[Federal Register Volume 63, Number 213 (Wednesday, November 4, 1998)]
[Notices]
[Pages 59610-59613]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-29467]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40606; File No. SR-NASD-98-51]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 to the Proposed Rule Change by the National 
Association of Securities Dealers, Inc. Relating to Microcap 
Initiatives-Amendments to NASD Rules 6530 and 6540

October 27, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on July 20, 1998, 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'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the NASD. On October 
7, 1998, the NASD filed with the Commission Amendment No. 1 to the 
proposal.\3\ The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Letter from Robert E. Aber, General Counsel, Nasdaq, to 
Katherine A. England, Assistant Director, Division of Market 
Regulation (``Division''), Commission, dated October 7, 1998 
(``Amendment No. 1''). The substance of Amendment No. 1 is 
incorporated into this notice.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Association is proposing amendments to NASD Rules 6530 and 6540 
to limit quotations on the OTC Bulletin Board (``OTCBB'') 
to the securities of issuers that are current in their reports filed 
with the SEC or other regulatory authority, and to prohibit a member 
from quoting a security on the OTCBB unless the issuer has made current 
filings, respectively. Proposed new language is in italics; proposed 
deletions are in [brackets].
* * * * *
6530. OTCBB Eligible Securities
    A Member shall be permitted to quote the [The] following categories 
of securities [shall be eligible for quotation] in the Service:
    (a) any domestic equity security that satisfies the requirements of 
paragraph (1) and either paragraph (2) or (3) or (4) below;
    (1) the security is not listed on The Nasdaq Stock Market 
(``Nasdaq'') or a registered national securities exchange in the U.S., 
except that an equity security [securities that are] shall be 
considered eligible if it:
    (A[1]) is listed on one or more regional stock exchanges, and
    (B[2]) [do] does not qualify for disseminating of transactions 
reports via the facilities of the Consolidated Tape [shall be 
considered eligible.]; and
    (2) the issuer of the security is required to file reports pursuant 
to Section 13 or 15(d) of the Act or the security is described in 
Section 12(g)(2)(B) of the Act, and, subject to a thirty calendar day 
grace period, the issuer of the security is current in its reporting 
obligations, or
    (3) the security is described in Section 12(g)(2)(G) of the Act 
and, subject to a sixty calendar day grace period, the issuer or the 
security is current in its reporting obligations, or
    (4) the issuer of the security is a bank or savings association 
that is not required to file reports with the Commission pursuant to 
Section 13 or 15(d) of the Act and, subject to a sixty calendar day 
grace period, the issuer of the security is current with all required 
filings with its appropriate Federal banking agency or State bank 
supervisor (as defined in 12 U.S.C. 1813).
    (b) any foreign equity security or American Depositary Receipt 
(ADR) that meets all of the following criteria:
    (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 dessimination of transaction reports via 
the facilities of the Consolidated Tape.
    (2) after March 31, 1998,] the security is registered with the 
Securities and Exchange Commission pursuant to Section 12 of the 
[Securities Exchange Act] Act [of 1934] and the issuer of the security 
is current in its reporting obligating; or the security satisfies the 
requirements of paragraph (a)(2) or (3) or (4) above; and
    (2) the security 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] meet this subparagraph (2) \4\ if 
it is:
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    \4\ The proposed rule text was changed from ``subparagraph (3)'' 
to ``subparagraph (2)'' to correct the internal cross-reference. 
Telephone conversation between Sara Nelson Bloom, Associate General 
Counsel, Nasdaq, and Robert B. Long, Attorney, Division Commission, 
on October 28, 1998.
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    (A) listed on one or more regional stock exchanges, and
    (B) does not qualify for dissemination of transaction reports via 
the facilities the Consolidated Tape.
    (c) any equity security that [is] meets the following criteria:
    (1) the security is undergoing delisting from either the New York 
Stock Exchange, Inc. (NYSE) or the American Stock Exchange, Inc. (AMEX) 
for non-compliance with maintenance-of-listing standards; and
    (2) the security is subject to a trading suspension imposed by the 
NYSE or

[[Page 59611]]

AMEX preceding the actual delisting; and
    (3) the security satisfies the requirements of paragraph (a)(2) or 
(3) or (4) above.
    (d) any Direct [District] Participation Program as defined in Rule 
6910 that is not listed on Nasdaq or a registered national securities 
exchange in the U.S. and that satisfies the requirements of paragraph 
(a)(2) or (3) or (4) above.
    (e) Paragraphs (a)(2) and (3) and (4) above will not apply with 
respect to any domestic equity security quoted in the Service on the 
effective date of this rule change until six months after that date.
* * * * *
Rule 6540. Requirements Applicable to Market Makers
    (a) No change.
    (b) No change.

    (1) Permissible Quotation Entries: no change.

    (2) Impermissible Quotation Entries.

    (A) No member or person associated with a member shall enter into 
the Service a priced bid and/or offer, an unpriced indication of 
interest (including ``bid wanted'' or ``offer wanted'' indications), or 
a bid or offer accompanied by a modifier to reflect unsolicited 
customer interest in any security that does not satisfy the 
requirements of Rule 6530.
    (B) No member or person associated with a member shall enter into 
the Service a priced bid and/or offer, an unpriced indication of 
interest (including ``bid wanted'' or ``offer wanted'' indications), or 
a bid or offer accompanied by a modifier to reflect unsolicited 
customer interest in any security of an issuer that does not make 
filing with the Securities and Exchange Commission through the 
Electronic Data Gathering, Analysis, and Retrieval (``EDGAR'') system 
(or in paper format, if specifically permitted by Commission Rules) 
unless the member:
    (i) notifies the Association of the issuer of the security's 
schedule for the filing of all periodic reports or financial reports 
required pursuant to the Act or regulatory authority, respectively, and 
the identity of the regulatory authority with which such reports are 
filed, or ensures that such notice is provided; and
    (ii) provides to the Association the issuer's periodic reports 
required pursuant to the Act, or the issuer's financial reports 
required by regulatory authority, prior to the expiration of the grace 
period described in Rule 6530(a)(3), or ensures that the required 
periodic reports are provided to the Association within that time 
period.
    (3) [(2)] Voluntary Termination of Registration
    No change.
    (4) [(3)] More Than One Trading Location
    No change.
    (5) [(4)] Clearance and Settlement
    No change.
    (c) Compliance With Market Maker Requirements
    Failure of a member or a person associated with a member to comply 
with this Rule may be considered conduct inconsistent with high 
standards of commercial honor and just and equitable principles of 
trade, in violation of Rule 2110.
* * * * *

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

    In its filing with the Commission, the NASD included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The NASD has prepared summaries, set forth in Sections 
A, B, and C below, of the most significant aspects of such statements.

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

1. Purpose
    The NASD has actively studied the OTC market in an effort to 
address abuses in the trading and sales of thinly traded, thinly 
capitalized (microcap) securities. These securities are not listed on 
Nasdaq or any exchange and trade on the OTCBB, in the ``pink sheets'' 
published by the National Quotation Bureau, Inc. (``Pink Sheets''), and 
in other quotation media where there are no listing requirements. With 
respect to its examination of the OTCBB in particular, the NASD noted 
the lack of reliable and current financial information about the 
issuers, and the perception by the public that the OTCBB is similar to 
a highly regulated market, such as the registered exchanges or 
Nasdaq.\5\
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    \5\ In addition, the NASD has filed a proposed rule change 
through its subsidiary, NASD Regulation, to require a member to 
review current financial statements and other business information 
about the issuer of a security that is not listed on Nasdaq or a 
national securities exchange before that member could recommend a 
transaction to a customer in the security and to provide certain 
disclosure information on the trade confirmation for all customer 
transactions (solicited and unsolicited) in such securities. See SR-
NASD-98-50.
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    The OTCBB 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 
trade over-the-counter that are neither listed on Nasdaq nor on a 
primary national securities exchange. Eligible securities include 
national, regional, and foreign equity issues, warrants, units. Direct 
Participation Programs (``DPPs''),\6\ and American Depositary Receipts 
(``ADRs'')\7\ not listed on any other U.S. national securities market 
or exchange. Unlike Nasdaq or registered exchanges where individual 
companies apply for listing on the market--and must meet and maintain 
strict listing standards--there are no listing standards for the OTCBB, 
and there currently is no requirement that issuers of securities on the 
OTCBB make current, publicly-available reports with the SEC or other 
regulator. In fact, over half of the companies that are currently 
quoted on the OTCBB are not subject to any public reporting 
requirements.
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    \6\ DPPs are securities offerings that permit investors to 
directly participate in the cash flow and tax consequences of the 
underlying investments. DPPs provide for the ``flow through'' of tax 
results. Thus, gains and losses are taxed to the investor not the 
issuer of the security.
    \7\ ADRs are receipts for shares of foreign corporations that 
are held by U.S. banks and bought and sold in the U.S. by investors, 
without utilizing overseas markets.
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    The proposed rule change was developed in an effort to balance the 
benefits that the transparency of the OTCBB provides with the public 
need for information about the issuers being quoted. The NASD is 
concerned that where there is no public information available regarding 
a security, the broad-based automated display of quotations in that 
security creates an unjustified perception of reliability. While the 
NASD realizes that the new rule may result in the lack of real-time 
quotations for those securities that become ineligible for the OTCBB, 
it believe that this loss is outweighed by the benefit to investors who 
would, under the proposed rule, have access to information about the 
companies in which they may invest. In addition, transactions in 
securities ineligible for the OTCBB would still be subject to real-time 
last sale trade reporting. These reports are publicly disseminated 
through market data vendors on a real-time basis.

Amendment to Rule 6530

    This proposed amendment to rule 6530 would limit quotations on the 
OTCBB to the securities of issuers that make current filings pursuant 
to

[[Page 59612]]

Sections 13 \8\ and 15(d) of the Act,\9\ securities of depository 
institutions that are not required to make filings under the Act, but 
file publicly-available reports with their appropriate regulatory 
agencies, registered closed-end investment companies, and insurance 
companies that are exempt from registration under Section 12(g)(2)(G) 
of the Act.\10\
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    \8\ 15 U.S.C. 78m.
    \9\ 15 U.S.C. 78o-(d).
    \10\ 15 U.S.C. 78(g)(2)(G).
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    To remain eligible for quotation on the OTCBB, as issuer must 
remain current in its filings with the SEC or applicable regulatory 
authority. A member would be required to inform the NASD of the 
issuer's reporting schedule. Based upon that schedule, the NASD will 
affix a modifier on the security's symbol if the NASD has not received 
information that the report was timely filed.\11\ The addition of the 
modifier to the symbol, as well as any changes to the symbol necessary 
to accommodate the modifier, will be publicly reported on the OTCBB 
Daily List, which is available to market makers and investors through 
the OTCBB web site as http://www.otcbb.com. Once an issuer is 
delinquent in filing a required report (e.g., Form 10-K, Form 10-Q, 
Form 20-F, Insurance Company Annual Statement, or call report), a 
security of the issuer may continue to be quoted on the OTCBB for a 30 
or 60 calendar day grace period from the due date of the report, 
depending on the type of issuer. After the grace period, quotations in 
the security of the delinquent issuer would not be permitted on the 
OTCBB.
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    \11\ It is contemplated that the modifier will be affixed one to 
two days after the report is due.
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    Filings for most OTCBB issuers are available through the SEC's 
Electronic Data Gathering, Analysis, and Retrieval (``EDGAR'') 
system.\12\ Foreign issuers are generally permitted to file in paper 
format and copies of these filings are available from the Commission. 
Exchange Act filings of banks and thrifts are available upon filing 
from the financial institution's primary bank regulatory agency. The 
grace period for these issuers is 30 days. In the case of banks and 
thrifts that are not required to make Exchange Act filings, members can 
obtain call report information from the National Information Center of 
Banking Information website (http://www.ffiec.gov/nic) or the Federal 
Deposit Insurance Corporation's website (http://www.fdic.gov). Call 
reports are filed 30 days after the end of each calendar quarter and 
are available to the public within 15 days of filing. Insurance 
companies file annual statements with the National Association of 
Insurance Commissioners (``NAIC'') by March 1 of each year. This 
information is released to the public by NAIC by April 1. Because of 
the delay in the availability of call reports and insurance company 
annual statements, the proposed rule permits a 60 calendar day grace 
period for the quotation of securities of these companies after the 
deadline for the issuer to submit a report to the appropriate 
regulator.
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    \12\ EDGAR is the SEC system for the receipt, acceptance, and 
review of documents submitted in electronic format.
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Amendment to Rule 6540

    This proposed amendment to Rule 6540 would prohibit member firms 
from quoting an issuer's security if the issuer has not made current 
reports with the SEC or the appropriate regulatory authority. Members 
must also provide such reports to the NASD, although the reports may be 
provided by any market maker in the security. The NASD is exploring 
ways to reduce the burden of this requirement for members, particularly 
with respect to issuers who are EDGAR filers. As discussed above, the 
NASD will affix a modifier to the security's symbol if the NASD has not 
received information that the report was timely filed. This indication 
will provide members with notice that the NASD has not received 
information that the issuer's report was timely filed. Once the NASD 
provides this notice, the member will have the opportunity to acquire 
the necessary report and provide it to the NASD before the end of the 
grace period.

Phase-In

    The new requirements will be immediately effective upon approval of 
the rule for securities not previously quoted on the OTCBB. Securities 
quoted on the OTCBB on the date the rule becomes effective will be 
afforded at least six months to comply with the new requirements. 
Specifically, and in order to accommodate the resource demands that may 
be placed upon the SEC when certain issuers elect to file current 
public reports, the new requirements will be applied in a month-by-
month staggered manner for a period from six to eighteen months from 
the date the rule is approved. The NASD will apply the new rule to 
approximately the same number of issuers for each month during that 
period in order to evenly distribute the SEC's anticipated work load. 
The delayed effectiveness of the rule should also enable market makers, 
investors, and issuers to take appropriate action. It should be noted 
that for issuers who file a Form 10 or Form 10SB with the SEC to 
register under Section 12(g) of the Exchange Act,\13\ all SEC comments, 
if any, must be cleared with the SEC before securities can be quoted on 
the OTCBB.
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    \13\ 15 U.S.C. 78l(G).
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2. Statutory Basis
    The NASD believes that the proposed rule change is consistent with 
the provisions of Section 15A(b)(6) \14\ of the Act, which requires, 
among other things, that the Association's rules be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, and, in general, to protect investors 
and the public interest. In addition, Section 15A(b)(11) \15\ of the 
Act requires that the rules of a registered national securities 
association be designed to produce fair and informative quotations, 
prevent fictitious or misleading quotations and to promote orderly 
procedures for collecting, distributing, and publishing quotations. The 
NASD believes the proposed rule change, which will address actual and 
potential fraud in the quotation and trading of non-listed securities 
and the investor perception that the OTCBB is equivalent to Nasdaq or 
exchange markets in terms of standards, regulatory structure and 
oversight, will accordingly protect investors and the public interest. 
Further, the NASD believes limiting the OTCBB to companies that provide 
public information will prevent fictitious and misleading quotations.
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    \14\ 15 U.S.C. 78o-3(b)(6).
    \15\ 15 U.S.C. 78o-3(b)(11).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The NASD does not believe that the proposed rule change will impose 
any inappropriate burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The proposed rule change was published for comment in NASD Notice 
to Members 98-14 (``Notice'' or ``NTM'') in January, 1998. A total of 
44 comments were received in response to the Notice.
    Of the 44 responses received, 18 responses (or 41%) were from 
broker/dealer firms or registered persons and the balance of 26 
comments (or 59%) were from individual investors, issuers, various 
state agencies, trade associations, and other interested parties. In 
providing comments, a majority of commenters expressed a

[[Page 59613]]

position (i.e., approval or disapproval) regarding each specific 
proposal. Other commenters did not provide a stated position on each 
proposal, but identified particular issues with certain proposals and 
provided written comment.
    Twenty-two commenters opposed the proposal, 19 commenters supported 
it, and three did not take a definitive position. Those commenters who 
disapproved of the proposed changes generally believed that the changes 
would decrease transparency and liquidity and would increase the 
regulatory burden that small issuers face. One commenter opined that 
the annual cost to an issuer to comply with the Exchange Act reporting 
requirements would be $150,000.
    Those commenters supporting the proposed changes generally felt the 
changes will help eliminate fraud by providing investors with reliable 
information. These commenters thought the deterrence of fraud and 
increased availability of information outweighed the increase burden on 
companies.
    Commenters indicated that the rule as proposed in the Notice should 
be modified to recognize issuers filing under Section 15(d) of the 
Exchange Act.\16\ A commenter encouraged the NASD to accept reports 
filed with regulatory agencies outside of the Exchange Act, such as 
call reports filed by financial institutions. The rule as published in 
the Notice would have permitted members to maintain quotes in a 
security in which an issuer is delinquent in its reports with the SEC 
or regulatory authorities for a period of ten days. Other commenters 
supported an expansion of the grace period for filing a report with the 
SEC to 30 days after its due date.
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    \16\ 15 U.S.C. 78o-(d).
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    After the public comment process, the staff recommended and the 
Boards of the NASD and Nasdaq approved the following modifications to 
the proposed rules. As to NASD Rule 6530, the proposed delinquency 
grace period was expanded from ten days to thirty days for issuers 
filing Exchange Act forms and to sixty days for insurance companies and 
financial institutions that do not file Exchange Act forms. This 
extended grace period is consistent with the proposed review period in 
the SEC's Rule 15c2-11 proposal.\17\ Further, in the original Notice, 
the staff solicited comment on whether certain non-Exchange Act 
depository institutions that provide publicly-available financial 
reports to banking regulators should be eligible for quotation on the 
OTCBB. Based on the comments received, the nature of the issuers, the 
independent oversight of banking regulators, and the SEC's position 
that reports filed with federal or state bank supervisory agencies 
contain information analogous to Exchange Act reports,\18\ the proposed 
rule allows securities of these issuers to be quoted on the OTCBB if 
the issuer provides timely reports to the appropriate Federal banking 
agency or State bank supervisor and the information is publicly 
available. Finally, consistent with comments received, the proposed 
rule includes securities of issuers who are currently filing reports 
with the SEC pursuant to Section 15(d) of the Act as eligible 
securities for the OTCBB. An issuer becomes subject to Section 15(d) as 
a result of registering securities under the Securities Act of 1933 
(``Securities Act'') and is thereby required to make timely filings 
with the SEC such as Forms 10-K, 10-Q, and 8-K or 20-F for at least a 
year following the Securities Act registration.\19\
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    \17\ Exchange Act Release No. 39670 (February 17, 1998), 63 FR 
9661 (February 25, 1998).
    \18\ Id. 9667-68.
    \19\ In addition to its requirements under Section 15(d), an 
issuer may voluntarily register under Section 12(g) or be required 
to register under Section 12(g) if it has 500 or more shareholders 
of record and total assets of more than $10 million. Under both 
scenarios, the issuer's securities would continue to qualify as 
eligible securities for purposes of the OTCBB Rules if the issuer 
maintains current filings with the SEC.
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    The staff and the NASD and Nasdaq Boards considered commenters' 
objection that the proposed rule would decrease transparency for 
securities no longer eligible for the OTCBB. However, this objection 
was outweighed by the benefit of ensuring that there was publicly-
available information regarding issuers that are afforded the 
visibility and credibility of the OTCBB. In this regard, the NASD 
considered that in granting permanent approval to the OTCBB, the SEC 
noted: ``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 harm from including unregistered securities on a visible U.S. 
market operated by a self-regulatory organization.'' \20\ The SEC also 
noted that ``the OTCBB may be inconsistent with the full disclosure 
goals of the securities laws in allowing a regulated public marketplace 
for unregistered securities.'' \21\ While these comments were made in 
the context of unregistered foreign securities, the NASD believes that 
the same concerns exist with respect to domestic securities for which 
no public information is available.
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    \20\ Exchange Act Release No. 38456 (March 31, 1997), 62 FR 
16635 at 16638 (April 7, 1997).
    \21\ Id.
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III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the publication of this notice in Federal 
Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposal is 
consistent with the Act. Persons making written submissions should file 
six copies thereof with the Secretary, Securities and Exchange 
Commission, 450 Fifth Street, NW, Washington, DC 20549. Copies of the 
submission, all subsequent amendments, all written statements with 
respect to the proposed rule change that are filed with the Commission, 
and all written communications relating to the proposed rule change 
between the Commission and any person, other than those that may be 
withheld from the public in accordance with the provisions of 5 U.S.C. 
552, will be available for inspection and copying at the Commission's 
Public Reference Room. Copies of such filing will also be available for 
inspection and copying at the principal office of the NASD.
    All submissions should refer to File SR-NASD-98-51 and should be 
submitted by November 25, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-29467 Filed 11-3-98; 8:45 am]
BILLING CODE 8010-01-M