[Federal Register Volume 59, Number 20 (Monday, January 31, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-2059]
[[Page Unknown]]
[Federal Register: January 31, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33507; File No. SR-NASD-93-24]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Order Approving Proposed Rule Change to Expand the
Universe of Equity Securities Eligible for Quotation in the OTC
Bulletin Board Service
January 24, 1994.
I. Introduction
On April 5, 1993, the National Association of Securities Dealers,
Inc. (``NASD'' or ``Association'') 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 expand the universe of equity
securities eligible for quotation in the OTC Bulletin Board Service
(``OTCBB''). Specifically, the NASD proposes that any equity security
meeting the following criteria will be deemed eligible for quotation in
the OTCBB: (1) The security is listed on one or more regional stock
exchanges in the U.S. and (2) the security does not meet the
requirements for dissemination of transaction reports through the
facilities of the Consolidated Tape (``non-Tape B securities'').
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1991).
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The proposed rule change was published for comment in Securities
Exchange Act Release No. 32169 (April 19, 1993), 58 FR 22010. The
Commission received five comment letters on the proposal,\3\ and an
NASD response to those letters,\4\ all of which are discussed below.
This order approves the proposed rule change.
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\3\See letter from George W. Mann, Senior Vice President and
General Counsel, Boston Stock Exchange, Inc. (``BSE''), to Jonathan
G. Katz, Secretary, Commission, dated May 18, 1993; letter from
David P. Semak, Vice President, Pacific Stock Exchange, Inc.
(``PSE''), to Jonathan G. Katz, Secretary, Commission, dated May 18,
1993; letter from William W. Uchimoto, Vice President and General
Counsel, Philadelphia Stock Exchange, Inc. (``Phlx''), to Jonathan
G. Katz, Secretary, Commission; letter from Edward G. Culverwell,
Culverwell & Co. Inc. (``Culverwell''), to Jonathan Katz, Secretary,
Commission, dated October 18, 1993; and letter from Cheryl Hess,
Chief Financial Officer, Thoratec Laboratories Corporation
(``Thoratec'') to Secretary, Commission, dated November 8, 1993.
\4\See letter from Robert E. Aber, Vice President and General
Counsel, NASD, to Jonathan G. Katz, Secretary, Commission, dated
November 9, 1993.
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II. Description of the Proposal
The NASD proposes to expand the universe of equity securities
eligible for quotation in the OTCBB. In the NASD's original proposal to
implement the OTCBB,\5\ the universe of securities classified as
potentially eligible for inclusion was limited to equity securities
that were neither qualified for inclusion on Nasdaq nor listed on a
U.S. securities exchange. The instant filing would expand that
classification by permitting certain exchange-listed equities to be
quoted in the OTCBB. The subset of equity securities affected by this
proposal is limited to those listed on any regional stock exchange
(i.e., current and prospective listings) and not included in the
definition of ``Eligible Securities'' under the Consolidated Tape
Plan.\6\
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\5\Securities Exchange Act Release No. 27975-A (May 30, 1990),
55 FR 23161 (File No. SR-NASD-88-19).
\6\Part VI(a) of the Consolidated Tape Plan defines ``Eligible
Securities'' to include any common stock, long-term warrant, or
preferred stock registered or admitted to unlisted trading
privileges on any national securities exchange other than the New
York Stock Exchange (``NYSE'') or the American Stock Exchange
(``Amex''), which, at the time of such registration or the
commencement of such trading, substantially meets the original
listing requirements of the NYSE or of the Amex.
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The NASD currently engages in surveillance of the relevant
securities. In 1991, the NASD Schedule H end-of-day reporting
requirements were expanded to cover over-the-counter (``OTC'')
transactions in exchange-listed equities that were not eligible for
transaction reporting on the Consolidated Tape.\7\ Under the current
proposal, this same group of equity securities would become eligible
for quotation in the OTCBB by NASD member firms that function as market
makers in this electronic medium. The NASD states that its surveillance
capabilities will be enhanced by the electronic capture of quotation
data to the extent that member firms elect to quote these securities in
the OTCBB.
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\7\NASD members that effect OTC transactions in exchange-listed
securities that are eligible for Consolidated Tape reporting must
observe the transaction reporting requirements contained in Schedule
G to the NASD By-Laws.
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In the present proposal, the NASD states that it recognizes that
some securities covered by this rule change might eventually qualify
for dissemination of transaction reports over the Consolidated Tape by
listing on one of the primary stock exchanges. If this occurs, the
security would no longer be qualified for quotation in the OTCBB. NASD
member firms desiring to continue as market makers for those securities
would have to then register as Consolidated Quotation Service (``CQS'')
market makers in accord with Part VII of Schedule D to the NASD By-
Laws.
III. Summary of Comments
The Commission received five comment letters on the proposal, of
which two favor,\8\ and three oppose Commission approval of the
proposal.\9\
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\8\See letters from Culverwell and Thoratec, supra note 3.
\9\See letters from BSE, Phlx, and PSE, supra note 3.
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The two letters favoring Commission approval of the proposal, one
from a regionally listed corporation and the other from an OTC market
maker, argue that the proposed expansion of securities eligible for
quotation in the OTCBB would add beneficial exposure to the relevant
securities. One letter also discusses difficulties in ascertaining
symbols in regioinally-listed securities, and argues that dual trading
with the OTCBB would increase access to market information.
The Phlx, in opposition to the proposal, states that the proposed
expansion goes well beyond the original scope and purpose contemplated
by the Commission's approval of the OTCBB which, the letter states, was
to provide more timely trading information in non-listed and non-Nasdaq
securities. The Phlx believes that for the NASD's listing expansion to
be consistent with National Market System objectives, the OTCBB must
reflect Phlx quotations as well as NASD member quotations, identify the
Phlx's three-character stock symbols for the relevant securities to
avoid confusion,\10\ and assure Phlx access to OTCBB member quotations.
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\10\The Phlx states that, in telephone conversations with the
NASD, the Phlx learned that the NASD intends to disseminate
quotations in the relevant securities using a four or five character
securities symbol rather than the exchanges' current three character
symbol.
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The BSE and PSE request that the Commission delay approval of the
present proposal, which they believe relates to other similar
initiatives by the NASD to trade listed stocks. The BSE and PSE argue
that approval of the present proposal, therefore, may have a
prejudicial effect on the treatment of these initiatives in the
Commission's Market 2000 Study.\11\ The BSE and PSE also state that if
the proposal is approved, the dissemination of quotations for each
listed stock should be limited to the symbol currently used by the
listing exchange to avoid shareholder and market participant confusion.
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\11\See Securities Exchange Act Release No. 30920 (July 14,
1992), 57 FR 32587 (July 22, 1992) (Market 2000 Study Concept
Release).
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The NASD responded to the letters opposing the Commission approval
of the proposal. With respect to uniform symbols, the NASD states that
each market center or quotation medium has been allowed to develop its
own conventions for collecting and disseminating dealers' quotations in
non-Tape B securities.\12\ According to the NASD, the OTCBB cannot
accommodate security symbols with fewer than four characters, and it is
not economically feasible to make the changes requested by the
exchanges, particularly in light of the small number of non-Tape B
securities potentially affected by the proposal. The NASD also notes
that approximately 90 equities currently listed on The Nasdaq Stock
Market are simultaneously listed on a regional exchange, and to the
NASD's knowledge, the different symbol format has not produced
confusion among investors.
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\12\The Commission notes that non-Tape B securities are not
subject to a transaction reporting plan, and therefore, do not fall
within the Rule 11Aa3-1(a)(4) definition of a ``reported security''
(i.e., a listed equity security or NASDAQ security for which
transaction reports are required to be made on a real-time basis
pursuant to an effective transaction reporting plan). Thus, non-Tape
B securities are not subject to the statutory requirements for
consolidated reporting. Accordingly, the Commission generally has
allowed the self-regulatory organizations to develop individual
procedures for trade and quotation reporting in those securities.
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The NASD states that it believes that, with respect to the present
proposal, greater potential for confusion probably lies with member
firm personnel than public investors. To minimize this potential, the
NASD is willing to modify the OTCBB Symbol Directory to provide a
separate alphabetical listing of all non-Tape B securities that NASD
members elect to quote in the OTCBB. The listing would include the four
character OTCBB symbol, the three character exchange symbol, and an
indication of the regional exchange on which the security is listed.
The NASD also would periodically publish a separate listing with this
information in the ``OTC Update,'' another publication dealing with the
OTCBB that specifically targets the trading community.\13\
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\13\The NASD will ensure that, within two months of this order,
the ``OTC Update'' will include this separate listing. Also, the
NASD will ensure that the Fall 1994 OTCBB Symbol Directory and all
future OTCBB Symbol Directories will include this modified listing.
Telephone conversation between Michael Kulczak, NASD and Betsy
Prout, Commission, January 19, 1994.
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In response to the request for consolidated reporting, the NASD
states that it has reviewed the possibility of creating a central
facility for consolidating and disseminating market information, and
concludes that it is not economically feasible to construct a central
facility dedicated to processing quotation and transaction information
for the relevant securities (approximately 200 securities, which the
NASD does not expect to increase significantly). The NASD addresses
potential specialist participation in the OTCBB, observing that
participation in the OTCBB is open to any NASD member firm, including
those also acting as regional specialists, as long as the firm meets
the financial and operational requirements for market making and enters
into a contract to receive the necessary Nasdaq terminal service. On
the other hand, there is no statutory requirement that the NASD
accommodate non-member market makers in the OTCBB. The NASD also notes
that a broker-dealer's membership in a self-regulatory organization is
essential to ensure adequate regulation of market participants and
discharge of the self-regulatory organization's statutory
responsibilities to enforce member's compliance with all applicable
rules governing use of its market facilities.
IV. Discussion
The Commission believes that the NASD's proposal to amend its rules
to allow OTCBB quotations in non-Tape B securities listed on one or
more regional exchange is consistent with sections 15A(b)(6) and
15A(b)(11) of the Act. Section 15A(b)(6) 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, to remove impediments to and perfect the
mechanisms of a free and open market and a national market system, and,
in general, to protect investors and the public interest. Section
15A(b)(11) requires the NASD to include in its rules provisions
governing the form and content of quotations relating to securities
sold otherwise than on a national securities exchange, and requires
those rules to be designed to produce fair and informative quotations,
to prevent fictitious or misleading quotations, and to promote orderly
procedures for collecting, distributing, and publishing quotations.
The Commission believes that inclusion of the relevant securities
in the OTCBB may lead to more effective NASD surveillance over NASD
members who trade those issues, thereby furthering the objectives of
section 15A(b)(6). Currently, the NASD monitors its members' trading
activity in the securities by analyzing aggregate volume and price
range data submitted by member firms pursuant to Schedule H of the
NASD's By-Laws. Under the present proposal, those surveillance efforts
should be enhanced by merging transaction data currently submitted by
NASD members with real-time OTCBB quotation data which would not
otherwise be readily accessible in OTC trading of non-Tape B
securities. Thus, the Commission supports the proposal in that it will
enhance the NASD's surveillance over its members' trading in the
relevant securities once they become quoted on OTCBB, and, therefore,
the Commission believes that the proposal is consistent with the
purposes of section 15A(b)(11). The Commission also believes that the
proposal is consistent with section 15A(b)(6), in that OTCBB
eligibility for non-Tape B securities should enhance the opportunity
for OTC market makers to provide dynamically updated electronic
quotations in those securities, thereby furthering the production of
fair and informative OTC market maker quotations, the prevention of
misleading quotations, and the promotion of orderly procedures for
collecting and dissemination quotations.
With respect to the comment letters received and the NASD's
response, the Commission believes that the potential benefits of the
proposal outweigh the potential risk of confusion asserted by those
opposing the proposal, and that the NASD has adequately responded to
the concerns raised in the comment letters. The Commission believes
that the NASD's suggested modification of the OTCBB Symbol Directory to
provide a separate alphabetical listing of all non-Tape B securities
that NASD members elect to quote in the OTCBB, combined with periodic
publication of a separate listing of the information, should serve to
avoid potential confusion caused by the different symbols in this
relatively small number of stocks. Thus, the Commission expects the
NASD to begin the supplemental publication efforts upon commencement of
OTCBB inclusion of the relevant securities.
While the Commission generally supports efforts for consolidated
reporting, the Commission realizes that the number of stocks affected
by this proposal is small and recognizes that the costs associated with
the creation of consolidated reporting in those securities might be
prohibitively high at this time. The Commission also recognizes that,
with respect to non-Tape B securities, the Act and the Rules thereunder
do not require consolidated quotations.\14\ Finally, the Commission
believes that, while consolidated quotations are preferable, adequate
avenues for access to OTCBB quotation information currently are
available to regional specialists, and therefore, it would be
inappropriate for the Commission to mandate consolidated quotations at
this time.
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\14\See supra, note 12.
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Finally, while the Commission is approving the present proposal,
the Commission notes that the proposal does not provide for a specific
amendment to the NASD's OTCBB Rules. Recently, the Commission approved
a proposed rule change submitted by the NASD which codified the
existing OTCBB requirements.\15\ The Commission requests that, within
30 days of publication of this order, the NASD submit a proposed rule
change to the Commission to codify the present proposal.\16\
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\15\Securities Exchange Act Release No. 33433 (January 5, 1994).
\16\The proposal states that the NASD will implement the revised
inclusion standards within 90 days of the date of the SEC's approval
order. The NASD also has supplied the Commission with language that
it intends to use in the codification. See letters from Robert E.
Aber, NASD, to Elizabeth H. MacGregor, Commission, dated July 1,
1993 and January 21, 1994. The Commission requests that the
codification of the present proposal be in place in the NASD Rules
before the NASD implements these revised inclusion standards.
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V. Conclusion
For the foregoing reasons the Commission finds that the present
proposal is consistent with the Act and the Rules and Regulations
thereunder.
It is therefore ordered, Pursuant to section 19(b)(2) of the
Act,\17\ that the proposed rule change (SR-NASD-93-24) is approved.
\17\15 U.S.C. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\18\
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\18\17 CFR 200.30-3(a)(12) (1991).
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[FR Doc. 94-2059 Filed 1-28-94; 8:45 am]
BILLING CODE 8010-01-M