
Decision'') is subject to review by the NASD Board of Directors and the 
Commission.
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    \6\ See Securities Exchange Act Release No. 52342 (August 26, 
2005), 70 FR 52456 (September 2, 2005) (SR-NASD-2004-125).
    \7\ Under NASD Rule 4803, upon the expiration of the 15 day 
period provided in a deficiency notice, the staff is required either 
to initiate delisting proceedings or grant an issuer up to 105 days 
to regain compliance with the listing standard. The staff's 
authority to grant an exception does not apply to quantitative 
listing standards that, by their terms, specify a cure period.
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    Under the current rules, a Staff Determination initiates 
proceedings to deny or limit listing. In monitoring the compliance of 
listed companies with Nasdaq's corporate governance rules, Nasdaq has 
identified circumstances where delisting would be disproportionate to 
the underlying deficiency. Nasdaq believes that the availability of a 
lesser sanction in the form of a public reprimand letter would ensure 
that investors are not harmed by the premature delisting of companies 
in certain limited situations where violations involve a relatively 
minor infraction of certain Nasdaq corporate governance standards or 
notice requirements.\8\
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    \8\ Examples of some circumstances where Nasdaq could determine 
to issue a public reprimand letter include those where: (1) The 
staff determines that a company engaged in a pattern of failing to 
provide advance notice of press releases to the Nasdaq StockWatch 
department; (2) the staff becomes aware that a company with a 
December 31 fiscal year end has not held an annual meeting for the 
prior year as of early January, but the company has filed a proxy to 
hold the meeting in the next few weeks; or (3) the staff determines 
that an independent director resigned from the company and was 
replaced with another independent director, but the company did not 
provide prior notice to Nasdaq.
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    The proposed rule change, thus, would modify NASD Rule 4801(k) to 
provide that, depending on the nature of the deficiency, a Staff 
Determination may take the form of either: (1) A written determination 
to limit or prohibit the initial or continued listing of an issuer's 
securities or (2) a public reprimand letter. Under the proposed rule 
change, the Listing Department could issue a public reprimand letter to 
an issuer only upon a determination that the issuer violated a Nasdaq 
corporate governance or notification listing standard (other than one 
required by Rule 10A-3 under the Act \9\) and that delisting is not an 
appropriate sanction. In determining whether to issue a public 
reprimand letter, the Listing Department would consider whether the 
violation was inadvertent, whether the violation materially adversely 
affected shareholders' interests, whether the violation has been cured, 
whether the issuer reasonably relied on an independent advisor, and 
whether the issuer has demonstrated a pattern of violations.
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    \9\ 17 CFR 240.10A-3.
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    Because a public reprimand letter would be considered a Staff 
Determination, it would be subject to appeal in the same manner as a 
notice to deny or limit listing. The proposed rule change also would 
modify NASD Rule 4804(b) to clarify that once a public reprimand letter 
is issued, a company would be required to make a public announcement 
through the news media disclosing the receipt of the letter, including 
the basis for the staff's determination. The timetable for the public 
announcement would be the same as for a deficiency or delisting 
letter--as promptly as possible, but not later than four business days 
following receipt of the public reprimand letter.
    Nasdaq also proposes to amend NASD Rules 4803, 4804(c), and 4804(d) 
to clarify that if an appeal of a public reprimand letter is pending, 
an issuer would not be disqualified from receiving an exception with 
respect to any additional deficiencies under NASD Rule 4803. If a Staff 
Determination is under review when the staff issues an additional 
deficiency notice, the current rules do not permit the staff to provide 
additional time to the issuer to cure the violation or to submit a plan 
to regain compliance with the listing standards. Instead, staff must 
issue a new Staff Determination with respect to the additional 
deficiencies under NASD Rule 4804(c) and notify the issuer that it 
should present its views with respect to the new deficiencies at the 
Panel hearing or, if the Panel hearing has occurred, in writing. 
Because public reprimand letters generally would involve minor rule 
violations and are intended to be a lesser sanction than delisting, 
Nasdaq believes it would not be appropriate to deny issuers that appeal 
such a letter the benefit of the exception provided by NASD Rule 4803 
in the event an additional deficiency is identified.
    Nasdaq also proposes to modify NASD Rule 4811 to provide that a 
Panel Decision, Listing Council Decision, or decision of the NASD Board 
could, in addition to granting an exception or limiting or prohibiting 
the initial or continued listing of an issuer's securities, serve as a 
public reprimand letter. Under the proposed rule change, like the 
Listing Department, the appropriate Adjudicatory Body \10\ could issue 
a public reprimand letter to an issuer only upon a determination that 
the issuer violated a Nasdaq corporate governance or notification 
listing standard (other than one required by Rule 10A-3 under the Act 
\11\) and that delisting is not an appropriate sanction. In determining 
whether to issue a public reprimand letter, the Adjudicatory Body would 
be required to consider the same criteria as the Listing Department. As 
in the case of a public reprimand letter issued by the staff, an issuer 
that receives a public reprimand letter issued by an Adjudicatory Body 
would be required to make a public announcement through the news media 
disclosing receipt of the letter.
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    \10\ NASD Rule 4801(b) defines ``Adjudicatory Body'' to mean a 
Panel, the Listing Council, or the NASD Board.
    \11\ 17 CFR 240.10A-3.
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    Nasdaq continues to believe that delisting is the appropriate 
sanction for companies that fall below the quantitative listing 
requirements, violate

[[Page 74395]]

Nasdaq listing standards, or raise public interest concerns. Nasdaq 
believes, however, that the authority to issue public reprimand letters 
would provide Nasdaq with the ability to impose lesser sanctions on 
issuers in limited circumstances, when delisting is not appropriate.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of section 15A of the Act,\12\ in general, and with 
section 15A(b)(6) of the Act,\13\ in particular, in that it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, remove impediments to a free 
and open market and a national market system, and, in general, to 
protect investors and the public interest. Nasdaq believes that this 
proposed rule change would increase the objectivity and transparency of 
its process of sanctioning companies for violations of listing 
standards and would promote public confidence in Nasdaq and the quality 
of Nasdaq's listed companies.
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    \12\ 15 U.S.C. 78o-3.
    \13\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change would result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Nasdaq neither solicited nor received written comments.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    This proposal has become effective pursuant to section 19(b)(3)(A) 
of the Act \14\ and subparagraph (f)(6) of Rule 19b-4 thereunder \15\ 
because the proposal: (1) Does not significantly affect the protection 
of investors or the public interest, (2) does not impose any 
significant burden on competition, and (3) by its terms does not become 
operative for 30 days after the date of this filing, or such shorter 
time as the Commission may designate, if consistent with the protection 
of investors and the public interest. Nasdaq has requested that the 
Commission waive the requirement that the proposed rule change not 
become operative for 30 days after the date of the filing. The 
Commission notes that the proposed rule change is substantially similar 
to New York Stock Exchange Rule 303A.13,\16\ which was previously 
approved by the Commission after notice and comment and, therefore, 
does not raise any new regulatory issues.\17\ For this reason, the 
Commission designates the proposal to be effective and operative upon 
filing with the Commission.\18\
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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(6).
    \16\ See Securities Exchange Release No. 48745 (November 4, 
2003), 68 FR 64154 (November 12, 2003) (SR-NYSE-2002-33).
    \17\ Rule 19b-4(f)(6) also requires a self-regulatory 
organization to give written notice of a proposed rule change filed 
pursuant to this subsection at least five business days prior to 
filing. Nasdaq complied with this requirement.
    \18\ For purposes only of waiving the operative delay for this 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-NASD-2005-136 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.

All submissions should refer to File Number SR-NASD-2005-136. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, all 

written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of such 
filing also will be available for inspection and copying at the 
principal office of the NASD. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-NASD-2005-136 and should be submitted on or before 
January 5, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
 [FR Doc. E5-7384 Filed 12-14-05; 8:45 am]

BILLING CODE 8010-01-P