[Federal Register Volume 59, Number 73 (Friday, April 15, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-9215]


[[Page Unknown]]

[Federal Register: April 15, 1994]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-33899; File No. SR-NASD-94-19]

 

Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by National Association of Securities Dealers, Inc., Relating to 
Part II, Sections 1, 2, and 3 of Schedule D to the NASD By-Law

April 12, 1994.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on April 6, 1994, the 
National Association of Securities Dealers, Inc. (``NASD'' or 
``Association'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the NASD. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\15 U.S.C. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Below is the text of the proposed rule change. Proposed new 
language is italicized

Schedule D to the NASD By-Laws, Part II, Qualification Requirements for 
NASDAQ Securities

Sec. 1. Qualification Requirements for Domestic and Canadian Securities
    The Association, as operator of the NASDAQ System, is entrusted 
with the authority to preserve and strengthen the quality of and public 
confidence in its market. The NASDAQ System stands for integrity and 
ethical business practices in order to enhance investor confidence, 
thereby contributing to the financial health of the economy and 
supporting the capital formation process. NASDAQ System issuers, from 
new public companies to companies of international stature, by being 
included in the NASDAQ System, are publicly recognized as sharing these 
important objectives of the NASDAQ System.
    The Association, therefore, in addition to applying the enumerated 
criteria set forth in Parts II and III hereof, will exercise broad 
discretionary authority over the initial and continued inclusion of 
securities in the NASDAQ System in order to maintain the quality of and 
public confidence in its market. Under such broad discretion and in 
addition to its authority under Subsection 3(a) hereof, the Association 
may deny initial inclusion or apply additional or more stringent 
criteria for the initial or continued inclusion of particular 
securities or suspend or terminate the inclusion of particular 
securities based on any event, condition, or circumstance which exists 
or occurs that makes initial or continued inclusion of the securities 
in the NASDAQ System inadvisable or unwarranted in the opinion of the 
Association, even though the securities meet all enumerated criteria 
for initial or continued inclusion in the NASDAQ System.

[Other provisions of Section 1 remain unchanged]
* * * * *
Sec 2. Qualification Requirements for Non-Canadian Foreign Securities 
and American Depository Receipts
    The Association, as operator of the NASDAQ System is entrusted with 
the authority to preserve and strengthen the quality of and public 
confidence in its market. The NASDAQ System stands for integrity and 
ethical business practices in order to enhance investor confidence, 
thereby contributing to the financial health of the economy and 
supporting the capital formation process. NASDAQ System issuers, from 
new public companies to companies of international stature, by being 
included in the NASDAQ System, are publicly recognized as sharing these 
important objectives of the NASDAQ System.
    The Association, therefore, in addition to applying the enumerated 
criteria set forth in Parts II and III hereof, will exercise broad 
discretionary authority over the initial and continued inclusion of 
securities in the NASDAQ System in order to maintain the quality of and 
public confidence in its market. Under such broad discretion and in 
addition to its authority under Subsection 3(a) hereof, the Association 
may deny initial inclusion or apply additional or more stringent 
criteria for the initial or continued inclusion of particular 
securities or suspend or terminate the inclusion of particular 
securities based on any event, condition, or circumstance which exists 
or occurs that makes initial or continued inclusion of the securities 
in the NASDAQ System inadvisable or unwarranted in the opinion of the 
Association, even though the securities meet all enumerated criteria 
for initial or continued inclusion in the NASDAQ System.

[Other provisions of Section 2 remain unchanged]

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the 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. The 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

Proposed Discretionary Authority Regarding Inclusion of Securities in 
the Nasdaq System

Background

Prior Rule Filing Proposal

    In recent years, the NASD has received an increasing number of 
applications for inclusion in the Nasdaq System from companies in which 
an officer, director, controlling shareholder, or other person in a 
position to influence management decisions has been enjoined, barred or 
suspended from participation in the securities industry for 
violations(s) of state or federal securities laws, self-regulatory 
organizations (``SRO'') rules and regulations, or convicted of any 
felony involving the purchase or sale of any security arising out of 
such person's participation in the securities or commodities industry. 
On a case-by-case basis, the NASD has denied the applications of such 
issuers for inclusion in the Nasdaq system pursuant to its authority 
under Part II, Subsection 3(a)(3) of Schedule D where the NASD formed a 
reasonable belief that enumerated persons connected with the issuer 
might engage in additional violative conduct contrary to the interests 
of the investing public. In such cases, the NASD's rationale has been 
that any adjudicated prior violative conduct raises concerns regarding 
the continuing potential for conduct in connection with the operation 
of the company or the market for its securities that would be 
considered fraudulent and manipulative, contrary to just and equitable 
principles of trade, or otherwise raise investor protection concerns. 
The NASD has been concerned that such person(s) may seek to continue 
their violative conduct in the securities markets through the 
management, control or influence of publicly-held company. More 
recently, the NASD has had concerns and denied inclusion in the Nasdaq 
System if persons in a position of management, control or influence of 
an issuer are the subject to pending proceedings for violations of 
state or federal securities laws.
    As a result of these concerns, the NASD filed with the SEC SR-NASD-
93-32 on June 2, 1993. SR-NASD-93-32 proposed to amend Part II, Section 
3(a) to Schedule D by adding new subsection 3(a)(3) to clarify the 
NASD's authority, on a case-by-case basis, to either deny inclusion or 
apply additional or more stringent criteria for the initial or 
continued inclusion of a particular securities, or to suspend or 
terminate the inclusion of an otherwise qualified security if any 
officer, director, controlling shareholder, or other person in a 
position to influence management decisions of the issuer has been: (i) 
Barred or suspended from participating in the securities industry by 
the SEC or any self-regulatory organization; (ii) permanently enjoined 
by order, judgment or decree of any court of competent jurisdiction 
from participating in the securities industry, or from engaging in or 
continuing any conduct or practice in connection with the purchase or 
sale of any security; or (iii) convicted of any felony involving the 
purchase or sale of any security arising out of such person's 
participation in the securities or commodities industry.\2\ In response 
to the SEC's publication for comment of the proposed NASD rule 
change,\3\ the SEC received one comment letter submitted by members of 
a Task Force of the American Bar Association (``ABA Task Force'') dated 
August 30, 1993 (the ``comment letter'').\4\ The comment letter 
referenced the criteria in the proposed rule change as ``bad boy 
criteria'' and stated:
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    \2\The adoption section 21(d)(2) of the Act, as part of the 
Remedies Act of 1990, demonstrates congressional concern regarding 
the potential abuse that may exist where a company i managed by such 
person(s) with a history of adjudicated violative conduct. Section 
21(d)(2) authorizes a federal court to bar or suspend an individual 
from serving as an officer or director of a public company as a 
sanction for securities law violations. Thus, Congress recognized 
that individuals may use public companies to manipulate the equity 
markets and harm investors.
    In the first U.S. District Court decision imposing a sanction 
under section 21(d)(2), the Court also required that all seucrities 
holdings of the respondents be placed in a voting trust to divest 
them of any control of any public company. The Court explicitly 
recognized that ownership of a controlling interest in a public 
company provides an opportunity for an individual to use a company 
as a vehicle for future securities violations. SEC v. Drexel Burnham 
Lambert Incorporated, 1993 WL 496837 (S.D.N.Y.) (December 1, 1993). 
See, Washington Post, December 2, 1993, at 13, col. #3.
    \3\Securities Exchange Act Release 32605 (July 9, 1993), 58 FR 
38150 (July 15, 1993).
    \4\See, Amendment No. 2 to SR-NASD-93-32 which includes the 
NASD's response to all of the comments of the ABA Task Force.
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    We generally do not object to specific ``bad boy'' criteria. We 
believe, however, that such criteria themselves should be subject to 
standards consistent with the NASD's discretionary authority under 
existing Subsection 3(a)(3), namely, to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade and to protect investors and the public interest. 
The ``bad boy'' criteria in proposed Subsection 3(a)(3) standing along 
would apply to an unduly broad range of vioaltions, some of which would 
not be appropriate bases for denying initial inclusion or suspension or 
termination of continued inclusion of the securities of an issuer in 
the Nasdaq System.\5\
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    \5\Comment letter at 3.
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    The comment letter also noted that a number of the ABA members that 
reviewed the comment letter in draft form strongly preferred that the 
NASD rely solely on the discretionary standards contained in existing 
Part II, Section 3(a)(3) of Schedule D to avoid the potential for 
``abuse that may derive from the inclusion of specific ``bad boy'' 
criteria'' in that Section.\6\ In response to the comment letter, the 
NASD filed on September 29, 1993, Amendment No. 2 to SR-NASD-93-32. In 
this amendment, the NASD noted it had not intended for the criteria to 
stand alone without reference to the current requirements set forth in 
Part II, Section 3(a)(3) of Schedule D. The text of the proposed rule 
change, therefore, was amended to clarify this issue.
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    \6\Id. at n. 7.
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Review of Association's Discretionary Authority

    The NASD recognized, however, that the ABA Task Force comment 
letter raised important questions regarding the scope of the NASD's 
discretionary authority over the inclusion of securities in the Nasdaq 
System. The NASD, therefore, commenced an additional review of the 
scope of its discretionary authority under Part II, Section 3(a)(3) of 
Schedule D and under the Act, and also compared such authority to the 
rules of the New York Stock Exchange (``NYSE'') and American Stock 
Exchange (``AMEX'') providing discretionary authority with respect to 
listings on such exchanges.
    Section 3(a)(3)--Section 3(a)(3) of Part II to Schedule D 
(``Section 3(a)(3)'') provides that the Association may, in accordance 
with Article IX of the NASD's Code of Procedure, apply additional or 
more stringent criteria for the initial or continued inclusion of 
particular securities or suspend or terminate the inclusion of an 
otherwise qualified security if the Association deems it necessary to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, or to protect investors and the 
public interest.\7\
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    \7\Any denial by the Association of initial or continued 
inclusion in the Nasdaq System is subject to review by the SEC and 
the Courts by request of the aggrieved party.
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    The NASD has always believed that Section 3(a)(3) provides broad 
discretionary authority in order to allow the Association to fulfill 
the statutory policies contained in this Section of Schedule D and in 
Section 15A(b)(6) of the Act. The policy goals of Section 3(a)(3) to 
Part II of Schedule D are based on the statutory requirements contained 
in Section 15A(b)(6) of the Act which requires, in part, that the rules 
of the Association be designed to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade 
and to protect investors and the public interest. Identical statutory 
mandates are imposed on the exchanges pursuant to Section 6(b)(5) of 
the Act. Compliance by the NASD and exchanges with these statutory 
mandates is central to the concept of self-regulation.
    The breadth of the NASD's discretionary authority under Section 
3(a)(3) was clearly intended and is necessary to fulfill the regulatory 
purpose of this Section to Schedule D and Section 15A(b)(6) of the Act. 
Without such broad discretionary authority to make determinations based 
on any issuer-related matter, the investor protection and public 
interest goals contained in Section 3(a)(3) and Section 15A(b)(6) of 
the Act, would be severely compromised. Limitations on the NASD's 
authority under Section 3(a)(3) could, in fact, result in circumstances 
where the NASD would be prevented from excluding an issuer from the 
Nasdaq System even if the Association deemed such action necessary to 
protect investors and the public interest.
    Tassaway Decision--The importance of the NASD's authority to 
exclude, in general, non-complying securities from the Nasdaq System 
was addressed by the SEC in In the Matter of Tassaway, Inc.\8\ 
(``Tassaway''). In Tassaway,  the SEC stated:
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    \8\Securities Exchange Act Release No. 11291 (Mar. 13, 1975), 45 
SEC 706, 6 SEC Docket 427.
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    Though exclusion from the system may hurt existing investors, 
primary emphasis must be placed on the interests of prospective future 
investors. The latter group is entitled to assume that the securities 
in the system meet the system's standards.
    Hence the presence in NASDAQ of non-complying securities could have 
a serious deceptive effect.\9\
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    \9\Tassaway 45 SEC 706 at 709. See also, In the Matter of ORS 
Automatic, Inc. 48 SEC 490, 493 (1986) wherein the Commission stated 
that the policy enunciated in Tassaway with regard to inclusion in 
the Nasdaq System is equally applicable to the Nasdaq National 
Market segment of the Nasdaq System.
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    The Commission in Tassaway also articulated its review standards 
regarding the Association's discretionary authority with respect to 
inclusion criteria in the Nasdaq System. The Commission stated:
    To the extent that discretion enters into the matter--and it very 
often does--the discretion in question is the NASD's not ours. Hence, 
we are not at liberty to substitute our discretion for that of the 
Association.\10\
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    \10\Id at 710. In a footnote to this statement, the Commission 
stated that the Nasdaq System's rules, like those of the exchanges 
do not lend themselves to mechanical and inflexible administration. 
The Commission noted that this is an area for ``pragmatic business 
judgments based on a kaleidoscopic variety of factors.''
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    The above statements in Tassaway were made prior to adoption of 
Section 3(a)(3) to Part II of Schedule D, and, therefore, did not 
address the NASD's discretion to deny or terminate inclusion in the 
Nasdaq System pursuant to Section 3(a)(3) to Part II of Schedule D, 
that authorizes the NASD to use discretion to fulfill the investor 
protection and public interest standards contained in Section 15A(b)(6) 
of the Act. The Association believes, however, that the Commission's 
statements in Tassaway are none-the-less valid with respect to the 
investor protection, public interest and other policy standards 
contained in Section 3(a)(3) of Part II to Schedule D and Section 
15A(b)(6) of the Act. Relying on the reasoning of Tassaway, the NASD 
believes that prospective future investors are entitled to assume that 
the securities in the Nasdaq System are subject to the Association's 
broad discretionary authority to deny or terminate inclusion when the 
Association deems it necessary to protect the public interest and the 
interests of potential future investors and other market participants, 
to promote just and equitable principles of trade, to prevent 
fraudulent and manipulative acts and practices, regardless of whether 
the issuer is in compliance with the inclusion criteria of Schedule D.
    The Tassaway decision affirms the NASD's long-held position that an 
issuer's access to the Nasdaq System is not an incontrovertible right 
but a privilege.\11\
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    \11\In 1957, the Commission stated that the use of the 
facilities of a national securities exchange by an issuer is a 
privilege involving important responsibilities under the Act. The 
Commission noted that when those responsibilities are abused, the 
integrity of the exchange market is vitiated. In the Matter of Great 
Sweet Grass Oils Ltd., 37 SEC 683, 698 (1957); aff'd per curiam sub 
nom. Great Sweet Oils, Ltd. v. SEC, 256 F.2d 893 (D.C. Cir. 1958); 
see also Kroy Oils, Ltd., 37 SEC 683, 698 (1957).
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    Section 11A--The investor protection, public interest and other 
statutory policies mandated by Section 15A(b)(6) of the Act (which are 
embodied in Section 3(a)(3) to Part II of Schedule D) were expanded by 
Congress in the Securities Exchange Act Amendments of 1975 (``1975 
Amendments'') through the adoption of Section 11a(a)(1)(A) of the Act 
(``Section 11A(a)(1)(A)''). As stated in Section 11A(a)(1)(A), 
``Congress finds that the securities markets are an important national 
asset which must be preserved and strengthened.'' The NASD believes 
that Congress thereby acknowledged that there is a general public 
interest in strong securities markets that is consistent, yet 
identifiably separate from the transaction-related investor protection 
and public interest policies previously addressed under Section 
15A(b)(6) of the Act. The NASD believes that the Congressional Joint 
Statement of the Committee of Conference to the 1975 Amendments 
emphasized this distinction when stating:
    The securities markets of the United States are indispensable to 
the growth and health of this country's and the world's economy. In 
order to raise the enormous sums of investment capital that will be 
needed in the years ahead and to assure that capital is properly 
allocated among competing uses, these markets must continue to operate 
fairly and efficiently. The increasing tempo and magnitude of the 
changes are occurring in our domestic and international economy make it 
clear that the securities markets are due to be tested as never before. 
Unless these markets adapt and respond to the demands placed upon them, 
there is a danger that America will lose ground as an international 
financial center and that the economic, financial and commercial 
interests of the Nation will suffer. The rapid attainment of a national 
market system as envisaged by this bill is important, therefore, not 
simply to provide greater investor protection and bolster investor 
confidence but also to assure that the country maintains a strong, 
effective and efficient capital arising and capital allocating system 
in the years ahead.\12\
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    \12\Introduction to the Joint Explanatory Statement of the 
Committee of Conference on the amendments of the House to the bill 
(S. 249), submitted to the House and Senate. See, Federal Securities 
Laws, Legislative History, (1933-1988) Vol. III at 3128.
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    In describing the securities markets of the United States as 
national assets, Congress envisioned that the NASD and exchanges would 
be increasingly responsible for advancing this public interest, as well 
as other statutory obligations. Senator Harrison A. Williams, Jr., 
during Senate consideration of the 1975 Amendments, specifically 
addressed the increased role of the self-regulatory organizations as 
envisioned in the 1975 Amendments when stating:
    Self-regulation should be preserved in the securities industry, but 
the self-regulatory organizations must display a greater responsiveness 
to their statutory obligations and to the need to coordinate their 
functions and activities.\13\
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    \13\Federal Securities Laws, Legislative History (1933-1988), 
Vol. III, Item 159 at 2949.
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    In addition, Sections 15A(b)(6) and 6(b)(5) of the Act require that 
the rules of the NASD and the exchanges be designed to perfect the 
mechanism of a national market system. The rules of the NASD and 
exchanges are, therefore, required to further all statutory policies 
underlying a national market system, including the Section 11A(a)(1)(A) 
policy to preserve and strengthen the securities markets.
    As the operator of the second largest securities market in the U.S. 
and the world, the NASD believes that the general legislative intent of 
the 1975 Amendments and the express findings of Congress set forth in 
Section 11A(a)(1)(A) of the Act, expand the investor and public 
interest policies contained in Section 15A(b)(6) of the Act and support 
the Association's position that it has broad discretionary authority to 
make issuer inclusion determinations based on broad concerns regarding 
any event, circumstance or condition in order to protect the Nasdaq 
System as a national asset.

Discretionary Listing Authority of the National Exchanges

    The NASD also compares its discretionary authority under Section 
3(a)(3) to Part II of Schedule D to the discretionary authority 
contained under comparable rules of the New York Stock Exchange 
(``NYSE'') and the American Stock Exchange (``AMEX'') (together, the 
``national exchanges''). The reason for this comparison is twofold. 
First, as noted above, the investor protection and public interest 
mandates imposed on the exchanges pursuant to Section 6(b)(5)\14\ of 
the Act are identical to the mandates imposed on the Nasdaq System 
pursuant to Section 15A(b)(6) of the Act. The NASD, therefore, 
concludes that the discretionary authority to fulfill such identical 
statutory mandates should be similar. Second, the Commission also 
expressly stated, in Tassaway, that the governing legal standards of 
both are the exchanges and the Nasdaq System should be the same. The 
Commission stated:
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    \14\Section 6(b)(5) provides:
    The rules of the 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 and perfect the mechanism of a 
free and open market and a national market system, and, in general, 
to protect investors and the public interest; and are not designed 
to permit unfair discrimination between customers, issuers, brokers, 
or dealers, or to regulate by virtue of any authority conferred by 
this title matters not related to the purposes of this title or the 
administration of the exchange.
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    So we think this is a suitable occasion on which to state the 
Standards by which we shall be guided when asked to review the NASD's 
actions with respect to [the Nasdaq System]. The NASD's role in Nasdaq 
is the same as that of the organized exchanges with respect to the 
lists of securities traded on them. It follows that the governing legal 
standards should also be the same.\15\
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    \15\45 SEC 706 at 709.
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    Pursuant to the Commission's determination in Tassaway, the NASD 
has concluded that the scope of its discretionary authority with 
respect to listings in the Nasdaq System can be no less than that of 
the national exchanges. The NASD's review of the exchanges' rules is as 
follows.
    AMEX Discretionary Authority--AMEX rules describe their numerical 
initial listing criteria as ``numerical guidelines'' and the exchange 
is provided with sole discretion to approve or disapprove a listing 
application. The AMEX rule states:
    The approval of an application for the listing of securities is a 
matter solely within the discretion of the Exchange. To assist 
companies interested in applying for listing, the Exchange has 
established certain numerical guidelines, outlined below, which will be 
considered in evaluating listing eligibility. Other factors which will 
also be considered include the nature of a company's business, the 
market for its products, the reputation of its management, its 
historical record and pattern of growth, its financial integrity, its 
demonstrated earning power and its future outlook. The fact that an 
applicant may meet the Exchange's numerical guidelines does not 
necessarily mean that its application will be approved. On the other 
hand, an application may be approved even though the company does not 
meet all of the numerical guidelines.\16\
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    \16\Part 1, section 101 of the Manual.
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    The rules of the AMEX regarding continued listing criteria 
(including their corporate governance criteria) are also stated to be 
only guidelines that in no way limit or restrict the exchange decision 
on continued listing or delisting determinations. The first three 
sections of Part 10 of the AMEX Manual regarding Suspension Delisting 
provide for such broad discretionary authority.\17\ Section 1001 
entitled ``General'' states:
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    \17\See, Part 10 entitled `Section and Delisting' of the AMEX 
Manual and Specifically Subsections 1001, 1002 and 1003 entitled 
`General'; Policies With Respect to Continued listing; and 
`Application of Policies' respectively.
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    In considering whether a security warrants continued trading and/or 
listing on the Exchange, many factors are taken into account, such as 
the degree of investor interest in the company, its prospects for 
growth, the reputation of its management, the degree of commercial 
acceptance of its products, and whether its securities have suitable 
characteristics for auction market trading. Thus, any developments 
which substantially reduce the size of a company, the nature and scope 
of its operations, the value or amount of its securities available for 
the market, or the number of holders of its securities, may occasion a 
review of continued listing by the Exchange. Moreover, events such as 
the sale, destruction, loss or abandonment of a substantial portion of 
its business, the inability to continue its business, steps towards 
liquidation, or repurchase or redemption of its securities, may also 
give rise to such a review.
    Section 1002 entitled ``Policies With Respect to Continued 
Listing'' first outlines the AMEX's discretionary authority to delist 
or suspend, and then outlines the AMEX's policy on when it will 
generally consider suspension or removal. This Section states:
    The Constitution of the Exchange provides that the Board of 
Governors may, in its discretion, at any time, and without notice, 
suspend dealings in, or may remove any security from, listing or 
unlisted trading privileges. The Exchange, as a matter of policy, will 
consider the suspension of trading in, or removal from listing or 
unlisted trading of, any security when in the opinion of the Exchange: 
(a) the financial condition and/or operating results of the issuer 
appear to be unsatisfactory; or
    (b) it appears that the extent of public distribution or the 
aggregate market value of the security has become so reduced as to make 
further dealings on the Exchange inadvisable; or
    (c) the issuer has sold or otherwise disposed of its principal 
operating assets, or has ceased to be an operating company; or
    (d) the issuer has filed to comply with its listing agreements with 
the Exchange; or
    (e) any other event shall occur or any condition shall exist which 
makes further dealings on the Exchange unwarranted.
    While the discretionary authority of the AMEX to list or delist is 
clearly stated in the first sentence of the above Section 1002, the 
AMEX strongly emphasizes its discretionary authority in the 
introductory paragraphs to the following Section 1003 entitled, 
``Application of Policies.'' Section 1003 begins as follows:
    The determination as to whether a security warrants continued 
trading on the Exchange is not based on any precise mathematical 
formula. Each case is considered on the basis of all relevant facts and 
circumstances and in light of the objectives of the Exchanges policies 
regarding continued listing (See also Sec. 1004). To assist in the 
application of these policies, the Exchange has adopted certain 
guidelines, outlined below, under which it will normally give 
consideration to suspending dealings in, or removing, a security from 
listing or unlisted trading. However, these guidelines in no way limit 
or restrict the Exchange in applying its policies regarding continued 
listing, and the Exchange may at any time, in view of the circumstances 
in each case, suspend dealings in, or remove, a security from listing 
or unlisted trading when in its opinion such security is unsuitable for 
continued trading on the Exchange. Such action will be taken regardless 
of whether the issuer meets or fails to meet any or all of the 
guidelines discussed below.
    Section 1003 also enumerates numerous quantitative and non-
quantitative guidelines, including corporate governance criteria. These 
guidelines include Subsection (e)(iii) that provides that the exchange 
will normally consider suspending dealings in, or removing from the 
list, a security ``if the company or its management shall engage in 
operations which, in the opinion of the exchange, are contrary to the 
public interest.''
    NYSE Discretionary Authority--Unlike the AMEX's ``guidelines,'' the 
NYSE initial and continued listing requirements are described as 
``criteria.'' NYSE rules, however, provide the Exchange with broad 
discretionary authority to list, suspend or delist securities.
    Section 1, Subsection 101 of the NYSE Listed Company Manual 
provides initial numerical listing criteria. In addition, the 
introductory language of this Section stresses that an NYSE listing 
must meet more than just the enumerated listing criteria, it must merit 
the recognition of the NYSE. The Rule specifically states:
    A listing on the New York Stock Exchange is internationally 
recognized as signifying that a publicly owned corporation has achieved 
maturity and front-rank status in its industry--in terms of assets, 
earnings, and shareholder interests and acceptance. Indeed, the 
Exchanges's listing standards are designed to assure that every 
domestic or non-U.S. company whose shares are admitted to trading in 
the Exchange market merit that recognition.
    This introductory language is followed by numerical criteria and 
additional language that provides the NYSE with discretionary authority 
to ensure that each issuer does ``merit that [international] 
recognition.'' The Rule states:
    Aside from the minimum numerical standards listed above, other 
factors are taken into consideration. The company must be a going 
concern or be the successor to a going concern. Although the amount of 
assets and earnings and the aggregate market value are considerations, 
greater emphasis is placed on such questions as the degree of national 
interest in the company, the character of the market for its products, 
its relative stability and position in its industry, and whether or not 
it is engaged in an expanding industry with prospects for maintaining 
its position. The Exchange is also concerned with such matters as 
voting rights of shareholders, voting arrangements and pyramiding of 
control, and related party transactions. When there is an indication of 
a lack of public interest in the securities of a company evidenced, for 
example, by low trading volume on another exchange, lack of dealer 
interest in the over-the-counter market, unusual geographic 
concentration of holders of shares, slow growth in the number of 
shareholders, low rate of transfers, etc., higher distribution 
standards may apply. In this connection, particular attention will be 
directed to the number of holders of from 100 to 1,000 shares and the 
total number of shares in this category.
    With respect to discretionary authority to delist securities, 
Section 802.00 of the NYSE Company Manual provides that the NYSE will 
``give consideration to delisting a security of a company'' when the 
company falls below certain numerical and corporate governance related 
criteria (listed in this Section), or when the NYSE makes certain other 
``determinations'' or ``appraisals.'' This NYSE section provides the 
NYSE with broad discretionary authority by stating:
    The Exchange is not limited by the criteria set forth above. 
Rather, it may make an appraisal of, and determine on an individual 
basis, the suitability for continued listing of an issuer in the light 
of all pertinent facts whenever it deems such action appropriate, even 
though a security meets or fails to meet any enumerated criteria. Other 
factors which may lead to a company's delisting include:
     The failure of a company to make timely, adequate, and 
accurate disclosures of information to its shareholders and the 
investing public.
     Failure to observe good accounting practices in reporting 
of earnings and financial position.
     Other conduct not in keeping with sound public policy.
     Unsatisfactory financial conditions and/or operating 
results.
     Inability to meet current debt obligations or to 
adequately Finance operations.
     Abnormally low selling price or volume of trading.
     Unwarranted use of company funds for the repurchase of its 
equity securities.
     Any other event or condition which may exist or occur that 
makes further dealings or listing of the securities on the Exchange 
inadvisable or unwarranted in the opinion of the Exchange.

Proposed Rule Change

    In the NASD's review of the rules of the national exchanges, the 
Association noted an important difference between the language 
contained in Part II, Section 3(a)(3) of Schedule D and the national 
exchanges' more extensive rule language that emphasizes each exchanges' 
broad discretionary authority to make determinations over the listing 
of securities on their markets. Whereas Section 3(a)(3) of Schedule D 
relies on investor protection and public interest rule language set 
forth in Section 15A(b)(6) of the Act, the exchange rules expressly 
reserve discretionary authority to the respective exchanges without 
tracking the identical investor protection and public interest rule 
language of Section 6(b)(5) of the Act.
    The NASD notes that the AMEX listing rules are emphasized to be 
only guidelines and Part I, Section 101 of the AMEX Manual provides 
that the approval of an application for listing is a matter solely 
within the discretion of the Exchange. In a similar manner, Section 
802.00 of the NYSE Company Manual specifically provides the exchange 
with discretionary authority to determine the suitability of continued 
listing of an issuer in light of all pertinent facts whenever it deems 
such action appropriate, even though a security meets or fails to meet 
any enumerated criteria. Section 802.00 also provides that a company 
may be delisted based on any other event or condition that may exist or 
occur that makes dealings or listing of the securities on the NYSE 
inadvisable or unwarranted in the opinion of the Exchange. The NYSE 
also utilizes its discretionary authority to maintain high non-
quantitative standards for its securities markets by stating, under 
Section 1, Subsection 101 of the NYSE Company Manual, that a listing on 
its market is internationally recognized and that its rules are 
designed to assure that every company admitted to trading on the NYSE 
merits such recognition.
    The NASD believes that the exchange rules that reserve to the 
exchanges discretionary authority over their respective listings, and 
the NYSE's merit of international recognition standard, reflect the 
interest of the exchanges' in preserving and strengthening the quality 
of their markets as a commercial service. The exchanges reservation of 
discretionary authority over listings is, therefore, intended to 
improve the quality of its commercial service in order to make the 
service more attractive to current and future customers (as well as 
regulate securities transactions). The NASD believes, therefore, as an 
operator of a securities market that is a commercial service, that its 
rules should similarly reserve discretionary authority over listings to 
the Association for the purpose of preserving and strengthening the 
quality of the Nasdaq System to the benefit of its customers, i.e. 
present and prospective investors, issuers, brokers, and dealers.

Description of Proposed Rule Change

    The NASD has determined that its rule applicable to the Nasdaq 
System must clearly and unambiguously reserve discretionary authority 
to the Association with respect to the initial or continued inclusion 
of particular securities that is comparable to that of the national 
exchanges. Such discretionary authority is necessary in order to 
preserve and strengthen the Nasdaq System as a national asset. The NASD 
also believes that such discretionary authority over inclusion in the 
Nasdaq System reflects the natural interest of the NASD, as operator of 
the market, in preserving and strengthening the quality of the Nasdaq 
System in order to increase the attractiveness of this market to all 
customers, i.e. present and prospective investors, issuers and broker/
dealers. In addition, the NASD believes such discretionary authority is 
necessary in order to ensure that securities which would otherwise be 
subject to the Penny Stock Rules (discussed below) merit this exemption 
when entering the Nasdaq System and continue to merit this exemption 
thereafter.
    The NASD is, therefore, proposing to amend Sections 1 and 2 of Part 
II to Schedule D\18\ to add an introduction to each section that states 
that: (1) the Association, as operator of the Nasdaq System, is 
entrusted with the authority to preserve and strengthen the quality of 
and public confidence in its market; (2) the Nasdaq System stands for 
integrity and ethical business practices in order to enhance investor 
confidence, thereby contributing to the financial health of the 
economy, and supporting the capital formation process; and (3) Nasdaq 
System issuers, from new public companies to companies of international 
stature, by being included in the Nasdaq System, are publicly 
recognized as sharing these important objectives of the Nasdaq System.
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    \18\The Nasdaq System includes both The Nasdaq SmallCap Market 
and Nasdaq National Market. Sections 1 and 2 to Part II of Schedule 
D include the qualification requirements for domestic and Canadian 
securities and for non-Canadian foreign securities and American 
Depositary Receipts, respectively. The qualification requirements in 
Sections 1 and 2 of Part II to Schedule D apply to both the Nasdaq 
SmallCap Market and the Nasdaq National Market.
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    The introduction then sets forth that as a result of the foregoing 
policy statement, the Association, in addition to applying the 
enumerated criteria set forth in Parts II and III hereof, will exercise 
broad discretionary authority over the initial and continued inclusion 
of securities in the Nasdaq System in order to maintain the quality of 
and public confidence in its market. Under such board discretion and in 
addition to its authority under Section 3(a), the introduction states 
that the Association may deny initial inclusion or apply additional or 
more stringent criteria for the initial or continued inclusion of 
particular securities or suspend or terminate the inclusion of 
particular securities based on any event, condition, or circumstance 
which exists or occurs that makes initial or continued inclusion of the 
securities in the Nasdaq System inadvisable or unwarranted in the 
opinion of the Association, even though the securities meet all 
enumerated criteria for initial or continued inclusion in the Nasdaq 
System.\19\
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    \19\Simultaneously, with the filing of this proposal, the NASD 
is withdrawing SR-NASD-93-32.
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    The proposed rule change would provide broad discretionary 
authority that is separate and distinct from the authority currently 
provided under Section 3(a)(3) of Part II to Schedule D. Section 3(a)3 
would not be deleted under the proposed rule change. The NASD would 
continue to rely on Section 3(a)(3) when appropriate.
    The proposed rule change is a single statement of discretionary 
authority in contrast to the rules of the national exchanges which also 
include statements of many enumerated factors that may be considered by 
each exchange in making a determination as to listing, delisting or 
suspension of a security. The NASD does not intend by proposing such a 
statement of discretionary authority that the scope of its authority 
with respect to listings in the Nasdaq System be narrower than the 
scope of authority of the NYSE and AMEX with respect to listings. To 
the contrary, the NASD intends, by this proposal, to make clear that 
its discretionary authority over listings is no less than that of the 
exchanges.
    The NASD believes the proposed rule change provides important 
guidance to investors, issuers and the general public that the NASD is 
authorized pursuant to the Act to make determinations over inclusion in 
the Nasdaq System to preserve and strengthen the quality of the Nasdaq 
System.

Penny Stock Sales Practice and Disclosure Rules

    The NASD believes the proposed rule change will enhance the 
Association's ability to oversee the initial and continued inclusion of 
securities that are exempted from the Penny Stock Sales Practice and 
Disclosure Rules of the Act\20\ (``Penny Stock Rules'') by virtue of 
inclusion in the Nasdaq System. The NASD believes that the clarity 
provided by the proposed rule change regarding the NASD's discretionary 
authority to deny or terminate such securities sends a strong message 
to those who would consider evading and abusing these statutory 
provisions. Such guidance enhances the continued vigilance required to 
ensure that inclusion in the Nasdaq System is not used as a vehicle to 
avoid compliance with the Penny Stock Rules by the very persons for 
whom compliance is so essential.
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    \20\The Penny Stock Sales Practice and Disclosure Rules of the 
Act are comprised of Rule 3a51-1 providing definitions of penny 
stocks and Rules 15g-1 to 15g-6, 15g-8 and 15g-9. In general, the 
Penny Stock Rules have been enacted to require more stringent 
regulation of broker/dealers that recommend penny stock transactions 
to customers. Under Rule 3a51-1 of the Act, Nasdaq System securities 
are excluded from the scope of the Penny Stock Disclosure Rules, 
except that Nasdaq SmallCap securities under $5.00 are deemed penny 
stocks for purposes of Section 15(b)(6) of the Act.
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    In a letter from the Securities and Exchange Commission to the 
President of the NASD, the SEC stated:
    In providing an exclusion for quotation on the Nasdaq System [from 
Rule 15c2-6],\21\ the Commission was relying on the NASD's ability to 
screen issuers and to authorize for quotation only legitimate companies 
whose quotation on the Nasdaq System would be in the public interest. 
The Division is concerned that certain promoters may attempt to 
circumvent the requirements of Rule 15c2-6 by seeking Nasdaq 
authorization. This situation demands extra caution in authority for 
quotation securities that otherwise would be subject to Rule 15c2-6. 
Before authorizing one of these securities, the NASD should assure 
itself of the bona fides of the company and its past trading 
market.\22\
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    \21\In August of 1989, the SEC adopted Rule 15c2-6 to address 
sales practice abuses in low priced over-the-counter (``OTC'') 
securities which, in general, prohibits a broker-dealer from selling 
to or effecting the purchase of a ``designated security'' by any 
person, unless the broker-dealer has approved the purchaser's 
account for such transactions and received from the purchaser a 
written agreement to the transaction. The Commission later amended 
Rule 15c2-6 and redesignated it as Rule 15g-9 of the Act. In the 
amendment, the Commission also conformed the definition of 
``designated security'' in Rule 15c2-6 to the definition of ``penny 
stock'' in Rule 3a51-1 of the Act, and, with certain exceptions, 
replaced the transactional exemption under the rule with the 
exemptions contained in Rule 15g-1 of the Act. See, Securities 
Exchange Act Release No. 32576 (July 2, 1993), 58 FR 37413 (July 12, 
1993).
    \22\See, January 10, 1990 letter from the Director, SEC Division 
of Market Regulation the President of the NASD.
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    The NASD, therefore, believes the proposed rule change is an 
indispensable and clear regulatory statement to public customers, 
issuers and other market participants that the NASD has the broad 
discretionary authority and will use such discretionary authority to 
ensure that securities which would otherwise be subject to the Penny 
Stock Rules merit this exemption when entering the Nasdaq System and 
continue to merit this exemption thereafter.
Proposal To Clarify the NASD Authority To Deny Inclusion of Particular 
Issuers in the Nasdaq System Under Part II, Section 3(a) of Schedule D
    Part II, Section 3(a) of Schedule D provides the NASD, under 
certain circumstances, with authority to apply additional or more 
stringent criteria for the initial or continued inclusion of particular 
securities or to suspend or terminate the inclusion of a security 
otherwise qualified for inclusion in the Nasdaq System. The NASD has 
for many years interpreted Part II, Section 3(a) as providing the 
Association with the authority to ``deny inclusion'' of a security in 
the Nasdaq System. Authority to deny inclusion is inherent in Part II, 
Section 3(a) otherwise the NASD would be required to include a security 
in the Nasdaq System in order to terminate the security's inclusion, 
which procedure was never the intent of the Association.
    The NASD has determined that its authority to deny inclusion of 
particular securities in the Nasdaq System in compliance with the 
enumerated provisions of Part II, Section 3(a) should be expressly 
stated. The proposed rule change would, therefore, amend Part II, 
Section 3(a) of Schedule D to clarify such authority.
Statutory Authority
    The NASD believes that the proposed rule change is in furtherance 
with the purposes of Sections 15A(b)(6) and 11A of the Act in that the 
proposed rule change provides the Association with discretionary 
authority to preserve and strengthen the Nasdaq System as a national 
asset.
    The NASD believes that the proposed rule change is consistent with 
the provisions of Section 15A(b)(6) of the Act which requires that the 
rules of a national securities association 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 in that the rule change: (1) Clarifies the NASD's 
authority to deny inclusion under the criteria under Section 3(a) to 
Part II to Schedule D; and (2) establishes the NASD's broad 
discretionary authority under Part II, Sections 1 and 2 of Schedule D 
to deny initial inclusion or apply additional or more stringent 
criteria for the initial or continued inclusion of particular 
securities or suspend or terminate the inclusion of particular 
securities based on any event, condition, or circumstance which exists 
or occurs that makes initial or continued inclusion of the securities 
in the Nasdaq System inadvisable or unwarranted in the opinion of the 
Association, even though the securities meet all enumerated criteria 
for initial or continued inclusion in the Nasdaq System.
    The NASD believes that the proposed rule change is in furtherance 
of Section 15A(b)(11) of the Act in that clarification of the NASD's 
authority to deny inclusion of securities under Section 3(a) to Part II 
of Schedule D, and also providing the Association with board discretion 
over the initial or continued inclusion of securities in the Nasdaq 
System under Sections 1 and 2 to Part II of Schedule D, is intended to 
enhance the ability of the NASD to prevent fictitious and misleading 
quotations in securities included in the Nasdaq System.
    The NASD believes that, with respect to securities that are 
designated in the Nasdaq Small Cap Market, the proposed rule change is 
in furtherance of the purposes of the Penny Stock Rules adopted under 
the Act in that the proposed rule change will provide the NASD with 
authority to ensure that securities which would otherwise be subject to 
the Penny Stock Rules merit this exemption when entering the Nasdaq 
System and continue to merit this exemption thereafter.
    The NASD believes that the proposed rule change is consistent with 
the purposes of the Act and, to the extent the proposed rule change 
imposes any burden on competition, the NASD believes that such burden 
on competition is in furtherance of the purposes of the Act is required 
by Section 15A(b)(9) of the Act.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    Providing broader discretion to the NASD over the inclusion of 
securities in the Nasdaq System may result in the denial or termination 
of certain securities that would otherwise be eligible for inclusion, 
yet such action does not result in an inappropriate competitive 
disadvantage to an issuer as there currently exist alternative 
electronic markets such as the NASD's OTC Bulletin Board which as of 
December 20, 1993 provides not only real time quotations but last sale 
trade reporting for companies whose securities are not traded in the 
Nasdaq System. Furthermore, the securities of the issuers would 
generally be eligible for inclusion on regional stock exchanges.
    Moreover, as set forth in Tassaway, the SEC stated that while 
exclusion from the Nasdaq System may hurt existing investors, the 
primary emphasis must be placed on the interest of prospective 
investors and that this latter group is entitled to assume that the 
securities in the Nasdaq System meet the system's standards.
    The NASD does not believe, therefore, that the proposed rule change 
will result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, as amended.

(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 in the 
proposed rule change. The SEC published for comment SR-NASD-93-32, a 
related proposed rule change,\23\ and received one comment letter from 
members of the Task Force on Listing Standards of Self-Regulatory 
Organizations of the Federal Regulation of Securities Committee, 
Section of Business Law of the American Bar Association (``Task 
Force''). On September 29, 1993, the NASD responded to the comment 
letter in Amendment No. 2 to SR-NASD-93-32. The NASD believes it 
appropriate to respond again to one issue raised in the comment letter 
as it remains applicable to the proposed rule change.
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    \23\Securities Exchange Act Release No. 32605 (July 9, 1993); 58 
FR 38150 (July 15, 1993).
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    The Task Force recommended that the securities of issuers already 
included in The Nasdaq System should not be suspended or terminated for 
``bad boy'' conduct that is known or disclosed prior to the adoption of 
the ``bad boy'' criteria contained SR-NASD-93-32 unless there is a 
change of control or influence or other meaningful change in 
circumstances with respect to such issuers. The Task Force expanded on 
this recommendation, in part, by arguing that application of the 
proposed rule change to all current Nasdaq issuers would be unfair to 
current security holders who relied on the fact that such securities 
were included or about to be included in the Nasdaq System. The NASD 
has reviewed this comment with respect to the proposed rule change and 
has determined that such a limitation on NASD authority would impose an 
arbitrary restriction on the NASD's oversight of the Nasdaq System that 
could undermine public confidence in the Nasdaq System as a securities 
market and be contrary to interests of retail and institutional 
investors, issuers, broker/dealers and the public in the Nasdaq System. 
Any determination to delist an issuer will be made on a case-by-case 
basis in accordance with Article IX of the NASD's Code of Procedure.

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, 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. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street NW., Washington, DC 20549. 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 such filing will also be 
available for inspection and copying at the principal office of the 
NASD. All submissions should refer to the file number in the caption 
above and should be submitted by May 2, 1994.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\24\
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    \24\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-9215 Filed 4-13-94; 9:20 am]
BILLING CODE 8010-01-M