[Federal Register Volume 62, Number 66 (Monday, April 7, 1997)]
[Notices]
[Pages 16635-16638]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-8792]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38456; File No. SR-NASD-92-7]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Order Approving and Notice of Filing and Order Granting
Accelerated Approval of Amendment Nos. 3 and 4 to Proposed Rule Change
Relating to the OTC Bulletin Board Service
March 31, 1997.
I. Introduction
On March 12, 1992, the National Association of Securities dealers,
Inc. (``NASD'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act''), \1\ a proposal to obtain permanent
approval of the OTC Bulletin Board Service (``OTCBB Service,''
``OTCBB'' or ``Service''). The Commission noticed and solicited
comments regarding the proposal in the Federal Register.\2\ On October
6, 1994 and on November 8, 1994, the NASD filed Amendment Nos. 1 and 2
to the proposal. The Commission noticed and solicited comment regarding
Amendments 1 and 2.\3\ On March 14, 1997, the NASD filed Amendment No.
3 to the proposed rule change. Amendment No. 3 supersedes Amendment
Nos. 1 and 2. On March 21, 1997, the NASD filed Amendment No. 4 to the
proposal.\4\ This Order approves the proposed rule change as amended by
Amendment Nos. 3 and 4 on an accelerated basis.
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\1\ 15 U.S.C. Sec. 78s(b)(1).
\2\ Securities Exchange Act Release No. 30766 (June 1, 1992), 57
FR 24281.
\3\ Securities Exchange Act Release No. 34956 (November 9,
1994), 59 FR 59808. The amendments would have narrowed the universe
of securities eligible for quotation on the Service. Specifically,
the NASD proposed to narrow the subset of foreign equity securities,
including those represented by American Depositary Receipts, that
would have been OTCBB-eligible to those securities registered with
the Commission pursuant to Section 12 of the Act. This requirement
would have become effective on July 5, 1994. Any foreign equity
security quoted in the OTCBB as of the close of business on July 1,
1994 that was not registered pursuant to Section 12 of the Act could
remain OTCBB-eligible provided that the issuer maintained an
exemption from Section 12 registration pursuant to Rule 12g3-2(b)
under the Act.
\4\ The NASD submitted a technical amendment on March 27, 1997,
stating that the change to Paragraph 6540(b)(1)(c) would not be
implemented until April 1, 1998. See Note 7 infra.
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II. Background
On June 1, 1990, the NASD, through Nasdaq, initiated operation of
the OTC
[[Page 16636]]
Bulletin Board Service, which the Commission had approved on a
temporary basis: \5\ The OTCBB Service provides a real-time quotation
medium that NASD member firms can use to enter, update, and retrieve
quotation information (including unpriced indications of interest) for
equity securities traded over-the-counter that are neither listed on
The Nasdaq Stock MarketSM nor on a primary national securities
exchange (collectively referred to as ``OTC Equities'').\6\
Essentially, the Service supports NASD members' market making in OTC
Equities through displaying quotations entered through authorized
Nasdaq Workstation units. Real-time access to quotation information
captured in the Service is available to subscribers of Level \2/3\
Nasdaq service as well as subscribers of vendor-sponsored services that
now carry OTCBB service data.
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\5\ Securities Exchange Act Release No. 27975 (May 1, 1990), 55
FR 19124. On March 12, 1992, the NASD filed with the Commission a
proposal to obtain permanent approval of the Service. See Securities
Exchange Act Release No. 30766 (June 1, 1992), 57 FR 24281. Since
that time, the Commission has extended operation of the Pilot
Program on several occasions. The most recent extension expires
March 31, 1997.
\6\ With the Commission's January 1994 approval of File No. SR-
NASD-93-24, the universe of securities eligible for quotation in the
OTCBB now includes certain equities listed on regional stock
exchanges that do not qualify for dissemination of transaction
reports via the facilities of the Consolidated Tape Association.
Securities Exchange Act Release No. 33507 (January 24, 1994), 59 FR
4300 (order approving File No. SR-NASD-93-24).
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The OTCBB disseminates quotations in electronic form for securities
that, for many years, had quotations published only through reports
known as the ``pink sheets.'' Consistent with the goals and objectives
respecting the development of a national market system, the OTCBB was
initiated to allow the market makers in non-Nasdaq securities to enter
and update quotation information on a real-time basis. This capability
has enhanced the availability of market information for non-Nasdaq
securities of domestic companies. Similarly, the OTCBB has provided
order entry firms with real-time access to the trading interest in
domestic securities being displayed by market makers in OTC equity
securities. This access has assisted them in negotiating the execution
of customer orders at the best available price. In addition, the
inclusion on the OTCBB of the telephone numbers of participating market
makers has expedited the retail firms' processing of market orders. The
OTCBB also has strengthened the NASD's ability to monitor quotations in
these OTC equity securities.
III. Description of Amendment Nos. 3 and 4
Amendment No. 3 proposes to require that foreign securities and
ADRs be registered with the Commission pursuant to Section 12 of the
Act to remain eligible for quotation on the OTCBB. The proposed
requirement would be effective on April 1, 1998.\7\ Amendment No. 4
amends the text of the proposed rule change and clarifies that the NASD
will remove any foreign security from the OTCBB if it is brought to its
attention that the security is no longer registered with the Commission
pursuant to Section 12 of the Act. Proposed new language is in italics;
proposed deletions are in brackets.
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\7\ Under the temporary approval, foreign securities that are
included on the OTCBB need not be registered with the Commission as
long as they are in compliance with Rule 12g3-2(b) under the Act.
Amendment No. 3 will provide a one-year sunset period for this part
of the Pilot Program.
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6530. OTCBB-Eligible Securities
The following categories of securities shall be eligible for
quotation in the Service:
(a) No change
[(b) any foreign equity security or American Depositary Receipt
(ADR) that is not listed on Nasdaq or a registered national securities
exchange in the U.S., except that foreign equity securities or ADRs
that are (1) listed on one or more regional stock exchanges and (2) do
not qualify for dissemination of transaction reports via the facilities
Consolidate Tape shall be considered eligible.]
(b) any foreign equity security or American Depositary Receipt
(ADR) that:
(1) prior to April 1, 1998, is not listed on Nasdaq or a registered
national securities exchange in the U.S., except that a foreign equity
security or ADR shall be considered eligible if it is:
(A) listed on one or more regional stock exchanges and;
(B) does not qualify for dissemination of transaction reports via
the facilities of the Consolidated Tape.
(2) after March 31, 1998, is registered with the Securities and
Exchange Commission pursuant to Section 12 of the Securities Exchange
Act of 1934 and is not listed on Nasdaq or a registered national
securities exchange in the U.S., except that a foreign equity security
or ADR shall be considered eligible if it is:
(A) listed on one or more regional stock exchanges and;
(B) does not qualify for dissemination of transaction reports via
the facilities of the Consolidated Tape.
* * * * *
6540. Requirements Applicable to Market Makers
(a) No change
(b) No change
(1) Permissible Quotation Entries
(A) No change
(B) No change
(C) A priced bid and/or offer entered into the Service for a
[foreign equity security, and ADR, or a]* Direct Participation Program
security shall be non-firm.\2\ Moreover, a market maker is only
permitted to update quotation entries in such securities twice daily,
i.e., once between 8:30 a.m. and 9:30 a.m. Eastern Time, and once
between noon and 12:30 p.m. Eastern Time.
\2\ The non-firm or indicative nature of a priced entry [in a
foreign or ADR issue] is specifically identified on the montage of
market maker quotations accessible through the Nasdaq Workstation
service for this subset of OTCBB-eligible securities.
* * * * *
*The text in brackets in paragraph 6540(b)(1)(c) and the
footnote will be amended effective April 1, 1998.\8\
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\8\ See Letter from Robert E. Aber, Vice President and General
Counsel, Nasdaq, to Katherine England, Assistant Director, Division
of Market Regulation, SEC (March 27, 1997).
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IV. Comments Received
The Commission received twenty-four letters in response to its
request for comments on the proposal and Amendment Nos. 1 and 2. Two
comment letters supported permanent approval of the Service.\9\ Twenty-
two letters commented about Amendment Nos. 1 and 2 to the proposal.
Although these amendments are superseded by Amendment Nos. 3 and 4,
most of the commenters expressed views regarding the eligibility of
foreign equity securities on the Service.
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\9\ Letter from William F. Ross, Public Securities, Inc., to
Jonathan G. Katz, Secretary, SEC (September 30, 1993); Letter from
Arthur J. Pacheco and John L. Watson III, Security Traders
Association, to Jonathan G. Katz, Secretary, SEC (June 23, 1992).
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Nineteen commenters urged the Commission not to narrow the group of
securities eligible for quotation on the Service.\10\ These commenters
argued
[[Page 16637]]
against limiting the Service to foreign equity securities registered
pursuant to Section 12 of the Act. The commenters stated that the
proposed amendment would adversely affect the market for Level I ADRs,
which permits many foreign issurers to develop a U.S. equity market.
They argued that the proposed amendment would hurt the liquidity of the
market for Level I ADRs and impair the access of foreign issuers to the
U.S. equity trading markets.
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\10\ Letter from Thomas D. Sanford, Vice President, The Bank of
New York, to Jonathan G. Katz, Secretary, SEC (May 6, 1996); Letter
from Zhi-jiong Xu, Vice Chairman and Chief Accountant, Shanghai
Erfanji Co., Ltd. to Jonathan G. Katz, Secretary, SEC (October 10,
1995); Letter from P.F. Haesler and C.R. Rosset, Holderbank, to
Jonathan G. Katz, Secretary, SEC (June 19, 1995); Letter from Todd
M. Roberts, Roberts, Sheridan & Kotel, to Jonathan G. Katz,
Secretary, SEC (April 18, 1995); Letter from Dr. Serfas Karran,
Dresdner Bank, to Jonathan G. Katz, Secretary, SEC (March 8, 1995);
Letter from Sergio Luiz Goncalves Pereira, Director of Economy and
Finance and Market Relations, Telebras, to Jonathan G. Katz, SEC
(March 8, 1995); Letter from Peter B. Tisne, Emmet, Marvin & Martin,
LLP, to Jonathan G. Katz, Secretary, SEC (March 16, 1995); Letter
from Alan Mercer, Peregrine Investments Holdings Limited, to
Jonathan G. Katz, Secretary, SEC (March 21, 1995); Letter from P.
Barnes-Wallis, Director of Public Affairs, Rolls-Royce plc, to
Jonathan G. Katz, Secretary, SEC (March 9, 1995); Letter from Murilo
Bueno Kammer, General Director, Iochpe-Maxion, to Jonathan G. Katz,
Secretary, SEC (March 17, 1995); Letter from Yauaki Hirata, Director
of Finance, Kobe Steel, Ltd., to Jonathan G. Katz, Secretary, SEC
(March 14, 1995); Letter from John T. Hung, Executive Director,
Wheelock and Company Limited, to Jonathan G. Katz, Secretary, SEC
(March 21, 1995); Letter from EVN Energie vernunftig nutzen, to
Jonathan G. Katz, Secretary, SEC (March 17, 1995); Letter from Ralph
Marinello, Vice President, Citibank, to Jonathan G. Katz, Secretary,
SEC (April 27, 1995); Letter from Song Zhuangfei, Chairman of the
Board and General Manager, Shanghai Tyre & Rubber Co., Ltd., to
Jonathan G. Katz, Secretary, SEC (February 1995); Letter from
Shanghai Aklai Chemical Co., Ltd., to Jonathan G. Katz, Secretary,
SEC (October 7, 1995); Letter from Shenzhen Special Economic Zone
Real Estate & Properties (Group) Co. Ltd., to Jonathan G. Katz,
Secretary, SEC (February 1995); Letter from Robert Courtney Mangone,
Fox & Horan, to Jonathan G. Katz, SEC (February 27, 1995); Letter
from Thomas D. Sanford, Vice President, The Bank of New York, to
Brandon Becker and Linda Quinn, SEC (November 15, 1994); Letter from
Scott A. Ziegler, Ziegler, Ziegler & Altman, to Jonathan G. Katz,
Secretary, SEC (December 11, 1994).
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The American Stock Exchange, Inc. (``Amex'') and the New York Stock
Exchange, Inc. (``NYSE'') submitted comment letters objecting to the
inclusion of unregistered foreign securities on the Service.\11\ Both
the Amex and the NYSE urged the Commission not to grant permanent
approval to the Service, and to disapprove the NASD's proposal to
grandfather and make eligible for quotation those securities whose
issuers had perfected their Rule 12g3-2(b) exemption by July 1, 1994.
The NYSE asserted its belief that the Commission should act promptly to
remove foreign securities from the Service. The Amex also objected to
the grandfathering of foreign unregistered securities, and asserted
that the Service provides a significant disincentive to listing and
registration for foreign issuers. In addition, the Amex argued against
allowing foreign unregistered securities to be quoted on the Service
because foreign issuers would be able to obtain much of the visibility
of an exchange or Nasdaq listing without the burdens of registration.
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\11\ Letter from James F. Duffy, Executive Vice President and
General Counsel, Amex, to Jonathan G. Katz, Secretary, SEC (December
9, 1994); Letter from James E. Buck, Senior Vice President and
Secretary, NYSE, to Jonathan G. Katz, Secretary, SEC (March 18,
1993).
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V. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning Amendment Nos. 3 and 4 to File No. SR-NASD-92-7.
Persons making written submissions should file six copies thereof with
the Secretary, Securities and Exchange Commission, 450 Fifth Street,
N.W., Washington, D.C. 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 the 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 April 28, 1997.
VI. Commission's Findings and Order Granting Accelerated Approval
The Commission finds that approval of the proposed rule change is
consistent with the Act and the rules and regulations thereunder, and,
in particular, with the requirements of Section 15A(b)(6), which
provides that the rules of the NASD must be designed to prevent
fraudulent and manipulative acts and practices and to promote just and
equitable principles of trade, and of Section 15A(b)(11) of the Act,
which provides that the rules of the NASD relating to quotations must
be designed to produce fair and informative quotations, prevent
fictitious or misleading quotations, and promote orderly procedures for
collecting, distributing, and publishing quotations.
The Commission believes that permanent approval of the NASD's
proposal is appropriate at this time. The OTCBB has fulfilled the
NASD's objectives of increasing the visibility, liquidity, and
surveillance of non-Nasdaq OTC equity securities.\12\ As currently
configured, the OTCBB provides firm quotations and 90 second trade
reporting for domestic securities, which has brought much needed
transparency to the market for these securities. The enhanced
transparency facilitates price discovery and the execution of
customers' orders at the best available price. Additionally, continued
operation of the Service will materially assist the NASD's surveillance
of its members' trading in OTC Equities that are eligible and quoted in
the Service, and in regional exchange securities that are not reported
to the Consolidated Tape and that are quoted in the OTCBB by NASD
members.
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\12\ At its inception, the OTCBB rules did not require firm
quotations, two-sided quotations, or trade reporting. The NASD has
made improvements to the OTCBB since then. Pursuant to NASD rules,
all quotations for domestic securities must be two-sided and firm;
trades are reported within 90 seconds.
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The domestic issues included on the OTCBB do not meet Nasdaq
inclusion standards and are less widely held, more illiquid, and do not
have the operating history of Nasdaq companies.\13\ While the potential
for trading abuses is greater for these types of securities, these
abuses can be reduced by according more transparency to these
securities. Nevertheless, the operation of the OTCBB places a
concomitant responsibility on the NASD to surveil adequately the quotes
and prices disseminated over the Service. Indeed, the additional
transparency from the OTCBB should assist the NASD in its surveillance
efforts.
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\13\ Issuers whose securities are included in the OTCBB
generally are required to register and report pursuant to Section 12
of the act when the issuer has more than 500 record holders of its
equity securities and $10 million in total assets.
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With respect to foreign issuers on the OTCBB, the Commission
believes a different analysis is warranted. Since the OTCBB's
inception, the inclusion of unregistered foreign securities and ADRs on
the Service has raised concern. As part of the Pilot Program, the
Commission permitted the inclusion of quotations on the OTCBB of
foreign securities that were not registered under the Act although in
compliance with Rule 12g3-2(b), because the OTCBB was viewed as merely
providing transparency to trading in foreign issues already occurring
in the over-the-counter market. In contrast, securities listed on an
exchange or quoted on Nasdaq must be registered securities.
Registration requires, in part, that the issuer provide financial
information in accordance with U.S. accounting standards. The quotation
of foreign securities on the OTCBB has raised
[[Page 16638]]
concerns that the OTCBB would provide an active secondary trading
market in unregistered securities. To address these concerns, the
quotation of foreign securities on the OTCBB was limited to ``non-
firm'' quotations that could be updated a maximum of two times per day.
Thus, each quotation in a foreign security on the OTCBB is ``stale''
and serves more as an indication of a market maker's interest in
dealing in the security than as an actual bid and offer in the
security. In addition, while market makers must report trades in
foreign securities to the NASD, the NASD uses this information for
surveillance purposes only and does not make this information public.
The Commission believes that is appropriate to require that foreign
securities be registered pursuant to Section 12 of the Act to be
eligible for inclusion in the OTCBB. As a general matter, transparency
benefits the markets. However, in the context of the inclusion of
unregistered foreign securities on the OTCBB, the benefits may be
outweighed by the potential from including unregistered securities on a
visible U.S. market operated by a self-regulatory organization.
Although the OTCBB provides some increase in transparency for foreign
securities, this transparency is limited by the restriction to non-firm
quotations updated twice daily. At the same time, the OTCBB may be
inconsistent with the full disclosure goals of the securities laws in
allowing a regulated public marketplace for unregistered securities.
The Commission believes that the NASD could increase transparency with
less customer confusion by requiring transaction reporting for foreign
securities traded over-the-counter in the U.S. Transaction reporting
information has the potential to greatly enhance the amount of market
information available to investors and better enable investors to
monitor the executions they receive in foreign securities. In the
meantime, the Commission believes that it is preferable for the NASD to
require foreign issuers that trade on the OTCBB to be registered. Under
the NASD's amendment, this requirement will apply one year from the
date of this Order. The one-year sunset provision for unregistered
foreign issuers on the OTCBB will give issuers an opportunity to
consider whether to register so that they can continue to have their
securities included on the OTCBB in the U.S. or to make other
arrangements. It also will provide the public with one-year's notice of
the fact that these issuers will no longer be quoted on the OTCBB. The
requirement that foreign securities be registered will be effective on
April 1, 1998.\14\
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\14\ The Commission expects that the NASD will act with
diligence in attempting to ensure that this change as amended is
enforced, and that the NASD will remove those securities from the
OTCBB upon gaining knowledge that a foreign issuer included on the
OTCBB is not registered and reporting under Section 12 of the Act,
and the rules thereunder.
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The Commission finds good cause for approving Amendment Nos. 3 and
4 to the proposed rule change prior to the 30th day after the date of
publishing notice of the filing thereof. The Commission finds that
approval of this proposed rule change is appropriate because the
Commission has considered the comments received from interested parties
and believes that the continued operation of the Service, as amended by
this Order, is in the public interest. In particular, the Commission
notes that the OTCBB has been operating continuously since June 1, 1990
on a pilot basis, and the Commission finds that a one-year phase-out of
the system for unregistered foreign securities would prove less
disruptive to trading than an immediate removal of unregistered foreign
issuers from the OTCBB.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change SR-NASD-92-7 be, and hereby is, approved
as amended. The change to Paragraph 6540(b)(1)(c) and the footnote will
be effective on April 1, 1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-8792 Filed 4-4-97; 8:45 am]
BILLING CODE 8010-01-M