[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