[Federal Register Volume 62, Number 168 (Friday, August 29, 1997)]
[Notices]
[Pages 45895-45899]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-23008]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38961; File No. SR-NASD-97-16]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Order Approving Proposed Rule Change and Notice of
Filing and Order Granting Accelerated Approval of Amendment No. 3
Relating to the Revision of the Criteria for Initial and Continued
Listing on The Nasdaq Stock Market, Inc.
August 22, 1997.
I. Introduction
On March 3, 1997, the National Association of Securities Dealers,
Inc. (``NASD'' or ``Association''), through its wholly owned subsidiary
The Nasdaq Stock Market, Inc. (``Nasdaq''), 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\ to revise its listing
and maintenance standards for Nasdaq National Market (``NNM'') and
SmallCap designated issuers. On March 27, 1997, the NASD filed
Amendment No. 1 to the proposal.\3\ On April 1, 1997, the NASD filed
Amendment No. 2 to the proposal.\4\ On June 17, 1997, the NASD filed
Amendment No. 3 to the proposal.\5\
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\1\ 15 U.S.C. Sec. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Letter from Robert E. Aber, Vice President and General
Counsel, Nasdaq, to Katherine England, Assistant Director,
Commission (March 27, 1997) (``Amendment No. 1''). Amendment No. 1
makes technical and conforming changes to the proposed rule filing.
\4\ Letter from Robert E. Aber, Vice President and General
Counsel, Nasdaq, to Katherine England, Assistant Director,
Commission (April 1, 1997) (``Amendment No. 2''). Amendment No. 2
makes technical and conforming changes to the proposed rule filing.
\5\ Letter from Robert E. Aber, Vice President and General
Counsel, Nasdaq, to Katherine England, Assistant Director,
Commission (June 17, 1997) (``Amendment No. 3''). Amendment No. 3
makes technical and conforming changes to the proposed rule filing,
correcting clerical errors and defining terms used in the rule
language. For example, Amendment No. 3 defines two abbreviations
used in the rules, as well as the terms ``Market Value'' and
``Country of Domicile.''
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Notice of the substance of the proposed rule change and Amendment
Nos. 1 and 2 was provided by issuance of a release \6\ and by
publication in the Federal Register.\7\ Eight comment letters regarding
the proposed rule change
[[Page 45896]]
were received.\8\ This order approves the proposed rule change, as
amended, and approves Amendment No. 3 on an accelerated basis.
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\6\ Exchange Act Release No. 38469 (April 2, 1997).
\7\ 62 FR 17262 (April 9, 1997).
\8\ Letters from Gerald L. Fishman, Fishman & Merrick, P.C.
(April 18, 1997) (``Fishman Letter''); Sam Rosen, Shannon, Gracey,
Ratliff & Miller, L.L.P. (April 28, 1997) (``Rosen Letter'');
Friedlob Sanderson Raskin Paulson & Tourtillot, LLC (April 30, 1997)
(``Friedlob Letter''); Van P. Carter, Walter & Haverfield P.L.L.
(April 30, 1997) (``Carter Letter''); James F. Duffy, American Stock
Exchange, Inc. (May 1, 1997) (``Amex Letter''); Bob Cardon,
Corporate Secretary, Dynatronics (May 6, 1997) (``Dynatronics Letter
No. 1''); Kelvyn H. Cullimore, Jr., President, Dynatronics (May 8,
1997) (``Dynatronics Letter No. 2''); and Sharon C. Kaiser, Chief
Financial Officer, HemaCare Corporation (May 30, 1997) (``HemaCare
Letter).
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II. Description of the Proposal
The NASD has filed with the Commission a proposal to revise the
Rule 4300 and 4400 Series governing the listing and maintenance
standards for NNM and SmallCap designated issuers. Listing and
maintenance standards for NNM issuers were last modified on January 9,
1989.\9\ SmallCap listing and maintenance standards were last modified
on August 30, 1991.\10\
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\9\ Exchange Act Release No. 26433 (January 9, 1989), 54 FR 1463
(January 13, 1989). Many states have exempted securities designated
as NNM from state registration requirements.
\10\ Exchange Act Release No. 29638 (August 30, 1991), 56 FR
44108 (September 6, 1991).
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The NASD states that the purpose of the revision to the listing and
maintenance standards is to increase the quality of companies listed on
Nasdaq and raise the level of investor protection. The changes,
according to the NASD, will allow Nasdaq to balance its role in capital
formation with its responsibility to provide adequate investor
protection. The NASD believes the proposed standards will: (1) Increase
safeguards to protect public investors; (2) address growth and change
in the market; (3) conform with structural enhancements to the market
that are currently underway; and (4) address the changes in the market
since Nasdaq listing and maintenance standards were last revised.
More specifically, the proposal would: (1) Extend corporate
governance requirements already applicable to the NNM issuers to
SmallCap issuers; \11\ (2) require peer review of auditors for both NNM
and SmallCap issuers; \12\ and (3) increase the minimum requirements,
both for listing and maintenance, for NNM and SmallCap issuers.\13\ The
minimum requirements that will be increased include: (1) Net tangible
assets, market capitalization, or assets and revenue; \14\ (2) public
float and market value of public float; \15\ (3) number of market
makers; \16\ and (4) minimum bid price.\17\ These requirements are
explained in greater detail below.
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\11\ Proposed Rule 4310(c)(25).
\12\ Proposed Rules 4310(c)(27) and 4450(m).
\13\ See generally Proposed Rule 4300 and 4400 Series.
\14\ Proposed Rules 4310(c)(2)(A), 4420(a)(5), 4420(b)(1) and
4420(c)(6) (for listing standards); Rules 4310(c)(2)(B), 4450(a)(3),
and 4450(b)(1) (for maintenance standards).
\15\ Proposed Rules 4310(c)(7), 4420(a), 4420(b) and 4420(c).
\16\ Proposed Rules 4310(c)(1), 4420(a)(7), 4420(b)(5),
4420(c)(4), 4450(b)(6) and 4450(e).
\17\ Proposed Rules 4310(c)(4) and 4450(a)(5).
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Elimination of the Exception to the $1 Minimum Bid Price
Currently, maintenance standards for both SmallCap and NNM
designated issuers require that issuers maintain a minimum bid price of
$1. The existing standards provide an exception to the $1 bid price
requirement for issuers able to meet higher float as well as higher
capital and surplus or net tangible asset requirements.\18\
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\18\ For SmallCap, the current exception requires $1 million in
market value of public float and $2 million in capital and surplus.
For NNM, the current exception requires $3 million in market value
of public float and $4 million in net tangible assets.
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The NASD proposes to eliminate the exception to the $1 bid price
minimum for several reasons. First, the NASD believes the change would
remove the incentive to engage in large, below market private
placements that cause dilution and concomitant harm to Nasdaq
investors. The NASD also believes the change would provide a safeguard
against abusive market activity sometimes associated with low-priced
securities. Further, when the exception was adopted, it was intended to
address a ``temporary adverse market condition[]'' that may result in a
bid price below $1.\19\ Contrary to the NASD's stated intent in 1991,
issuers have used the exception as a permanent means of meeting the
listing standards. Finally, the NASD believes that a $1 minimum bid
price would serve to increase investor confidence and the credibility
of the Nasdaq market, commensurate with its increased prominence.
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\19\ See Exchange Act Release No. 29638 (August 30, 1991), 56 FR
44108 (September 6, 1991).
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Corporate Governance Standards for SmallCap Issuers
The NASD proposes to extend the corporate governance requirements
currently applicable to NNM issuers to SmallCap issuers. The
requirements include: (1) A minimum of two independent directors; (2)
an audit committee with a majority of independent directors; (3) an
annual shareholder meeting; and (4) shareholder approval for certain
corporate actions.\20\ The NASD believes the shareholder approval
requirement should help prevent further stock issuances that dilute
shareholder interest without the prior knowledge of investors. Further,
the NASD believes the audit committee, independent director, and annual
meeting requirements will provide enhanced safeguards to the investing
public.
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\20\ It is contemplated that, as is currently the case with
respect to NNM issuers, the NASD would have the discretion to waive
or modify these corporate governance standards for foreign SmallCap
issuers where the standards are contrary to generally accepted
business practices in the issuer's country of origin.
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Increase in the Quantitative Standards for Both the SmallCap and NNM
The NASD proposes to increase the quantitative standards for
issuers to list on SmallCap and NNM. The NASD proposes this change
because of the passage of time since the standards were last adjusted,
the opportunities to improve the quality of the market as identified by
the NASD from its experience over that period, and the concomitant
increases in the growth of the market and the rate of inflation. The
NASD believes the increases will further strengthen Nasdaq listing
criteria and enhance the quality of Nasdaq companies, while preserving
the ability of qualified Nasdaq companies to raise capital.
Market Capitalization Test for NNM
The NASD proposes to permit an issuer unable to meet either of two
alternative net tangible asset tests, as amended by the proposed rule
change.\21\ to be afforded designation as a NNM issuer provided it
initially had a market capitalization of $75 million, or total assets
and total revenue of $75 million each. For continued listing, such an
issuer would have to maintain a market capitalization of $50 million,
or total assets and total revenue of $50 million. The NASD states that
this provision would provide an alternative for issuers that may fail
to comply with the NNM net tangible asset test as a result of
accounting for goodwill associated with various merger and acquisition
activities or, as in the case of the telecommunications industry,
significant depreciation charges. The
[[Page 45897]]
NASD believes the proposed changes provide access to NNM listing for
NNM caliber companies that would otherwise not qualify due to
accounting conventions associated with certain business combinations
and specialized industries.
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\21\ As amended under the proposed rule change for initial
listing on the National Market, an issuer must have net tangible
assets of $18 million, or $6 million if the issuer has had earnings
of $1 million in the most recent year or two of the last three
years. Net tangible assets equals total assets (including the value
of patents, copyrights and trade marks but excluding the value of
goodwill) less total liabilities. See Rule 4200(w).
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Peer Review for Auditors of Nasdaq Listed Companies
The NASD proposes to require that auditors of Nasdaq listed
companies be subject to a practice monitoring program under which the
auditors' quality control systems would be reviewed by independent peer
auditors on a periodic basis. Currently, companies whose shares are
designated NNM or SmallCap are not required to have auditors who are
subject to such peer review.\22\ The proposal requires all independent
public accountants auditing Nasdaq listed companies to receive, or be
enrolled in, a peer review that meets acceptable guidelines. Acceptable
guidelines would include comparability to standards of the American
Institute of Certified Public Accountants (``AICPA'') included in the
Standards for Performing on Peer Reviews codified in the AICPA's SEC
Practice Section Reference Manual, and oversight by an independent body
comparable to the organizational structure of the Public Oversight
Board as codified in the AICPA's SEC Practice Section Reference Manual.
Further, the NASD proposes requiring that copies of peer review
reports, accompanied by any letters of comment and letters of response,
would be maintained by the administering entity of the peer review
program and be made available to Nasdaq upon request. Similarly, the
NASD proposes that working papers of the administering entity and the
independent oversight body would also be required to be retained for a
period after the report is filed, and be made available to Nasdaq upon
request.
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\22\ Amex does require a program of peer review for auditors of
issuers that are applying for listing on Amex. See Amex Letter,
supra n.27.
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Other Clarifying and Conforming Changes
The NASD also proposes to specify that the requirements relating to
the number of outstanding shareholders for SmallCap issuers be based on
the number of ``round lot'' holders of an issuer's shares. The NASD
believes this definition conforms with the standards of NNM and other
exchanges, and ensures that issuers maintain a broad and significant
shareholder base justifying a listing on a national securities market.
In addition, the NASD proposes to conform the stock price
compliance mechanism for initial listing under the NNM standards with
that of the SmallCap by specifying that the applicable price is the bid
price, and by removing the provisions under the NNM standards that
require satisfaction of the applicable stock price only ``on each of
the five business days prior to the date of application by the
issuer.'' The NASD states that the purpose of this change is to clarify
the requirement and ensure that issuers be in compliance with the bid
price requirement at the time of listing, and not just at the time
coinciding with the filing of the application.
Furthermore, the NASD proposes to amend certain provisions and
cross-references to the proposed rule changes and renumber them
appropriately. Finally, the NASD proposes to eliminate outdated
references and definitions, rename headings, and amend the Rule 4300
and 4400 Series where appropriate to replace ``Association'' with
``Nasdaq.''
III. Comments
The Commission received eight comment letters in response to the
filing, with one commenter submitting two letters.\23\ One comment
letter requested an extended comment period,\24\ six letters opposed
portions of the proposal,\25\ one letter supported portions of the
proposal,\26\ and one letter offered a clarification to the Notice
publishing the proposed rule change.\27\ The NASD submitted a letter in
response to those commenters in opposition to the proposal.\28\
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\23\ See supra n.8.
\24\ See Fishman Letter.
\25\ See Rosen Letter, Friedlob Letter, Carter Letter,
Dynatronics Letter No. 1, Dynatronics Letter No. 2 and HemaCare
Letter.
\26\ See Friedlob Letter.
\27\ See Amex Letter. Amex clarified that, contrary to the
NASD's statement in its rule filing, Amex does require a program of
peer review for auditors of issuers that are applying for listing on
Amex.
\28\ See letter from Robert E. Aber, Vice President and General
Counsel, Nasdaq, to Katherine England, Assistant Director,
Commission (May 28, 1997) (``Nasdaq Letter'').
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One commenter stated that issuers unable to meet the proposed NNM
maintenance requirements (which therefore would lose their NNM
designation) should not be required to apply anew for SmallCap
designation.\29\ The commenter suggested requiring issuers that lost
their NNM designation as a result of the increased maintenance
requirements to apply for SmallCap designation could have the effect of
punishing companies initially designated NNM instead of SmallCap. In
response to this comment, the NASD has stated it will provide for a
one-time waiver of the application for SmallCap designation for issuers
losing NNM designation through the implementation of the proposed
maintenance standards.\30\
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\29\ See Rosen Letter.
\30\ See Nasdaq Letter, supra n.28.
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Another commenter argued that the proposed implementation period
for the new listing and maintenance standards would only provide
temporary relief for affected issuers.\31\ Three commenters objected to
the proposed listing and maintenance standards because of reliance by
issuers or shareholders on existing standards.\32\ One commenter
proposed that companies currently listed on Nasdaq be governed by the
existing standards, and that companies listed after the new standards
became effective be governed by the proposed listing standards.\33\
Another commenter suggested a three year implementation period for the
new standards.\34\ A third commenter expressed a concern that issuers
were not aware of the proposal to revise the listing and maintenance
requirements because the NASD had not notified issuers that it was
going forward with the revision.\35\
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\31\ See Friedlob Letter.
\32\ See Carter Letter, HemaCare Letter and Dynatronics Letter
No. 2.
\33\ See Carter Letter.
\34\ See HemaCare Letter.
\35\ See Dynatronics Letter No. 1.
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The NASD, in its response to these comments, stated that issuers
may meet the new listing standards at any time between their initial
listing until 90 days after the proposal is approved by the
Commission.\36\ The NASD noted that issuers applying for Nasdaq
designation were provided with notice of the proposed changes to the
listing and maintenance standards. Further, the NASD pointed out that
when new standards were implemented in 1991, they were also applied
retroactively.
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\36\ See Nasdaq Letter, supra n.28.
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Another commenter believed that the proposed higher standards will
have a negative effect on small businesses and capital formation.\37\
The commenter also stated that neither the $1 minimum bid price nor the
quantitative entry and maintenance standards reflect the strength and
stability of an issuer. Another commenter objected to the maintenance
standard requiring a $1 minimum share price, stating that issuers do
not control their stock price.\38\ The commenter argued that a reverse
stock split, which could assist an issuer in meeting the $1 share price
[[Page 45898]]
minimum, is expensive and often has a negative impact on the market
capitalization of an issuer. The commenter also noted that the change
in minimum share price would not be a safeguard against improper market
activity, and might lead to manipulation as companies tried to maintain
the $1 minimum share price.
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\37\ See Friedlob Letter.
\38\ See Dynatronics Letter No. 2.
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The NASD responded to these comments by reiterating that the $1 bid
price requirement is an important component in the NASD's efforts to
provide safeguards against abusive market activity associated with low-
priced securities. The NASD also stated that the requirement would:
reduce large, below market issuances; curtail the interim exceptions'
use as a permanent solution for bid price deficiencies; and increase
investor confidence as well as the credibility of Nasdaq.\39\ The NASD
noted that, in response to comments it received, it expanded the time
period the bid price must be under $1 (from 10 to 30 consecutive days)
in order to fail this maintenance requirement.\40\
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\39\ See Nasdaq Letter, supra n.28.
\40\ One commenter argued that the rule governing the 90-day
period for an issuer to return to minimum bid price maintenance
compliance applies to NNM issuers as well as SmallCap. See Rosen
Letter (discussing application of Rule 4310(c)(8)(B)). The NASD has
confirmed that this interpretation is correct. See Nasdaq Letter,
supra n.28. The NASD has clarified that the rules of the Rule 4300
Series, unless otherwise specifically noted, also apply to the NNM
issuers. Phone conversation between Andrew Margolin, Nasdaq and
Janice Mitnick, Commission, on June 13, 1997. Therefore, under the
proposed rules, both SmallCap and NNM issuers would have 90 days to
return to compliance with the $1 minimum bid.
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Finally, one commenter endorsed the proposed corporate governance
standards, the auditor peer review proposal, and the retention of
discretion by the NASD in applying the listing criteria to issuers
applying for Nasdaq designation.\41\
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\41\ See Friedlob Letter.
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IV. Discussion
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange, and in
particular, Section 15A(b)(6).\42\ Section 15A(b)(6) requires, among
other things, that the rules of an association be designed to promote
just and equitable principles of trade, perfect the mechanism of a free
and open market, and in general, to further investor protection and the
public interest.\43\
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\42\ 15 U.S.C. Sec. 78o-3(b)(6).
\43\ In approving this rule, the Commission notes that it has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. Sec. 78c(f).
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The development and enforcement of adequate standards governing the
initial listing and maintenance of listing of securities is an activity
of critical importance to financial markets and the investing public.
Listing standards serve as a means for a marketplace to screen issuers
and to provide listed status only to bona fide companies with
sufficient float, investor base and trading interest to maintain fair
and orderly markets. Once an issuer has been approved for initial
listing, the maintenance criteria allow a marketplace to monitor the
status and trading characteristics of that issuers to ensure that it
continues to meet standards for market depth and liquidity. Many states
have recognized the importance of listing and maintenance standards by
exempting from state registration requirements securities traded on the
New York Stock Exchange, Inc., the American Stock Exchange, Inc., or
Nasdaq (for securities designated as NNM).
The Commission finds that the proposed rule change is an
appropriate action by the NASD in light of market growth and changes,
and the goals stated by the NASD in revising Nasdaq listing and
maintenance standards. There has been tremendous change in the Nasdaq
stock market, both in terms of volume and market developments, since
the most recent changes to the listing and maintenance requirements.
Since 1991, when the Nasdaq listing and maintenance standards were last
revised, volume on Nasdaq has more than tripled.\44\ Nasdaq is now the
second largest securities market in the world and includes hundreds of
stocks that would qualify for a New York Stock Exchange, Inc. listing.
This growth has resulted in investor expectations of a commensurate
level of quality for Nasdaq designated issuers. The Commission finds
that the NASD's attempts to meet such expectations by raising its
listing standards are appropriate and reasonably related to enhancing
the overall quality of issuers included on Nasdaq.
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\44\ In 1991, Nasdaq's volume was 41.3 billion shares. For 1996,
Nasdaq's volume was 138.1 billion shares.
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The new maintenance standards will become effective six months
after this rule change is approved by the Commission. The Commission
believes this time period will provide current issuers with adequate
time to complete any corporate actions necessary to comply with the new
maintenance rules.\45\ The Commission notes that when new listing and
maintenance standards were implemented in 1991, they were also applied
retroactively.\46\ At that time, the Commission stated that retroactive
implementation was necessary in order to avoid creating a two-tiered
Nasdaq market: one for issuers governed by the previous criteria, and
one for issuers required to meet the new requirements.\47\ The
Commission believes that this rationale applies to the revision of the
Nasdaq listing and maintenance standards approved here. The Commission
notes that, as discussed above, the NASD will provide for a one-time
waiver of the application for SmallCap designation for issuers losing
NNM designation through the implementation of the proposed NNM
maintenance standards.\48\
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\45\ Such corporate actions could include the implementation of
the new corporate governance provisions required for SmallCap
issuers, or the authorization and issuance of additional shares to
meet the new market capitalization requirements.
\46\ Exchange Act Release No. 29638 (August 30, 1991), 56 FR
44108 (September 6, 1991).
\47\ The Commission also stated that retroactive application was
appropriate because the standards would assist the Commission in its
enforcement role pursuant to newly implemented rules under the Act
designated to prevent manipulation and fraud in the sale of low-
priced, non-Nasdaq designated securities. See Rule 15g-9 (previously
Rule 15c2-6).
\48\ See n.29 and accompanying discussion, supra.
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Under the current maintenance standards for both SmallCap and NNM,
issuers must maintain a minimum bid price of $1. The current standards
provide an exception to the $1 bid price for those issuers that can
meet a higher float as well as higher capital and surplus or net
tangible asset requirements.\49\ The NASD has proposed to eliminate the
exception to the $1 bid price requirement, thereby requiring all
issuers to maintain a bid price of $1.\50\
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\49\ For SmallCap issuers, the current exception requires $1
million in market value of public float and $2 million in capital
and surplus. For NNM issuers, the current exception requires $3
million in market value of public float and $4 million in net
tangible assets.
\50\ Under the proposal, an issuer would fail the maintenance
standard if the issuer's bid price fell below $1 for 30 consecutive
days. Once an issuer's stock falls below $1 for 30 consecutive
business days, it would have 90 days to meet the $1 standard for 10
consecutive business days, thus returning to compliance with the
maintenance standard.
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The Commission believes that while the maintenance standard
requiring the $1 minimum bid price will have an impact on some issuers,
the potential impact is not unreasonable when viewed in light of the
goals of the revised standards. In enhancing its market, Nasdaq would
like to remove extremely low-priced stocks. The Commission finds that
the $1 bid price minimum is a reasonable measure for the NASD to use to
maintain its quality
[[Page 45899]]
control standards for issuers quoted on Nasdaq. As of May 31, 1997, the
average bid price for an NNM common stock was $15.62 and the average
bid price for a SmallCap common stock was $5.44. The Commission notes
that the $1 bid price minimum is approximately 6.4% of the NNM bid
price average and approximately 18.4% of the SmallCap bid price
average. In establishing criteria to uphold the quality of the market,
it is appropriate for the NASD to set a minimum for the stock price
that is acceptable in conjunction with the other standards for listing
and maintenance. The $1 price minimum is well below the price of most
Nasdaq securities and is a reasonable standard to use to remove low-
priced securities from Nasdaq. In addition, the Commission believes
that because share price may be increased by a reverse stock split, not
all issuers predicted to fail this maintenance standard will actually
do so.
Some of the listing and maintenance standards, as modified, will
have an impact on the ability of some issuers currently designated as
NNM and SmallCap issuers to remain as such. Since the SmallCap listing
standards were last revised in 1991, there have been modifications to
the OTCBB.\51\ Pursuant to rules patterned after the Nasdaq reporting
requirements, NASD rules now require member firms effecting
transactions in OTCBB eligible securities to transmit last sale reports
of transactions made during normal market hours within 90 seconds after
execution.\52\ The OTCBB also has a firm quote requirement pursuant to
NASD rules, obligating market makers to display firm quotes for
domestic equity securities up to a minimum quotation size \53\
determined by the bid or offer price of the security.\54\ Like
information for Nasdaq issuers, last sale prices and quotes for the
OTCBB are distributed on a real-time basis through Nasdaq Workstations
and market data vendors, which in turn distribute this information to
approximately 250,000 terminals worldwide.
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\51\ On March 31, 1997, the Commission issued an order granting
permanent approval to the OTCBB. Exchange Act Release No. 38456
(March 31, 1997), 62 FR 16635 (April 7, 1997).
\52\ See Rule 6550.
\53\ See Rule 6540(b)(1)(B). The OTCBB did mandate a firm quote
requirement when the SmallCap listing standards were last revised;
however, the firm quote requirement did not have a minimum quote
size component. This was approved by the Commission on July 1, 1993.
Exchange Act Release No. 32570 (July 1, 1993), 58 FR 36725 (July 8,
1993).
\54\ See Rule 6750. Generally, the rule provides that the lower
the share price, the higher the minimum quote requirement. For
example, an issue with a bid price of $.50 has a minimum quote
requirement of 5,000 shares; an issue with a $9.50 bid price has a
minimum quote requirement of 500 shares. See id.
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Hence, while there may be some effect on the quality of the market
for an issuer designated as SmallCap that moves to the OTCBB, the
impact of such a move may be less than in 1991. For example, it appears
that the average number of market makers per issuer on the OTCBB for
issuers that lost their SmallCap designation is not significantly lower
than for those same issuers on Nasdaq, just prior to losing their
SmallCap designation.
In summary, the Commission believes it is reasonable for the NASD
to raise its criteria for issuer inclusion. The heightened standards
reflects the NASD's judgment that it wants only higher quality
companies to avail themselves of the Nasdaq marketplace, and the
imprimatur that such inclusion confers. The increase in standards is
neither discriminatory nor arbitrary, and the standards are directly
related to the NASD's intended goals of enhancing its listing
standards. Therefore, the Commission believes that the proposal is
consistent with the Act.
In approving this rule change, the Commission finds that the NASD
has reached an acceptable balance between the burden that may be
imposed on issuers seeking NNM or SmallCap designation, and the market
and investor benefits to be gained by increased listing and maintenance
standards for NNM and SmallCap issuers. Issuers desire to list and
trade on Nasdaq to improve their visibility and aid in their capital
formation. Against this, the NASD must balance its statutorily mandated
obligation to maintain the integrity of the Nasdaq market, and to
protect investors and their confidence in the market. In response to
these considerations, the NASD is working to achieve its general goal
of improving the quality and nature of the market.\55\ The Commission
believes that the potential impact on some small issuers resulting from
the proposed revision to the Nasdaq listing and maintenance standards
is not unreasonable when weighed against the anticipated benefits to
the market and investors.
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\55\ The 21(a) report and the undertakings agreed to be the NASD
have been well publicized. See August 8, 1996 Order issued pursuant
to Administrative Proceeding File No. 3-9056. The NASD is also
working to conform itself to the undertakings agreed to pursuant to
this action. See id.
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The Commission finds good cause for approving Amendment No. 3 to
the filing prior to the 30th day after the date of publication of the
notice of the filing. Amendment No. 3 merely serves to effect a
clarification to the NASD's proposal, raises no new regulatory issues,
and does not materially impact the substance of the proposal.\56\
Accordingly, the Commission believes there is good cause, consistent
with Sections 15A(b)(6) and 19(b)(2) of the Act, to approve Amendment
No. 3 to the proposal on an accelerated basis.
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\56\ See supra n.3.
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V. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 3. Persons making written
submissions should file six copies 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. Sec. 552, will be available for inspection and copying the
SEC'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 File No. SR-NASD-97-16, and
should be submitted by September 19, 1997.
VI. Conclusion
For the reasons discussed above, the Commission finds that the
proposal is consistent with the Act, and, in particular, Section 15A of
the Act.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\57\ that the proposed rule change (SR-NASD-97-16), as amended, is
approved.
\57\ 15 U.S.C. Sec. 78s(b)(2).
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By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-23008 Filed 8-28-97; 8:45 am]
BILLING CODE 8010-01-M