Document ID: SEC-2006-0430-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2006-03-31T05:00Z

[Federal Register: March 31, 2006 (Volume 71, Number 62)]
[Notices]               
[Page 16350-16353]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31mr06-103]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53546; File No. SR-NASD-2005-067]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of 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

March 24, 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 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'' or ``SEC'') a proposed rule change to amend NASD Rules 
6530 and 7010 to clarify the availability of a process to review 
eligibility determinations under NASD Rule 6530 and to adopt service-
based fees for Over-the-Counter Bulletin Board (``OTCBB'') issuers. On 
September 27, 2005, Nasdaq filed with the Commission Amendment No. 1 to 
the proposed rule change to remove the record-keeping fee proposed in 
NASD Rule 7010. On October 1, 2005, the Commission approved 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 
over-the-counter (``OTC'') equity operations, including the OTCBB, 
rather than continuing to delegate this authority to Nasdaq.\3\ As 
such, NASD assumed direct authority for OTC equities operations, 
including operation of the OTCBB (quotation and trade reporting 
platform and other services), trade reporting for other non-

[[Page 16351]]

OTCBB OTC equity securities and other services, and related rulemaking 
functions. On December 8, 2005, NASD filed with the Commission 
Amendment No. 2 to the proposed rule change to reflect NASD's authority 
for the OTCBB and to make certain clarifying changes. On February 23, 
2006, NASD filed with the Commission Amendment No. 3 to the proposed 
rule change to clarify eligibility for the hearing process set forth in 
proposed NASD Rule 6530(f) for those securities of an OTCBB issuer 
subject to removal from the OTCBB under NASD Rule 6530(e)(1),\4\ and to 
make clarifying changes relating to the application of the NASD Rule 
9700 Series, as described in Items I, II, and III below, which Items 
have been prepared by NASD.\5\ 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\ See Securities Exchange Act Release No. 52508 (September 26, 
2005), 70 FR 57346 (September 30, 2005) (SR-NASD-2005-089). Nasdaq, 
however, will continue to furnish the OTCBB quotation and trade 
reporting platform and certain other services that it provided with 
respect to over-the-counter equity operations.
    \4\ Pursuant to NASD Rule 6530(e), the securities of those OTCBB 
issuers (1) that are delinquent in a required filing three times in 
a two-year period and (2) those that are removed from the OTCBB for 
failure to file two times in a two-year period, are ineligible for 
quotation on the OTCBB. Following removal under NASD Rule 6530(e), 
an issuer's security would not be eligible for re-inclusion unless 
the issuer has timely filed in complete form all required annual and 
quarterly reports for a one-year period. See Securities Exchange Act 
Release No. 52786 (November 16, 2005), 70 FR 70907 (November 23, 
2005) (SR-NASD-2005-011). See also infra note 14.
    \5\ Amendment No. 3 replaced and superseded the prior filings 
for this proposed rule change in their 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 amend NASD Rule 6530 to clarify the 
availability of a process to review eligibility determinations with 
respect to OTCBB securities and to implement fees for such review. 
Below is the text of the proposed rule change, as amended. Proposed new 
language is in italics; proposed deletions are in [brackets].
* * * * *
6530. OTCBB-Eligible Securities
    A Member shall be permitted to quote the following categories of 
securities in the Service:
    (a) through (d) No change.
    (e) Notwithstanding the foregoing paragraphs, a member shall not be 
permitted to quote a security if:
    (1) and (2) No change.
    If an issuer's security becomes ineligible for quotation on the 
OTCBB pursuant to paragraph (e)(1) above, the security will be removed 
from quotation on the OTCBB without the benefit of any grace period for 
the third delinquency, except that NASD will provide seven calendar 
days from the date notification is mailed to the issuer pursuant to 
paragraph (f)(1) to permit an aggrieved party to request a review of 
the determination by a hearing panel pursuant to paragraph (f) below. 
Following the removal of an issuer's security[securities] pursuant to 
this paragraph (e), such security[securities] shall not be eligible for 
quotation until the issuer has timely filed in a complete form all 
required annual and quarterly reports due in a one-year period. For 
purposes of this paragraph, a report filed within any applicable 
extensions permitted by [SEC] Rule 12b-25 under the Exchange Act will 
be considered timely filed. Furthermore, filings for reporting periods 
ending before October 1, 2005 will not be considered for purposes of 
this paragraph (e).
    (f) (1) Upon determining that an issuer's security would be 
ineligible for quotation under this rule, NASD will send a notification 
to the address on the cover of the issuer's last periodic report. This 
notification will state the date upon which the security will be 
removed, following any applicable grace period, unless the condition 
causing the ineligibility has been cured by that date. When a security 
becomes ineligible for quotation pursuant to paragraph (e) above, 
however, the issuer may not cure the condition that caused the 
ineligibility. In all cases, NASD will provide at least seven calendar 
days from the date the notification is mailed to the issuer to permit 
an aggrieved party to request review pursuant to paragraph (f)(2) 
below, before removal of the security.
    (2) Pursuant to the Rule 9700 Series, as modified herein, an 
aggrieved party may request a review by a hearing panel of the 
determination that an issuer's security is ineligible for quotation 
under this rule. NASD must receive the request for review at least two 
business days prior to the scheduled removal of the security, together 
with a $4,000 hearing fee payable to NASD to cover the cost of review. 
A request for review under this paragraph (f)(2) will stay the removal 
of the issuer's security from the Service until the hearing panel 
issues a decision under Rule 9750. The hearing panel will consider only 
the issues of whether the issuer's security is then eligible for 
quotation in the Service 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 Exchange Act. The hearing panel shall 
not have discretion to grant any extensions of time for ineligible 
securities to become eligible. Notwithstanding any contrary provision 
in the Rule 9700 Series, hearings will be conducted via telephone and 
NASD will provide the aggrieved party at least five business days 
notice of the hearing unless the aggrieved party waives such notice.
    (3) The aggrieved party may request a review of a hearing panel's 
decision under Rule 9760. Such a request for review must be accompanied 
by a $4,000 fee payable to NASD to cover the cost of review. This 
review will only consider whether the issuer's security, at the time of 
the initial review under paragraph (f)(2), was eligible for quotation 
in the Service 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 Exchange Act. A request for review under this 
paragraph (f)(3) shall not stay the removal of the issuer's security 
from the Service and there will be no discretion to grant extensions of 
time for ineligible securities to become eligible. Notwithstanding any 
contrary provision in the Rule 9700 Series, a review under this 
paragraph (f)(3) will be based on the written record, unless additional 
hearings are ordered. If any further hearings are ordered, the hearings 
will be conducted via telephone and NASD will provide the aggrieved 
party at least five business days notice of the hearing unless the 
aggrieved party waives such notice.
* * * * *

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 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
    In January 1999, Nasdaq and NASD adopted amendments to NASD Rules 
6530 and 6540 that require all issuers of securities quoted on the 
OTCBB to be current in their filings with the Commission or other 
appropriate

[[Page 16352]]

regulator (the ``Eligibility Rule'').\6\ When an OTCBB issuer does not 
comply with the Eligibility Rule, either because a filing is not made 
or because a filing is incomplete,\7\ a fifth character ``E'' is 
appended to the trading symbol of that issuer's security.\8\ This 
identifier notifies investors and other market participants that NASD 
does not have information that the issuer is current in its reporting 
obligations. If the issuer does not comply within the applicable grace 
period provided by the Eligibility Rule (typically 30 days), the 
issuer's security is removed from the OTCBB.\9\
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    \6\ See Securities Exchange Act Release No. 40878 (January 4, 
1999), 64 FR 1255 (January 8, 1999) (SR-NASD-98-51).
    \7\ In order for a filing to be complete, it must, for example, 
contain all required certifications, attestations, and financial 
statements, including an auditor's review pursuant to SAS-100 (for 
quarterly reports) or an unqualified auditor's opinion (for annual 
reports). See, e.g., Rule 13a-14 under the Act, 17 CFR 240.13a-14, 
and Rules 10-01(d) and 2-02(c) of Regulation S-X, 17 CFR 210.10-
01(d) and 2-02(c). In addition, the auditor must be registered with 
the Public Company Accounting Oversight Board. See Section 102(a) of 
the Sarbanes-Oxley Act of 2002, 15 U.S.C. 7212(a).
    \8\ To the extent an issuer has multiple classes of securities 
quoted on the OTCBB, when an issuer becomes delinquent with respect 
to its reporting requirements under NASD Rule 6530, all of that 
issuer's securities become ineligible for quotation on the OTCBB.
    \9\ The Eligibility Rule provides a 60-day grace period to 
banks, savings associations and insurance companies that do not file 
with the Commission, but are required to file with other regulators. 
NASD has filed a separate proposed rule change with the Commission, 
which became effective upon filing, to amend NASD Rule 6530 to 
clarify the removal process and grace periods contained in that 
rule. See File No. SR-NASD-2006-029.
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    In November 2005, the Commission approved amendments to NASD Rule 
6530 that limit the eligibility for quotation on the OTCBB of the 
securities of an issuer that is repeatedly late or otherwise delinquent 
in filing periodic reports.\10\ Specifically, NASD Rule 6530(e) 
provides that OTCBB issuers that file late with the Commission or other 
respective regulator, even if within the grace period allowed by NASD 
Rule 6530, three times in a two-year period and those that have been 
removed from the OTCBB for failure to file two times in a two-year 
period, are ineligible for quotation on the OTCBB by an NASD member 
until such time as the issuer has timely filed complete required 
periodic reports for a one-year period.\11\
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    \10\ See Securities Exchange Act Release No. 52786 (November 16, 
2005), 70 FR 70907 (November 23, 2005) (SR-NASD-2005-011).
    \11\ This provision of NASD Rule 6530 applies to filings for 
reporting periods ending on and after October 1, 2005.
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    Since late 2000, a party aggrieved by a determination relating to 
the OTCBB (``aggrieved party'') has been able to request a review of a 
determination under the Eligibility Rule by a hearing panel pursuant to 
the NASD Rule 9700 Series.\12\ The proposed rule change would provide 
transparency to the availability and scope of such review and impose a 
fee for such review.\13\ Specifically, under the proposed rule change, 
upon determining that an issuer's security would be 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 removal, even if there is no applicable 
grace period.\14\ 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.\15\
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    \12\ See, e.g., High Speed Net Solutions, Inc., Securities 
Exchange Act Release No. 43434 (October 12, 2000); Palmworks, Inc., 
Securities Exchange Act Release No. 43423 (October 6, 2000); JD 
American Workwear, Inc., Securities Exchange Act Release No. 43295 
(September 15, 2000).
    \13\ Under proposed NASD Rule 6530(f)(2), the hearings would be 
conducted via telephone.
    \14\ Under NASD Rule 6530(e), the securities of an issuer are 
removed from the OTCBB the third time that the issuer fails to file 
by the due date (including, if applicable, any extension permitted 
by Rule 12b-25 of the Exchange Act) in a two-year period, without 
the benefit of the grace period for the third delinquency. Prior to 
removal from the OTCBB, however, NASD provides 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 will be removed for failure to file by the due date for the 
third time in a two-year period, NASD provides 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 is proposing to amend 
NASD Rule 6530(e) and (f) to codify this procedural framework.
    \15\ See Telephone conversation between Richard Holley III, 
Special Counsel, Division of Market Regulation, Commission, and 
Andrea Orr, Assistant General Counsel, NASD, on March 23, 2006. If 
an issuer's security becomes ineligible for failure to file by the 
due date for the third time in a two-year period, such issuer will 
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).
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    In addition, the proposed rule change advises aggrieved parties of 
their right to request a review of the determination by a hearing 
panel, pursuant to the procedures in the NASD Rule 9700 Series as 
modified by the proposed rule change, and implements a $4000 fee for 
such review. The proposed rule specifies that the hearing panels can 
determine 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 pursuant to Rule 
12b-25 under the Exchange Act. The hearing panels do not have the 
discretion to grant any extensions of time for ineligible securities to 
become eligible for quotation on the OTCBB.\16\ NASD believes that this 
lack of discretion is appropriate given the 30 or 60-day grace period 
that is already built into the rule. The proposed rule change notes 
that the request for review will stay the securities' removal until the 
panel makes its determination.
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    \16\ If a valid filing is made before the hearing panel's 
decision is issued, the issuer would not be rendered ineligible for 
further quotation on the OTCBB. However, if a security becomes 
ineligible for quotation pursuant to NASD 6530(e)(1), the issuer may 
not cure the condition that caused the ineligibility. See supra note 
15.
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    The proposed rule change also advises aggrieved parties of their 
right to request a review of the hearing panel decision, pursuant to 
NASD Rule 9760, and implements a $4000 fee for such review. The 
proposed rule change indicates that the review of the hearing panel 
decision is 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 Exchange Act. There is no discretion to grant any 
extensions of time for ineligible securities to become eligible for 
quotation on the OTCBB. The proposed rule change notes that the request 
for review of the hearing panel decision will not stay the security's 
removal.\17\
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    \17\ 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.
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    Unlike the NASD Rule 4800 Series that governs hearings for Nasdaq-
listed securities, the NASD Rule 9700 Series currently does not provide 
for a fee to offset the costs to conduct these hearings.\18\ Given the 
increasing number of these hearings,\19\ NASD believes it is 
appropriate to adopt a fee to offset the associated costs. 
Specifically, NASD

[[Page 16353]]

proposes to adopt a $4,000 fee for aggrieved parties requesting review 
by a hearing panel. In addition, aggrieved parties that seek review of 
the hearing panel's decision would also be subject to an additional 
$4,000 fee.
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    \18\ See, e.g., NASD Rule 4805(c), which requires Nasdaq-listed 
issuers to submit a $4,000 fee for a written hearing and a $5,000 
fee for an oral hearing, to cover the cost of holding the hearing, 
and NASD Rule 4807(a), which 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. See also Sections 1203 and 1205 
of the American Stock Exchange's Company Guide, which impose similar 
fees, and Section 804.00 of the New York Stock Exchange's Listed 
Company Manual, which requires an issuer to submit a $20,000 fee to 
request review of a delisting decision by the NYSE staff.
    \19\ In 2003, 14 hearing requests were received from OTCBB 
issuers. By contrast, in 2004, 53 hearing requests were received 
from OTCBB issuers and, in 2005, 124 such requests were received.
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    The proposed rule change will be effective immediately upon 
Commission approval.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(5) of the Act, which requires, among other 
things, that NASD rules provide for the equitable allocation of 
reasonable dues, fees and other charges among members and issuers and 
other persons using any facility or system that NASD operates or 
controls. NASD also believes that the proposed rule change is 
consistent with the provisions of Section 15A(b)(6) of the Act, 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 will clarify the OTCBB eligibility review process and will 
impose certain fees associated therewith to compensate NASD for the 
costs of conducting eligibility review hearings.

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 
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-2005-067 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-2005-067. 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 the 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-2005-067 and should be submitted on or before April 21, 2006.
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    \20\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
Nancy M. Morris,
Secretary.
[FR Doc. E6-4673 Filed 3-30-06; 8:45 am]

BILLING CODE 8010-01-P