Document ID: SEC-2006-0735-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: NASDAQ Stock Market LLC
Posted Date: 2006-06-07T04:00Z

[Federal Register: June 7, 2006 (Volume 71, Number 109)]
[Notices]               
[Page 33024-33025]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07jn06-145]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53913; File No. SR-NASDAQ-2006-008]

 
Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by The NASDAQ Stock Market LLC To Require Securities Be Eligible 
for a Direct Registration System

May 31, 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 April 27, 2006, The NASDAQ Stock Market LLC (``Nasdaq'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change described in Items I, II, and III below, which items have 
been prepared primarily by Nasdaq. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
parties.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to require securities to be eligible for a Direct 
Registration System (``DRS'').\3\ The text of the proposed rule change 
is below. Proposed new language is in italics, and proposed deletions 
are in brackets.\4\
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    \3\ Nasdaq refers to a Direct Registration System as a Direct 
Registration Program. For purposes of clarity and consistency with 
other related filings referred to below, the term Direct 
Registration System or DRS will be used in place of Direct 
Registration Program or DRP in this notice.
    \4\ Changes are marked to the rules of The NASDAQ Stock Market 
LLC found at http://www.nasdaqtrader.com. These rules will become 

effective when Nasdaq fulfills certain conditions and commences 
operations as a national securities exchange, which became effective 
April 17, 2006, but has not yet been published. See Exchange Act 
Release No. 53128 (January 13, 2006), 71 FR 3550 (January 23, 2006) 
[File No. 10-131]. Nasdaq modified the title to Rule 4350. This 
filing reflects the revised title.
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Rule 4350. Qualitative Listing Requirements for Nasdaq Issuers Except 
for Limited Partnerships

    (a)-(k) No change.
    (l) Direct Registration Program
    (1) All securities initially listing on Nasdaq on or after January 
1, 2007, must be eligible for a Direct Registration Program operated by 
a clearing agency registered under Section 17A of the Exchange Act. 
This provision does not extend to: (i) additional classes of securities 
of companies which already have securities listed on Nasdaq; (ii) 
companies which immediately prior to such listing had securities listed 
on another registered securities exchange in the U.S.; or, (iii) non-
equity securities which are book-entry-only.
    (2) On and after January 1, 2008, all securities listed on Nasdaq 
(except non-equity securities which are book-entry-only) must be 
eligible for a Direct Registration Program operated by a clearing 
agency registered under Section 17A of the Exchange Act.
    (3) If an issuer establishes or maintains a Direct Registration 
Program for its shareholders, the issuer shall, directly or through its 
transfer agent, participate in an electronic link with a [securities 
depository] clearing agency registered under Section 17A of the 
Exchange Act to facilitate the electronic transfer of securities held 
pursuant to such program.
    (m)-(n) No change.
* * * * *

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 these 
statements.\5\
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    \5\ The Commission has modified portions of the text of the 
summaries prepared by the Nasdaq.
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A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Nasdaq Rule 4350(l) currently allows an issuer to establish a DRS 
for its shareholders provided the issuer, directly or through its 
transfer agent, participates in an electronic link with a clearing 
agency registered under Section 17A of the Exchange Act. DRS permits an 
investor's ownership position to be recorded and maintained in book-
entry form on the records of the issuer or its transfer agent. Because 
ownership positions are recorded in book-entry form, investors receive 
an account statement from the issuer or its transfer agent as evidence 
of ownership instead of receiving a physical certificate. Brokerage 
firms and transfer agents are linked through an electronic system 
administered by The Depository Trust Company (``DTC'') thereby 
permitting securities positions to be electronically transferred 
between a broker-dealer and a transfer agent without the need to 
transfer for physical certificates.\6\
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    \6\ Currently, the only registered clearing agency operating a 
DRS is DTC. For a description of DRS and the DRS facilities 
administered by DTC, see Securities Exchange Act Release Nos. 37931 
(November 7, 1996), 61 FR 58600 (November 15, 1996), [File No. SR-
DTC-96-15] (order granting approval to establish DRS) and 41862 
(September 10, 1999), 64 FR 51162 (September 21, 1999), [File No. 
SR-DTC-99-16] (order approving implementation of the Profile 
Modification System).
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    Nasdaq believes that DRS will be an important step in reducing the 
use of physical certificates which will facilitate efficiencies and 
reduced risks in securities transactions and could eventually lead to 
lower costs for issuers and investors.\7\ As such, to encourage the use 
of DRS, Nasdaq is proposing to amend its rules to require that all 
listed securities be eligible to participate in DRS.\8\ While this 
proposed rule change would require that issuers' securities be eligible 
for DRS, it would not require issuers to participate in DRS and would

[[Page 33025]]

not mandate the elimination of physical certificates. As a result, 
subject to applicable state law and the company's governing documents, 
an investor could still elect to receive a certificate if the issuer 
chose to make certificates available.
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    \7\ In March 2004, the Commission published a concept release 
that discussed, among other things, whether more should be done to 
reduce the use of physical certificates by individual investors. The 
Commission noted that the use of physical certificates increases the 
costs and risks of clearing and settling securities transactions, 
costs that most often are ultimately born by investors. Securities 
Exchange Act Release 8398 (March 11, 2004), 69 FR 12922 (March 18, 
2004) [File No. S7-13-04] (Securities Transaction Settlement concept 
release).
    \8\ The New York Stock Exchange LLC and the American Stock 
Exchange LLC have also filed proposed rule changes with the 
Commission that would require certain listed companies securities 
DRS eligible. Securities Exchange Act Release Nos. 53912 (May 31, 
2006) [File No. SR-NYSE-2006-29] and 53911 (May 31, 2006) [File No. 
SR-Amex-2006-40].
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    Because currently the only DRS operated by a registered clearing 
agency is that of DTC, in order for a security to be eligible to 
participate in DRS, the issuer is required to use a transfer agent that 
meets DTC's insurance and connectivity requirements. As a result, some 
transfer agents acting for Nasdaq issuers may have to make changes to 
comply with these requirements, and some issuers may choose to change 
transfer agents. Certain issuers may also have to make amendments to 
their governing documents, such as their by-laws, to be eligible to 
issue securities that are not represented by certificates. To allow 
sufficient time for any of these changes that need to take place, 
Nasdaq proposes to implement the proposed rule change January 1, 2008, 
for the securities of issuers with securities already listed on Nasdaq 
or another listed marketplace at the time the proposed rule change is 
approved. Companies listing for the first time should have greater 
flexibility to adopt any changes required to have their securities DRS 
eligible and therefore, the proposed rule change requirement would be 
applicable to new listings beginning January 1, 2007. In addition, 
Nasdaq proposes that the requirement not apply to non-equity securities 
that are held in book-entry-only form.
2. Statutory Basis
    The statutory basis under the Act for this proposed rule change is 
the requirement under Section 6(b)(5) of the Act, which requires, among 
other things, that the rules of an exchange are designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to perfect the mechanism of a free 
and open market and a national market system, and, in general, to 
protect investors and the public interest.\9\ Nasdaq believes that 
requiring securities to be eligible for DRS will ease the trading of 
securities in book-entry form, which will facilitate transactions in 
securities.
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    \9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Nasdaq does not believe that the proposed rule change will 
impose 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

    On March 7, 2005, Nasdaq solicited comment from issuers on the 
impact of a rule requiring securities to be eligible for DRS. Nasdaq 
received nine responses to this solicitation, all from representatives 
of issuers. Eight responses, including five participants in DRS, were 
supportive citing factors such as cost savings, shareholder service, 
and efficiency. One respondent was opposed because of the associated 
costs and perceived negative response of shareholders. Nasdaq notes, 
however, that the concerns expressed by this commenter may not be 
applicable to this proposed rule change because this proposal would not 
mandate the use of DRS.\10\
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    \10\ Nasdaq's solicitation and the comments received are 
attached as Exhibit 2 to this proposed rule change, which can be 
found at http://www.nasd.com.

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

    Within thirty-five 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 ninety 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, 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-NASDAQ-2006-008 in 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-NASDAQ-2006-008. 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 Section, 100 F Street, 
NE., Washington, DC 20549. Copies of such filings also will be 
available for inspection and copying at the principal office of Nasdaq 
and on Nasdaq's Web site, http://www.nasdaq.com. 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-NASDAQ-2006-008 and should be submitted 
on or before June 28, 2006.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
 [FR Doc. E6-8819 Filed 6-6-06; 8:45 am]

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