Document ID: SEC-2005-0264-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2005-11-23T05:00Z

[Federal Register: November 23, 2005 (Volume 70, Number 225)]
[Notices]               
[Page 70907-70909]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23no05-149]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52786; File No. SR-NASD-2005-011]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Approving Proposed Rule Change and Amendment Nos. 
1, 2, and 3 Thereto To Limit the Eligibility for Quotation on the OTCBB 
of the Securities of an Issuer That Is Repeatedly Delinquent in Its 
Periodic Reporting Obligations

November 16, 2005.

I. Introduction

    On January 28, 2005, the National Association of Securities 
Dealers, Inc. (``NASD''), through its subsidiary, The Nasdaq Stock 
Market, Inc. (``Nasdaq''), filed with the Securities and Exchange 
Commission (``Commission''), pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to limit the eligibility for 
quotation on the Over-the-Counter Bulletin Board (``OTCBB'') of the 
securities of an issuer that is repeatedly late or otherwise delinquent 
in filing required periodic reports.\3\ Nasdaq submitted Amendment No. 
1 to this filing on May 10, 2005.\4\ Nasdaq submitted Amendment No. 2 
to this filing on June 24, 2005.\5\ Nasdaq submitted Amendment No. 3 to 
this filing on August 15, 2005.\6\ The proposed rule change, as 
amended, was published for comment in the Federal Register on August 
24, 2005.\7\ The Commission received one comment letter on the 
proposal.\8\ Nasdaq \9\ and the NASD \10\ each responded to the comment 
letter. This order approves the proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Commission notes that subsequent to publication of the 
Notice, the Commission approved the NASD's proposal to amend its 
Plan of Allocation and Delegation of Functions by the NASD to 
Subsidiaries, as well as certain corresponding NASD rules, to permit 
the NASD to assume direct authority for over-the-counter (``OTC'') 
equity operations, including the OTCBB, rather than continuing to 
delegate this authority to Nasdaq. 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. See Securities Exchange Act Release No. 52508 
(September 26, 2005), 70 FR 57346 (September 30, 2005) (SR-NASD-
2005-089).
    \4\ Amendment No. 1, which replaced the original filing in its 
entirety, made clarifying changes to the proposal's rule text; 
provided greater detail regarding how Nasdaq would notify issuers 
about the proposed rule; and stated that the proposed rule would be 
implemented for those filings for periods ending on or after June 1, 
2005.
    \5\ Amendment No. 2, which replaced the original filing and 
Amendment No. 1 in their entirety, further clarified the proposal's 
rule text; and amended the proposal's rule text to provide that 
filings for reporting periods ending before June 1, 2005, would not 
be considered for purposes of the proposed rule change.
    \6\ Amendment No. 3, which supplemented the filing as modified 
by Amendment No. 2, amended the proposal's rule text to provide that 
filings for reporting periods ending before October 1, 2005, would 
not be considered for purposes of the proposed rule change.
    \7\ See Securities Exchange Act Release No. 52291 (August 18, 
2005), 70 FR 49701 (``Notice'').
    \8\ See E-mail from John Meade to rule-comments@sec.gov, dated 
September 14, 2005.
    \9\ See Letter from Edward S. Knight, Executive Vice President 
and General Counsel, Nasdaq, to Jonathan G. Katz, Secretary, 
Commission, dated September 29, 2005.
    \10\ See Letter from Andrea Orr, Assistant General Counsel, 
NASD, to Katherine A. England, Assistant Director, Division of 
Market Regulation, Commission, dated October 14, 2005.
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II. Description of the Proposal

    Pursuant to current NASD Rule 6530 (the ``Eligibility Rule''), for 
an issuer's securities to be eligible and remain eligible for quotation 
on the OTCBB by an NASD member, the issuer must be current in its 
filings with the Commission or other appropriate regulator.\11\ When a 
security becomes ineligible for quotation on the OTCBB due to the 
Eligibility Rule, either because a required periodic filing is not made 
or because a filing is incomplete,\12\ Nasdaq appends an additional 
character ``E'' designator to the security's symbol.\13\ If the issuer 
does not comply within the applicable grace period provided by the 
Eligibility Rule (typically 30 days),\14\ the Rule prohibits NASD 
members from quoting the issuer's securities on the OTCBB.

[[Page 70908]]

Nasdaq notes that approximately 80% of issuers achieve compliance 
within the applicable grace period, while 20% are removed from 
quotation on the OTCBB.
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    \11\ See Securities Exchange Act Release No. 40878 (January 4, 
1999), 64 FR 1255 (January 8, 1999) (SR-NASD-98-51).
    \12\ 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 210.2-02(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).
    \13\ Nasdaq also appends an ``E'' to a security's symbol when it 
fails to receive notice that an issuer, which files with a regulator 
other than the Commission, has timely filed. In the case of those 
issuers, the Nasdaq generally receives notice of a regulatory filing 
from the applicable market maker or the issuer itself, and will 
investigate any instance where it has not received such notice. See 
Telephone conversation between Tim Fox, Attorney, Commission, and 
Arnold Golub, Associate Vice President, Nasdaq on May 20, 2005.
    \14\ The Eligibility Rule provides a 60-day grace period to 
banks, savings association and insurance companies that do not file 
with the Commission, but are required to file with other regulators. 
See NASD Rule 6530(a)(3) and (4).
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    Nasdaq reports that it has identified a high level of non-
compliance with the Eligibility Rule. Specifically, over the two-year 
period ended August 31, 2004, Nasdaq identified over 3,000 instances of 
delinquent or otherwise incomplete filings by 1,806 OTCBB issuers, of 
which 1,067 were still quoted as of August 31, 2004. Of the 1,806 
issuers, 1,035 were late in filing one time, 548 issuers were 
delinquent twice and 223 were delinquent three or more times. Given the 
high rate of recidivism, Nasdaq has proposed to amend NASD Rule 6530(e) 
to make certain OTCBB securities ineligible for quotation on the OTCBB 
for a period of one year. Specifically, the proposed rule change would 
prohibit NASD members from quoting on the OTCBB the securities of OTCBB 
issuers that have been delinquent in their filing obligations on the 
number of occasions and within the time frame specified in the proposed 
rule, as described below. Nasdaq has proposed to implement the rule 
change in connection with filings for reporting periods ending on or 
after October 1, 2005.\15\
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    \15\ See Amendment No. 3, supra note 6. Filings for reporting 
periods ending before October 1, 2005, would not be considered in 
determining the applicability of proposed NASD Rule 6530(e).
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    Under proposed NASD Rule 6530(e)(1), an NASD member would be 
prohibited from quoting on the OTCBB for a period of one year the 
securities of those OTCBB issuers that submit a required filing late or 
in an incomplete form three times in the prior two-year period while 
the security was quoted on the OTCBB.\16\ Accordingly, the securities 
of an OTCBB issuer would become ineligible for quotation on the OTCBB 
on the third time in the prior two-year period that the issuer does not 
file in complete form a required periodic report by the due date 
(including, if applicable, any extensions permitted by Rule 12b-25 
under the Act,\17\ but without the benefit of any grace period for this 
third delinquency).\18\ In applying the look-back associated with this 
provision, Nasdaq would consider reports characterized by due dates 
(including, if applicable, any extensions permitted by Rule 12b-25 
under the Act) that fell within the prior two-year period.
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    \16\ A filing would not be considered late for the purposes of 
this proposed rule if it is made within any applicable extensions 
permitted pursuant to Rule 12b-25 under the Act, 17 CFR 240.12b-25. 
Nasdaq also appends an ``E'' to a security's symbol when it does not 
receive notice that an issuer that files with a regulator other than 
the Commission has timely filed. Nasdaq would not consider such 
occurrences to be a late filing for purposes of the proposed rule if 
the issuer did, in fact, timely file with the appropriate regulator. 
Nonetheless, Nasdaq states that these issuers can help alleviate 
confusion by providing Nasdaq with a copy of the filing made with 
the appropriate regulator on or before its due date.
    \17\ 17 CFR 240.12b-25.
    \18\ Prior to such removal, Nasdaq intends to provide issuers 
with 7 calendar days to request review of the determination by a 
hearings panel. See File No. SR-NASD-2005-067, which proposes to 
clarify the availability of a process to review eligibility 
determinations under NASD Rule 6530.
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    Under proposed NASD Rule 6530(e)(2), an NASD member would be 
prohibited from quoting on the OTCBB for a period of one year the 
securities of those OTCBB issuers that are removed from the OTCBB due 
to the issuer's failure to satisfy paragraphs (a)(2), (3) or (4) of 
NASD Rule 6530 twice in the prior two-year period.\19\ According to 
Nasdaq, the more stringent test for this category reflects the greater 
length of the filing delinquencies, i.e., these issuers were unable to 
regain compliance even within the applicable ``grace'' period. In 
applying the look-back associated with this provision, Nasdaq would 
consider the date the security is removed, without regard to when the 
delinquent reports were actually due.
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    \19\ An issuer that is not removed because it files a late 
report after requesting a hearing pursuant to the NASD Rule 9700 
Series but before a decision has been issued in the matter would not 
be considered to have failed to file pursuant to proposed NASD Rule 
6530(e)(2), but would be considered to have filed late for purposes 
of proposed NASD Rule 6530(e)(1).
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    Under the proposed rule change, as amended, only filings for which 
the grace period ends while the issuer's securities are quoted on the 
OTCBB would be considered.\20\ Once they become ineligible for 
quotation on the OTCBB because the conditions in NASD Rule 6530(e)(1) 
or (e)(2) have occurred, the securities of an OTCBB issuer would not 
become eligible for re-inclusion on the OTCBB until the issuer has 
timely filed in a complete form all required annual and quarterly 
reports for a period of one year. Thus, the securities of, for example, 
most domestic issuers would not be eligible for re-inclusion until the 
issuer has timely filed at least one Form 10-K and three Forms 10-Q. 
While a late filing during the period when an issuer is ineligible for 
quotation on the OTCBB would reset the ineligibility period, once an 
issuer that is removed for failure to satisfy NASD Rule 6530(e)(1) or 
(e)(2) is re-included, Nasdaq would not consider late filings due prior 
to the date of re-inclusion under the proposed rule.
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    \20\ Thus, for example, an OTCBB-quoted issuer that has no prior 
late filings fails to file its Form 10-K for the period ended 
December 31, 2005, prior to the end of the applicable grace period. 
The issuer is removed from the OTCBB under existing NASD Rule 
6530(a)(2), and thereafter also files its Form 10-Q for the period 
ended March 31, 2006, after the due date. The issuer is subsequently 
re-included on the OTCBB. Only the late filing for the period ended 
December 31, 2005, would count for purposes of the proposed rule 
change because the issuer was not quoted on the OTCBB when the grace 
period for the March 31, 2006 filing expired. See Telephone 
conversation between Tim Fox, Attorney, Division of Market 
Regulation, Commission, and Arnold Golub, Associate Vice President, 
Nasdaq, on August 17, 2005.
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    Finally, Nasdaq has proposed to clarify its current position that 
the 60-day grace period applicable to banks and savings associations 
also applies to holding companies for such entities. Nasdaq believes 
that this clarification is appropriate because, like banks and savings 
associations, these holding companies must also file publicly available 
periodic reports with the appropriate state or federal regulator.

III. Summary of Comments and the Nasdaq's and NASD's Response

    The Commission received one comment in response to the proposed 
rule change, as amended.\21\ The commenter urged the Commission and the 
NASD to ``start properly regulating the smallcap market.'' 
Specifically, the commenter advocated that all public companies, 
regardless of size, be required to file periodic financial reports. In 
addition, the commenter recommended that if a reporting issuer is 
delinquent with respect to a required filing for 60 days, then trading 
in its securities should be halted in all venues until such time as it 
files the late report.
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    \21\ See supra note 8.
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    In its response to the comment letter,\22\ Nasdaq affirmed the 
importance of timely filing periodic financial reports. Nasdaq 
explained that an NASD rule governing the OTCBB already imposes a 
requirement that all issuers of securities quoted on the OTCBB file 
periodic reports and be current in those filings with the appropriate 
regulator. Nasdaq does not believe, however, that halting the trading 
of the securities of delinquent OTCBB issuers would be appropriate, 
since other OTC marketplaces, including the Pink Sheets, do not require 
reporting issuers to be current in their filings. Nasdaq reiterated its 
view that the proposed rule change strikes an appropriate balance, 
because it is designed to increase the timeliness of disclosure 
available to investors and to prevent the securities of issuers who 
repeatedly fail to comply with their disclosure obligations from being 
quoted on the OTCBB, subject to an appropriate grace period for 
companies that only

[[Page 70909]]

occasionally experience problems in submitting complete filings in a 
timely manner.
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    \22\ See supra note 9.
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    The NASD also responded to the single comment letter received on 
the proposal.\23\ In its response, the NASD noted, among other things, 
that it regulates trading in both the OTCBB and the Pink Sheets, and 
that there are, in certain instances, rules that are applicable only to 
trading in OTCBB securities. Further, the NASD noted that, as part of 
the recent transfer of direct authority over the OTCBB from Nasdaq to 
NASD,\24\ the NASD is currently analyzing whether certain distinctions 
across quotation services in the OTC market are appropriate.
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    \23\ See supra note 10.
    \24\ See supra note 3.
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IV. Discussion and Commission Findings

    The Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities association 
and, in particular, the requirements of section 15A of the Act \25\ and 
the rules and regulations thereunder. The Commission finds specifically 
that the proposed rule change is consistent with the provisions of 
section 15A(b)(6) of the Act,\26\ which requires, among other things, 
that the NASD's rules 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.\27\
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    \25\ 15 U.S.C. 78o-3.
    \26\ 15 U.S.C. 78o-3(b)(6).
    \27\ In approving this proposed rule change, as amended, the 
Commission notes that it has considered the proposed rule's impact 
on efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    Under the proposed rule change, the securities of an OTCBB issuer 
that submits a required periodic filing late or in an incomplete form 
three times during a two-year period, and the securities of an OTCBB 
issuer that are removed from the OTCBB as a result of the issuer's 
failure to file a required report with the appropriate regulatory 
agency two times in a two-year period, would become ineligible for 
continued quotation on the OTCBB by an NASD member. The issuer's 
securities, however, would become again eligible for quotation on the 
OTCBB when the issuer has timely filed, in a complete form, all 
required annual and quarterly reports for a one-year period.
    In the Commission's view, the proposed rule change is designed to 
protect investors and the public interest by setting forth conditions 
upon which an NASD member would be precluded from quoting on the OTCBB 
for a period of one year the securities of those OTCBB issuers that 
have failed to meet their reporting obligations on the number of 
occasions and within the time frame specified in the proposed rule 
change. The Commission believes that the proposed rule change's 
imposition of a one-year ban from quotation on the OTCBB upon the 
issuer's third failure during a two-year period to file a complete 
required annual or quarterly report by its due date (including any 
extension permitted by Rule 12b-25 under the Act), or upon the second 
removal of the issuer's securities from the OTCBB during a two-year 
period, are designed to foster the timeliness of disclosure available 
to the public by OTCBB issuers. Once such issuer has timely filed in a 
complete form all required annual and quarterly reports for a one-year 
period, its securities would become re-eligible for quotation on the 
OTCBB.
    The Commission believes that the proposal provides measures that 
are designed to exclude from its applicability those OTCBB issuers that 
occasionally and inadvertently fail to comply with their reporting 
obligations. The securities of OTCBB issuers would not be precluded 
from quotation on the OTCBB, unless the issuer failed to file annual or 
quarterly reports or filed incomplete reports three times during the 
prior two-year period or unless the issuer's securities were removed 
from the OTCBB twice in the prior two-year period due to the issuer's 
failure to file required reports. A required periodic filing would not 
be considered delinquent if the issuer files a complete Form 12b-25 
with the Commission and submits the report within the applicable time 
frame specified in Rule 12b-25 under the Act.
    With respect to the procedural rights of OTCBB issuers adversely 
affected by the operation of the proposed rule change, the Commission 
notes that OTCBB issuers retain the right to initiate the hearing 
process under NASD Rule 9700 Series, through which an issuer could 
request a review of an ineligibility determination made pursuant to 
NASD Rule 6530. Moreover, Nasdaq has represented that it would provide 
OTCBB issuers that file late or are otherwise delinquent a third time 
in a two-year period with seven calendar days' notice prior to removal 
of the issuer's securities from the OTCBB in order to allow the issuer 
to request a review of the determination by a hearings panel under the 
NASD Rule 9700 Series. In addition, Nasdaq has represented that, upon 
implementation, it plans to provide an OTCBB issuer notification 
whenever Nasdaq determines that the issuer is late in a periodic 
filing, along with an explanation of the consequences of the OTCBB 
issuer's delinquent status.\28\
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    \28\ Telephone conversation between Arnold Golub, Associate Vice 
President, Nasdaq and Nancy Sanow, Assistant Director, Division of 
Market Regulation, Commission, and Tim Fox, Special Counsel, 
Division of Market Regulation, Commission on November 15, 2005.
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    Finally, NASD staff has advised of plans to identify on the OTCBB 
Web site, http://www.otcbb.com, those OTCBB issuers that are subject to 

removal from quotation on the OTCBB for a one-year period if the issuer 
fails to satisfy the requirements of NASD Rule 6530(e)(1) or (e)(2). In 
the event that an issuer's securities are to be removed from the OTCBB 
because the security has become ineligible for quotation pursuant to 
NASD Rule 6530(e), the NASD staff has advised of plans to indicate the 
date on which the issuer's securities no longer will be eligible for 
quotation on the OTCBB.\29\ In the Commission's view, this information 
will help broker-dealers and investors to ascertain those securities 
that are at risk of being removed from the OTCBB for a one-year period, 
if the issuer fails to keep current in its reporting obligations.
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    \29\ Telephone conversation among Arnold Golub, Associate Vice 
President, Nasdaq, Andrea Orr, Assistant General Counsel, NASD, 
Nancy Sanow, Assistant Director, Division of Market Regulation, 
Commission and Tim Fox, Special Counsel, Division of Market 
Regulation, Commission on November 16, 2005.
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\30\ that the proposed rule change (SR-NASD-2005-011), as amended, 
be, and it hereby is, approved.
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    \30\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\31\
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    \31\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
 [FR Doc. E5-6455 Filed 11-22-05; 8:45 am]

BILLING CODE 8010-01-P