[Federal Register Volume 59, Number 110 (Thursday, June 9, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-14031]


[[Page Unknown]]

[Federal Register: June 9, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34151; File No. SR-NASD-94-19]

 

Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Approving Proposed Rule Change to Provide the NASD 
With Discretionary Authority to Exclude an Issuer From the Nasdaq Stock 
Market or Impose Additional or More Stringent Criteria for Inclusion in 
the Nasdaq Stock Market

June 3, 1994.

I. Introduction

    On April 6, 1994, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association'') filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') a proposed rule change 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'')\1\ and Rule 19b-4 thereunder.\2\ The rule change adds 
provisions to Schedule D to the NASD By-Laws clarifying the NASD's 
discretionary authority to exclude an issuer from the Nasdaq Stock 
Market (``Nasdaq'') or require additional or more stringent criteria 
for inclusion in Nasdaq.
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1993).
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    Notice of the proposed rule change together with its terms of 
substance was provided by issuance of a Commission release and by 
publication in the Federal Register.\3\ Three comments were received in 
response to the Commission release, one expressing general support and 
two opposing the proposal. This order approves the proposed rule 
change.
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    \3\Securities Exchange Act Release No. 33899 (Apr. 12, 1994), 59 
FR 18171 (Apr. 15, 1994).
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II. Description

    According to the NASD, it submitted this rule filing primarily to 
address concerns about the increasing number of applications for 
inclusion in Nasdaq by companies controlled or substantially influenced 
by persons with a history of securities or commodities violations.\4\ 
The NASD also indicated that its proposal to amend Sections 1 and 2 of 
Part II to Schedule D\5\ is intended to codify certain principles 
underlying Nasdaq. First, the NASD states, that as operator of Nasdaq, 
it is entrusted with the authority to preserve and strengthen the 
quality of and public confidence in its market. Second, Nasdaq stands 
for integrity and ethical business practices in order to enhance 
investor confidence, thereby continuing to the financial health of the 
economy, and supporting the capital formation process. Third, inclusion 
in Nasdaq carries with it an implicit expectation that all Nasdaq 
issuers, from new public companies to companies of international 
stature, share these objectives. The proposal further clarifies that 
the NASD, in addition to applying the enumerated criteria set forth in 
Parts II and III to Schedule D, may exercise broad discretionary 
authority over the initial and continued inclusion of securities in 
Nasdaq in order to maintain the quality of and public confidence in its 
market. Under this broad discretion, and in addition to its authority 
under Subsection 3(a), the proposal notes that the NASD 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 Nasdaq inadvisable or 
unwarranted in the opinion of the NASD, even though the securities meet 
all enumerated criteria for initial or continued inclusion in Nasdaq.
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    \4\In addition, this rule change corrects a technical deficiency 
in the NASD's rules. The proposal amends Part II, Section 3(a) of 
Schedule D to the NASD's By-Laws which currently provides the NASD, 
under certain circumstances, with the 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 Nasdaq. For many 
years, the NASD has interpreted Section 3(a) to authorize the NASD 
to deny inclusion of a security in Nasdaq. The NASD believes 
authority to deny inclusion is inherent in Section 3(a), otherwise 
the NASD would be required to include a security in Nasdaq in order 
to terminate the security's inclusion. The NASD has determined that 
its authority to deny inclusion of particular securities in Nasdaq 
in compliance with the enumerated provisions of Section 3(a) should 
be stated expressly. The proposed rule change, therefore, amends 
Part II, Section 3(a) of Schedule D to clarify this authority.
    \5\NASD Manual, Schedules to the By-Laws, Schedule D, Part II, 
Secs. 1 & 2, (CCH)  1803 & 1804. Nasdaq includes both Nasdaq 
SmallCap Market and Nasdaq National Market securities. 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 
Nasdaq National Market securities.
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    The NASD is concerned about an increase in recent years in the 
number of applications for inclusion in Nasdaq by issuers that are 
managed, controlled or influenced by persons with a history of 
significant securities or commodities violations.\6\ In particular, the 
NASD is concerned about issuers substantially influenced by persons who 
have previously been the subject of a significant sanction for 
violations of state or federal securities laws, self-regulatory 
organization (``SRO'') rules and regulations, or the subject of a 
felony conviction in connection with the purchase or sale of securities 
or commodities. The NASD believes that applications from these issuers 
for inclusion in Nasdaq reflect a pattern of activity in which persons 
with a history of securities or commodities violations seek to continue 
their violative conduct in the securities markets through the 
management, control or influence of a publicly-held company. The NASD 
has indicated that a case-by-case review of issuer applications has 
previously resulted in denials of certain applications pursuant to the 
``catch-all'' provision of Part II, Section 3(a)(3) of Schedule D.\7\
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    \6\As a result of its concerns, on June 2, 1993, the NASD filed 
a proposal to amend Part II, Section 3(a). Securities Exchange Act 
Release No. 32605 (July 9, 1993), 58 FR 38150 (July 15, 1993) 
(Commission notice of File No. SR-NASD-93-32). Concurrent with the 
filing of the instant proposal, the NASD withdrew File No. SR-NASD-
93-32. Letter from T. Grant Callery, Vice President and General 
Counsel, NASD, to Mark P. Barracca, Branch Chief, SEC (Apr. 6, 
1994).
    \7\Section 3(a)(3) provides that ``[t]he 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.'' NASD Manual, Schedules to the By-Laws, Schedule D, Part 
II, Sec. 3(a)(3), (CCH)  1805 (``Section (3)(a)(3)'').
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    In exercising discretion about whether to include an issuer in 
Nasdaq, the NASD will form a reasonable belief as to whether certain 
persons connected with an issuer may be predisposed to engage in 
further violative conduct contrary to interests of the investing 
public. In these cases, the NASD believes that the history of 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's concern regarding situations where a person with a 
history of securities or commodities law violations manages, controls 
or influences a Nasdaq issuer is heightened by the fact that inclusion 
of the securities of such issuers in Nasdaq would exempt the 
transactions in these securities from Commission rules adopted to 
prevent certain fraud and abuse in the penny stock market. In August 
1989, the Commission adopted Rule 15c2-6 to address sales practice 
abuses in low priced over-the-counter (``OTC'') securities.\8\ In 
general, this rule prohibits broker-dealers from selling a ``designated 
security'' 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.\9\ On April 10, 1992, the Commission 
adopted the Penny Stock Disclosure Rules\10\ which, in general, require 
that broker-dealers: (1) Furnish to a customer a risk disclosure 
document; (2) disclose the current bid and ask quotations and the 
commissions; and (3) provide monthly updates on the value of the 
securities. Among other exemptions, the Commission excluded from the 
scope of Rule 15c2-6 and the Penny Stock Disclosure Rules all issuers 
authorized or approved for inclusion in Nasdaq. The NASD believes that 
continued vigilance is required to ensure that inclusion in Nasdaq is 
not used as a vehicle to avoid compliance with the Penny Stock 
Disclosure Rules. The NASD further believes that prospective investors 
in the securities of a Nasdaq company are entitled to assume that 
securities included in Nasdaq meet the system's standards.\11\
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    \8\Securities Exchange Act Release No. 27160 (Aug. 22, 1989), 54 
FR 35468 (Aug. 28, 1989).
    \9\17 CFR 240.15c2-6(a).
    \10\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 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. See, Securities 
Exchange Act Release No. 30608 (Apr. 20, 1992), 57 FR 18004 (Apr. 
28, 1992).
    \11\See In the Matter of Tassaway, Inc., Securities Exchange Act 
Release No. 11291 (Mar. 13, 1975), 45 SEC 706, 6 SEC Docket 427 
(``primary emphasis must be placed on the interests of prospective 
future investors'').
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III. Comments

    As noted above, the Commission received three comment letters in 
response to the NASD's proposed rule change. 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 (``ABA Task Force'') expressed general support for the 
NASD's initiative, but indicated concern over the retroactive 
application of the NASD's rule. In particular, the ABA Task Force is 
concerned that the NASD may exclude a current issuer based on a 
previously disclosed condition. The ABA Task Force believes that the 
NASD should only apply the rule retroactively to issuers where there is 
a change in control, disclosure of new material information, or other 
meaningful change in circumstance.\12\ A second commenter opposed the 
proposal, asserting that the discretion accorded the NASD was unlimited 
and could lead the NASD to exclude an issuer from Nasdaq on a basis 
wholly unrelated to the legitimate concerns of administering 
Nasdaq.\13\ Finally, a third commenter argued that the NASD's 
comparison to the NYSE and Amex rules is misplaced. In particular, this 
commenter argued that the rules of these exchanges provide greater 
procedural protection to issuers in that an appeal within the NYSE or 
Amex provides an automatic stay of the initial decision but does not 
with an appeal within the NASD of an NASD decision.\14\
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    \12\Letter from John F. Olson, Chair, Committee on Federal 
Regulation of Securities, ABA Section on Business Law, and Robert 
Todd Lang, Chair, Task Force on Listing Standards of Self-Regulatory 
Organizations, ABA Section on Business Law, to Jonathan G. Katz, 
Secretary, SEC (Apr. 29, 1994). According to the letter, it was 
prepared by members of the ABA Task Force, circulated among the 
members and a substantial majority of the members agree with it. 
Nonetheless, the letter indicated that it does not represent the 
official position of the ABA, the Section of Business Law, the 
Federal Regulation of Securities Committee or the ABA Task Force.
    \13\Letter from Andrew I. Telsey to Jonathan G. Katz, Secretary, 
SEC (Apr. 26, 1994). This commenter also asserted that the proposal 
was tantamount to a prior restraint on speech and a violation of the 
United States Constitution's guarantee of free speech. The 
Commission is convinced that the proposal, as designed, will have no 
such consequences. The NASD's proposal is similar in many respects 
to that of existing authority vested in other securities markets.
    \14\Letter from Joseph McLaughlin, Brown & Wood, to Jonathan G. 
Katz, Secretary, SEC (May 6, 1994).
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    The NASD responded to these comments in letters dated May 17 and 
May 25, 1994.\15\ With respect to the concerns of the ABA Task Force, 
the NASD believes that limiting this authority to prospective issuers 
or to issuers undergoing a material change in circumstance would 
inappropriately restrict its oversight of Nasdaq and hinder its review 
of individual issuers. In addition, the NASD believes that prospective 
investors are entitled to assume that the NASD protects the quality and 
integrity of Nasdaq.\16\
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    \15\Letters from T. Grant Callery, Vice President and General 
Counsel, NASD, to Mark P. Barracca, Branch Chief, SEC (May 17, 1994) 
and Suzanne E. Rothwell, Associate General Counsel, NASD, to Mark P. 
Barracca, Branch Chief, SEC (May 25, 1994).
    \16\In connection with its prior proposal, SR-NASD-93-32, the 
NASD responded to a similar comment by the ABA Task Force by stating 
that limiting its discretion in the suggested manner would impose an 
arbitrary restriction on the NASD's oversight of Nasdaq. This, the 
NASD argued, could undermine public confidence in Nasdaq and would 
be contrary to interests of retail and institutional investors, 
issuers, broker-dealers and the public. See Securities Exchange Act 
Release No. 33899 (Apr. 12, 1994), 59 FR 18171 (Apr. 15, 1994) 
(Commission notice of File No. SR-NASD-94-19); File No. SR-NASD-93-
32, Amendment No. 2 (File No. SR-NASD-93-32 was withdrawn by the 
NASD concurrent with the filing of File No. SR-NASD-94-19).
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    The NASD also believes that assertions that the proposed rule would 
provide the NASD boundless discretion are unwarranted. First, the 
nature and scope of the NASD's discretionary authority is set forth in 
the proposed new language. In addition, any determination to exclude an 
issuer will be made on a case-by-case basis in accordance with the 
procedures set forth in Article IX of the NASD's Code of Procedure,\17\ 
and an aggrieved party may request the NASD to review its initial 
determination.\18\ In addition, the NASD indicated that an issuer may 
request, or the NASD may voluntarily grant, a stay pending appeal 
within the NASD. Indeed, in the past, the NASD has delayed immediate 
delisting when the matter presented novel policy issues. Finally, if 
the aggrieved party is dissatisfied with a final determination of the 
NASD, it may then request that the Commission stay the NASD's action, 
and ultimately it may obtain review of the Commission's final order in 
the United States Court of Appeals.
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    \17\NASD Manual, Code of Procedure, Art. IX, Sec. 1, (CCH) 
3101. The NASD also noted that its Code of Procedure has been 
subject to public notice and comment, Securities Exchange Act 
Release No. 19097 (Oct. 4, 1982), 47 FR 44903 (Oct. 12, 1982) 
(Commission notice of SR-NASD-82-11), and has been approved by the 
Commission, Securities Exchange Act Release No. 21838 (Mar. 12, 
1985), 50 FR 11035 (Mar. 19, 1985) (Commission approval of SR-NASD-
82-11). The NASD also noted that its authority to exclude an issuer 
or to impose additional or more stringent criteria under the 
proposed rule is substantially similar to the authority it currently 
exercises under Section 3(a)(3).
    \18\NASD Manual, Code of Procedure, Art. IX, Secs. 6 & 8, (CCH) 
3106 & 3108.
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IV. Discussion

    Under Section 19(b) of the Act, the Commission must approve a 
proposed NASD rule change if it finds that the proposal is consistent 
with the requirements of the Act and the rules and regulations 
thereunder that govern the NASD.\19\ No other finding is required.\20\ 
In evaluating a given proposal, the Commission must examine the record 
before it and all relevant factors and necessary information.\21\ 
Section 15A of the Act addresses with some specificity the requirements 
applicable to NASD rules, and those are the standards against which the 
Commission must measure the NASD proposal.\22\
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    \19\15 U.S.C. 78s(b).
    \20\The Commission's statutory role is limited to evaluating the 
rule as proposed against the statutory standards, and does not 
require the SRO to prove its proposal is the least burdensome 
solution to a problem.
    \21\In the Securities Acts Amendments of 1975 (``1975 
Amendments''), Congress directed the Commission to use its authority 
under the Act, including its authority to approve SRO rule changes, 
to foster the establishment of a national market system and promote 
the goals of economically efficient securities transactions, fair 
competition, and best execution. Congress granted the Commission 
``broad, discretionary powers'' and ``maximum flexibility'' to 
develop a national market system and to carry out these objectives. 
Furthermore, Congress gave the Commission ``the power to classify 
markets, firms, and securities in any manner it deems necessary or 
appropriate in the public interest or for the protection of 
investors and to facilitate the development of subsystems within the 
national market system.'' S.Rep. No. 75, 94th Cong., 1st. Sess., at 
7 (1975).
    \22\See 15 U.S.C. 78o-3.
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    The Commission has determined to approve the NASD's proposal. The 
Commission believes that the rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to the NASD, including the requirements of Sections 15A 
(b)(6) and 15A (b)(9) of the Act.\23\ Section 15A(b)(6) requires, in 
part, 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. Section 15A(b)(9) requires that the 
NASD's rule not impose any burden on competition not necessary or 
appropriate in furtherance of the Act. In addition, the Commission 
believes that the rule change will further the goals of Section 11A in 
that it will help preserve and strengthen the nation's securities 
markets.\24\
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    \23\Id. Sec. 78o-3(b) (6) and (9).
    \24\Id. Sec. 78k-1(a)(1)(A).
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    The Commission believes that inclusion of a security for trading in 
Nasdaq, like listing on an exchange, should not depend solely on 
meeting quantitative criteria, but should also entail an element of 
judgment given the expectations of investors and the imprimatur of 
listing on a particular market.\25\ Securities listed for trading or 
included in Nasdaq often qualify for margin loans and are exempt from 
many of the state blue sky laws, which apply concepts of merit 
regulation to determine whether investors in that state may purchase 
the issuer's securities.
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    \25\See e.g., In the Matter of Silver Shield Mining and Milling 
Company, Securities Exchange Act Release No. 6214 (Mar. 18, 1960) 
(``use of the facilities of a national securities exchange is a 
privilege involving important responsibilities under the Exchange 
Act''); In the Matter of Consolidated Virginia Mining Co., 
Securities Exchange Act Release No. 6192 (Feb. 26, 1960) (same).
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    Almost twenty years ago, the Commission held in In the Matter of 
Tassaway\26\ that the NASD is vested with discretionary authority to 
deny an issuer's request that its securities be included in Nasdaq. In 
that decision, the Commission stated that while exclusion from Nasdaq 
may hurt existing shareholders, the primary emphasis must be placed on 
the interest of prospective public investors and that this latter group 
is entitled to assume that the securities in Nasdaq meet the NASD 
standards. Although the Commission is of the view that the NASD's 
current rules authorize it to exclude an issuer, the proposal would 
clarify that authority. The Commission believes that this rule change 
provides greater protection to both existing and prospective investors. 
This rule change provides investors greater assurance that the risk 
associated with investing in Nasdaq is market risk rather than the risk 
that the promoter or other persons exercising substantial influence 
over the issuer is acting in an illegal manner.
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    \26\Securities Exchange Act Release No. 11291 (Mar. 13, 1975), 
45 SEC 706, 6 SEC Docket 427.
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    The rule change will address the increase of applications by 
issuers for inclusion in Nasdaq where a person with a history of 
significant securities or commodities law violations is in a position 
to manage, control or influence the issuer to the detriment of 
investors. The rule change also responds to the related concern that 
inclusion of these securities in Nasdaq would exempt the transactions 
in these securities from Commission rules adopted to prevent certain 
fraudulent sales practices and abuses in the penny stock market.\27\ 
The Commission agrees that with respect to the Nasdaq SmallCap Market, 
the rule change furthers the purposes of the Penny Stock Rules adopted 
under the Act. The 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 Nasdaq and continue to 
merit this exemption thereafter.
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    \27\See Letter from Richard G. Ketchum, Director, Division of 
Market Regulation, SEC, to Joseph R. Hardiman, President, NASD (Jan. 
10, 1990).
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    As indicated above, one commenter raised due process concerns. In 
the context of excluding issuers from Nasdaq, the Commission believes 
these concerns are addressed by the statutory and regulatory authority 
and obligations of the NASD. The Act requires the NASD to adopt and 
enforce rules designed, among other things, to prevent fraudulent and 
manipulative acts and practices and to protect investors and the public 
interest.\28\ The Act further requires that the NASD's rules provide a 
fair procedure when prohibiting or limiting access to Nasdaq,\29\ which 
includes notification of the specific grounds for prohibiting or 
limiting access, providing an opportunity to be heard, and maintaining 
a record.\30\ In accordance with these obligations, the NASD has 
established quantitative and qualitative criteria for inclusion in 
Nasdaq,\31\ and procedures to review decisions to deny or limit access 
to an issuer the NASD determines does not satisfy the criteria for 
inclusion.\32\ Those procedures provide an opportunity for a 
hearing\33\ and, although not explicit, an opportunity to request a 
stay from the NASD. In addition to these obligations, the Act and 
Commission rules require the NASD to notify the Commission promptly of 
any final or summary action to prohibit or limit access to Nasdaq.\34\ 
The Act and Commission rules further provide that any final action by 
the NASD is subject to review by the Commission.\35\ In addition, the 
Commission may stay summary action by the NASD on its own motion or 
upon an application by the issuer.\36\ Finally, a person dissatisfied 
with a final determination of the Commission may seek review of that 
decision by the United States Court of Appeals.\37\
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    \28\15 U.S.C. section 78o-3(b)(6).
    \29\Id. section 78o-3(b)(8).
    \30\Id. section 78o-3(h)(2).
    \31\NASD Manual, Schedules to the By-Laws, Schedule D, Parts II 
& III, (CCH)  1803-1806A & 1807-1813.
    \32\NASD Manual, Code of Procedure, Art, VIII, Secs. 1-10, (CCH) 
 3081-3090 (NASD procedures re: summary action prohibiting or 
limiting access to Nasdaq) and Art. IX, Secs. 1-9, (CCH)  3101-
3109 (NASD procedures re: final action prohibiting or limiting 
access to Nasdaq).
    \33\See Belfort v. NASD, No 93-7159, 1994 U.S. Dist. LEXIS 3457 
(S.D.N.Y. Mar. 21, 1994) (court lacks jurisdiction because the 
plaintiff did not exhaust administrative remedies under the Act); 
Dimensional Visions v. NASD, 799 F. Supp. 29 (E.D. Pa. 1992) (same).
    \34\15 U.S.C. 78s(d)(1). The Commission rule promulgated 
pursuant to 15 U.S.C. 78s(d)(1) distinguishes between notice to the 
Commission of final action excluding an issuer from Nasdaq (17 CFR 
240.19d-1(e)) and notice to the Commission of summary action 
excluding an issuer from Nasdaq (17 CFR 240.19d-1(i)). With respect 
to notice of final action, the rule requires that it be promptly 
filed with the Commission and include the name of the issuer and the 
last known place of business, the statutory and/or regulatory basis 
for excluding the issuer, a statement describing the issuer's 
response to the NASD's decision, a statement of the finding of facts 
and conclusions, a statement supporting the resolution of the 
principal issues raised, the effective date of the NASD's action and 
other information the NASD deems relevant. 17 CFR 240.19d-1(f). With 
respect to notice of summary action, the rule requires that it be 
filed with the Commission within 24 hours of the effectiveness of 
the action and include the name of the issuer and the last known 
place of business, a statement describing the specific statutory 
basis for summarily excluding the issuer, the effective date of the 
NASD's action and other information the NASD deems relevant. 17 CFR 
240.19d-1(i).
    \35\15 U.S.C. 78s(d)(2) and 17 CFR 240.19d-3.
    \36\15 U.S.C. 78o-3(h)(3) and 17 CFR 240.19d-2.
    \37\Id. section 78y(a)(1).
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    The Commission believes that this rule strikes the appropriate 
balance between protecting investors and providing a marketplace for 
issuers satisfying the disclosure requirements under the federal 
securities laws. This rule change clarifies the NASD's current practice 
of using its authority under Section 3(a)(3) of Part II to Schedule D. 
The authority granted under Section 3(a)(3) is discretionary in nature 
and this rule change will continue to allow the NASD to exercise its 
discretion in applying the standards of Section 3(a)(3) on a case-by-
case basis. The rule change will also provide important guidance to the 
NASD review process, and will alert issuers seeking inclusion in 
Nasdaq, as well as current Nasdaq issuers, that the NASD considers an 
issuer's connection to a person with a history of significant 
securities or commodities violations in determining whether to grant 
initial or continued inclusion of the security, and that the security 
may be subject to additional criteria as a condition for initial and 
continued inclusion in Nasdaq. The rule change establishes the NASD's 
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 Nasdaq inadvisable or unwarranted, even though the securities meet 
all enumerated criteria for initial or continued inclusion in Nasdaq. 
Nonetheless, the Commission expects that before the NASD exercises its 
discretionary authority under the new rule, it will consider as one of 
several factors the extent to which events or circumstances giving rise 
to the proposed action were previously disclosed.

V. Conclusion

    In conclusion, for the reasons stated above, the Commission finds 
that the rule change is 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. The 
Commission therefore finds that the proposed rule change is consistent 
with the requirements of the Act.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change SR-NASD-94-19 be, and hereby is, 
approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\38\
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    \38\17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-14031 Filed 6-8-94; 8:45 am]
BILLING CODE 8010-01-M