Document ID: SEC-2006-0734-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2006-06-07T04:00Z

[Federal Register: June 7, 2006 (Volume 71, Number 109)]
[Notices]               
[Page 33026-33029]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07jn06-146]                         

[[Page 33026]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53920; File No. SR-NASD-2006-039]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change and Amendment 
No. 1 Thereto To Amend NASD Rules To Modify and Expand NASD's Authority 
To Initiate Trading and Quotation Halts in OTC Equity Securities

June 1, 2006.
    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 March 22, 2006, the National Association of Securities Dealers, Inc. 
(``NASD'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by NASD. On May 23, 
2006, NASD filed with the Commission Amendment No. 1 to the proposed 
rule change.\3\ The Commission is publishing this notice to solicit 
comments on the proposed rule change, as amended, from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replace and susperseded the original rule 
filing in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to (1) amend NASD rules to modify and expand 
NASD's authority to initiate trading and quotation halts in over-the-
counter (``OTC'') equity securities; \4\ and (2) adopt IM-6660-1 to 
identify certain factors that NASD may consider in determining, in its 
discretion, whether imposing a trading and quotation halt in an OTC 
equity security is appropriate. Below is the text of the proposed rule 
change, as amended. Proposed new language is in italics; proposed 
deletions are in brackets.\5\
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    \4\ See NASD Rule 6610.
    \5\ The proposed rule text incorporates certain technical 
corrections that NASD will incorporate into an amendment that it 
will file with the Commission before approval of the proposed rule 
change. Telephone conversation between Kosha Dalal, Associate 
General Counsel, NASD and Tim Fox, Special Counsel, Commission on 
June 1, 2006.
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* * * * *

[6545]6660. Trading and Quotation Halt in OTC[BB-Eligible] Equity 
Securities

(a) Authority for Initiating a Trading and Quotation Halt
    In circumstances in which it is necessary to protect investors and 
the public interest, NASD may direct members, pursuant to the 
procedures set forth in paragraph (b), to halt trading and quotations 
in OTC Equity Securities (as such term is defined in Rule 6610)[the 
over-the-counter (``OTC'') market of a security or an American 
Depository Receipt (``ADR''), that is included in the OTC Bulletin 
Board (``OTCBB'')] if:
    (1) The OTC[BB] Equity S[s]ecurity or the security underlying an 
American Depository Receipt (``ADR'') that is an OTC Equity Security 
(``OTC ADR'')[the OTCBB ADR] is listed on or registered with a foreign 
securities exchange or market, and the foreign securities exchange, 
market, or regulatory authority overseeing such issuer, exchange, or 
market, halts trading in such security for regulatory reasons because 
of public interest concerns (``Foreign Regulatory Halt''); provided, 
however, that NASD will not impose a trading and quotation halt if the 
Foreign Regulatory Halt was imposed solely for material news, a 
regulatory filing deficiency, or operational reasons; [or]
    (2) The OTC[BB] Equity S[s]ecurity or the security underlying 
[the]an OTC[BB] ADR is a derivative or component of a security listed 
on or registered with a national securities exchange, The Nasdaq Stock 
Market, or foreign securities exchange or market (``listed security'') 
and the national securities exchange, The Nasdaq Stock Market, or 
foreign securities exchange or market, imposes a trading halt in the 
listed security[.]; or
    (3) NASD determines that an extraordinary event has occurred or is 
ongoing that has had a material effect on the market for the OTC Equity 
Security or has caused or has the potential to cause major disruption 
to the marketplace and/or significant uncertainty in the settlement and 
clearance process. [the issuer of the OTCBB security or the security 
underlying the OTCBB ADR fails to comply with the requirements of SEC 
Rule 10b-17 regarding Untimely Announcements of Record Dates.]
(b) Procedure for Initiating a Trading and Quotation Halt
    (1) When a halt is initiated under subparagraph (a)(1) of this 
rule, upon receipt of information from a foreign securities exchange or 
market on which the OTC[BB] Equity S[s]ecurity or the security 
underlying the OTC[BB] ADR is listed or registered, or from a 
regulatory authority overseeing such issuer, exchange, or market, NASD 
will promptly evaluate the information and determine whether a trading 
and quotation halt in the OTC[BB] Equity S[s]ecurity is appropriate.
    (2) Should NASD determine that a basis exists under this rule for 
initiating a trading and quotation halt, the commencement of the 
trading and quotation halt will be effective simultaneous with the 
issuance of appropriate public notice.
    (3) Trading and quotations in the OTC market may resume when NASD 
determines that the basis for the halt no longer exists, or when [five] 
ten business days have elapsed from the date NASD initiated the trading 
and quotation halt in the security, whichever occurs first. NASD shall 
disseminate appropriate public notice that the trading and quotation 
halt is no longer in effect.
(c) Violation of OTC[BB] Trading and Quotation Halt Rule
    If a security is subject to a trading and quotation halt initiated 
pursuant to this rule, it shall be deemed conduct inconsistent with 
just and equitable principles of trade and a violation of Rule 2110 for 
a member:
    (1) To effect, directly or indirectly, a trade in such security; or
    (2) To publish a quotation, a priced bid and/or offer, an unpriced 
indication of interest (including ``bid wanted'' and ``offer wanted'' 
indications), or a bid or offer accompanied by a modifier to reflect 
unsolicited customer interest, in any quotation medium. For purposes of 
this rule, ``quotation medium'' shall mean any: system of general 
circulation to brokers or dealers that regularly disseminates 
quotations of identified brokers or dealers; or publication, 
alternative trading system or other device that is used by brokers or 
dealers to disseminate quotations to others.
* * * * *

IM-6660-1 Factors To Be Considered When Initiating a Trading and 
Quotation Halt

    NASD may impose a trading and quotation halt in an OTC Equity 
Security pursuant to Rule 6660(a)(3) where NASD determines, in its 
discretion, based on the facts and circumstances of the particular 
event, that halting trading in the security is the appropriate 
mechanism to protect investors and ensure a fair and orderly 
marketplace. As a general matter, NASD does not favor imposing a 
trading and quotation halt in an OTC Equity

[[Page 33027]]

Security and will exercise this authority in very limited 
circumstances. In determining whether to impose a trading halt under 
Rule 6660(a)(3), NASD will consider several factors in making its 
determination, including but not limited to: (1) The material nature of 
the event; (2) the material facts surrounding the event are undisputed 
and not in conflict; (3) the event has caused widespread confusion in 
the trading of the security; (4) there has been a material negative 
effect on the market for the subject security; (5) the potential exists 
for a major disruption to the marketplace; (6) there is significant 
uncertainty in the settlement and clearance process for the security; 
and/or (7) such other factors as NASD deems relevant in making its 
determination. NASD may review all or some of these factors as it 
determines appropriate.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NASD included statements 
concerning the purpose of and basis for the proposed rule change, as 
amended, 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. NASD 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
    Effective October 1, 2005, NASD transferred ownership and 
operations of the OTC Bulletin Board (``OTCBB'') from The Nasdaq Stock 
Market, Inc. (``Nasdaq'') to NASD. Prompted in part by the transition 
of the OTCBB, NASD has been analyzing the regulatory framework in this 
sector of the marketplace to determine whether changes in this area are 
appropriate.\6\ As part of this ongoing effort, NASD is proposing 
several changes related to its current authority under NASD Rule 6545 
to halt trading and quotations in the OTC market of a security or 
American Depository Receipt (``ADR'') that is included in the OTCBB.
    Generally, national securities exchanges, such as the New York 
Stock Exchange LLC (``NYSE'') as well as Nasdaq, have the authority to 
halt trading and quotations in a security listed on such exchange.\7\ 
Issuers that have securities listed on a national securities exchange 
enter into a listing agreement with such exchange that provides, among 
other things, that such issuer will give timely notice of material news 
affecting the security or issuer. Such exchanges generally have the 
authority to halt trading and quotations in a security to allow a 
company to announce important news or where there is a significant 
order imbalance between buyers and sellers in a security.
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    \6\ See, e.g., Securities Exchange Act Release No. 53224 
(February 3, 2006), 71 FR 7101 (February 10, 2006) (SR-NASD-2005-
112) (approving amendments to NASD Rule 3360 to expand the short 
interest reporting requirements to OTC equity securities).
    \7\ See, e.g., NYSE Rule 80B (Circuit Breakers); Section 202.06 
of the NYSE Listed Company Manual (Procedure for Public Release of 
Information); and NASD Rule 4120 (Trading Halts).
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    NASD, however, does not have a listing agreement or similar 
relationship with issuers of OTC Equity Securities \8\ and cannot 
compel such issuers to disclose material information. As a result, NASD 
currently has limited trade halt authority with respect to these 
securities. Specifically, NASD Rule 6545(a) currently provides NASD 
with authority to halt trading and quotations of OTCBB securities only 
where: (1) The OTCBB security (or security underlying an OTCBB ADR) is 
listed on or registered with a foreign market and the foreign 
regulatory authority or market halts trading in the security; (2) the 
OTCBB security (or the security underlying the OTCBB ADR) is a 
derivative or component of a security listed on or registered with 
Nasdaq, a national securities exchange or foreign exchange and the 
exchange or market halts trading in the underlying security; or (3) the 
OTCBB issuer fails to comply with the requirements of Rule 10b-17 under 
the Act,\9\ which generally requires the issuer of a class of 
securities that are publicly traded to give notice to NASD no later 
than 10 days prior to the record date of a dividend or distribution. 
Pursuant to NASD Rule 6545, NASD has authority to halt trading and 
quotations of OTCBB-eligible securities for up to five business days.
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    \8\ The term ``OTC Equity Security'' as used in proposed NASD 
Rule 6660 is defined in NASD Rule 6610(d), as may be amended from 
time to time. NASD Rule 6610(d) provides that the term means any 
equity security not classified as a ``designated security,'' for 
purposes of the NASD Rule 4630 and 4640 Series. This term also 
includes certain exchange-listed securities that do not otherwise 
qualify for real-time trade reporting because they are not 
``eligible securities'' as defined in NASD Rule 6410(d). The term 
``OTC Equity Security'' does not include ``restricted securities,'' 
as defined by Rule 144(a)(3) under the Securities Act of 1933, nor 
any securities designated in the PORTAL Market under the NASD Rule 
5300 Series.
    \9\ 17 CFR 240.10b-17.
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    NASD is proposing four amendments to expand its current authority 
to halt trading and quotations:
    First, NASD is proposing to expand the scope of its current trade 
halt authority to include authority to halt trading and quotations in 
all OTC Equity Securities, which includes ADRs that trade in the OTC 
market. NASD's existing trading halt authority is limited to OTCBB 
securities and therefore NASD does not have authority to impose trading 
or quotation halts in other OTC Equity Securities (e.g., securities 
quoted exclusively on the Pink Sheets). NASD believes that its trading 
and quotation halt authority should apply uniformly to all OTC Equity 
Securities and is therefore proposing to expand NASD's existing trading 
halt authority to all OTC Equity Securities.\10\ NASD believes that 
eliminating this disparity will further investor protections in this 
area of the securities market.
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    \10\ In addition, because the current NASD Rule 6500 Series 
relates solely to OTCBB securities, NASD is proposing to renumber 
the amended NASD Rule 6545 as NASD Rule 6660, which would be part of 
the NASD Rule 6600 Series (OTC Equity Securities).
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    Second, NASD is proposing to modify and expand NASD's existing 
trading halt authority to provide more general trading and quotation 
halt authority beyond halts related to non-compliance with Rule 10b-17, 
while limiting such authority to only those extraordinary events that 
have a material effect on the market for the OTC Equity Security and 
that have the potential to cause major disruption to the marketplace 
and/or cause significant uncertainty in the settlement and clearance 
process. Specifically, the proposed trading and quotation halt 
authority would provide NASD with the ability to impose a trading and 
quotation halt for material events, where NASD determines, in its 
discretion, based on the facts and circumstances of the particular 
event, that halting trading in the security is the appropriate 
mechanism to protect investors and ensure a fair and orderly 
marketplace.
    Third, NASD is proposing to increase the maximum number of business 
days that it can impose a trading and quotation halt from up to five 
business days to ten business days. NASD believes that a period of up 
to ten business days is consistent with the maximum duration that the 
Commission is permitted to suspend trading in securities in accordance 
with section

[[Page 33028]]

12(k) of the Act.\11\ NASD believes increasing the maximum number of 
days from five to ten business days will allow more time for regulators 
to act and for the market of the subject security to stabilize.
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    \11\ 15 U.S.C. 781(k).
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    Fourth, NASD is proposing to adopt IM-6660-1 to identify certain 
factors that NASD may consider in determining, in its discretion, 
whether halting trading in an OTC Equity Security under proposed NASD 
Rule 6660(a)(3) is appropriate. Proposed IM-6660-1 provides that as a 
general matter, NASD would not favor imposing a trading halt and thus 
would exercise this authority in very limited circumstances. It 
identifies factors that NASD would consider in determining whether to 
impose a trading halt under this expanded authority. Specifically, IM-
6660-1 provides that NASD would consider several factors in making its 
determination, including but not limited to: (1) The material nature of 
the event; (2) whether the material facts surrounding the event are 
undisputed and not in conflict; (3) whether the event has caused 
widespread confusion in the trading of the security; (4) whether there 
has been a material negative effect on the market for the subject 
security; (5) whether the potential exists for a major disruption to 
the marketplace; (6) whether there is significant uncertainty in the 
settlement and clearance process for the security; and/or (7) such 
other factors as NASD deems relevant in making its determination. NASD 
may review all or some of these factors as it determines appropriate. 
NASD staff would weigh the relevant information and make a 
determination whether halting trading in the security is appropriate 
and may consult with NASD's Uniform Practice Code (``UPC'') Committee 
(or any successor thereto) as it deems necessary or appropriate.\12\
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    \12\ The UPC Committee is a standing committee of NASD, 
currently consisting of six professionals in the securities 
industry. The UPC Committee has authority to advise NASD on issues 
of interest and concern to the securities industry, including 
specifically interpretations with respect to the UPC. NASD staff may 
present matters relating to possible trading halts to the UPC 
Committee from time to time. However, the role of the UPC Committee 
in this regard is advisory only. NASD staff will retain full power 
and authority to make all determinations under proposed NASD Rule 
6660 and IM-6660-1.
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    NASD is proposing to expand its trading and quotation halt 
authority in the OTC market at this time in large part due to several 
recent events, for which NASD believes that having this type of 
authority would have been beneficial to investors and the marketplace. 
For example, in 2005, an issuer announced that 3 million shares of its 
common stock, an OTC Equity Security, were issued improperly prior to 
the impending payment of a 3 million for 1 share dividend (i.e., a 
forward split) in the security. As a result, significant questions 
arose regarding the accuracy of publicly disseminated information 
concerning the issuer, including the total shares outstanding, the 
availability of non-restricted shares for trading and delivery, the 
issuer's shareholders, and rights with respect to shares of the issuer. 
The impact of this event was far-reaching, including widespread 
investor confusion and the potential for several large clearing firms 
to be forced to recognize substantial net capital charges on their 
short positions and open fails.\13\
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    \13\ See SEC Order of Suspension of Trading, In the Matter of 
Gluv Corporation (File No. 500-1; May 27, 2005). See also NASD 
Notice to Members 05-41 (June 2005).
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    Based on NASD's experience to date, each event presents a unique 
set of facts and circumstances. As a result, NASD would exercise 
significant discretion in determining whether a particular event 
affecting a security warranted a trading and quotation halt. The 
authority would not be used to correct informational imbalances 
resulting from corporate news about the issuer (e.g., financial 
results, release of new product, or pending regulatory investigation) 
because NASD has no listing or other agreement with the issuer of an 
OTC Equity Security and therefore cannot compel such issuers to 
disclose material information.
    It is important to note that for OTC Equity Securities, quoting may 
not automatically resume when a trading halt ends. Rule 15c2-11 under 
the Act \14\ and NASD Rule 6740 require a broker-dealer to review 
information about the issuer and have a reasonable basis under the 
circumstances to believe that the information on the issuer is accurate 
in all material respects and the sources of such information are 
reliable unless an exception to Rule 15c2-11 is available. If a trading 
or quotation halt is in effect for more than four consecutive business 
days, the ``piggyback'' exception of Rule 15c2-11(f)(3) \15\ would not 
be available. As a result, broker-dealers would be required to comply 
with the requirements of Rule 15c2-11 and NASD Rule 6740 before 
resuming publication of quotations for the subject security.
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    \14\ 17 CFR 240.15c2-11.
    \15\ 17 CFR 240.15c2-11(f)(3).
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    NASD believes that the proposed amendments will further the goal of 
investor protection in this sector of the marketplace and enhance the 
quality of the OTC market. NASD will announce the effective date of the 
proposed rule change in a Notice to Members to be published no later 
than 60 days following Commission approval. The effective date will be 
30 days following publication of the Notice to Members announcing 
Commission approval.
2. Statutory Basis
    NASD believes that the proposed rule change, as amended, is 
consistent with the provisions of section 15A(b)(6) of the Act,\16\ 
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 interest. NASD believes that the proposed rule 
change, as amended, will further investor protection and the operation 
of a fair and orderly market by expanding NASD's current authority to 
halt trading and quotation in OTCBB securities to (1) all OTC Equity 
Securities and (2) extraordinary events that have the potential to 
cause major market disruption.
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    \16\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD does not believe that the proposed rule change, as amended, 
will 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

    Written comments were neither solicited nor received by NASD.

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, as amended, or
    (B) Institute proceedings to determine whether the proposed rule 
change, as amended, should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and

[[Page 33029]]

arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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-2006-039 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASD-2006-039. 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 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-2006-039 and should be submitted on or before June 28, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E6-8810 Filed 6-6-06; 8:45 am]

BILLING CODE 8010-01-P