[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