[Federal Register Volume 64, Number 5 (Friday, January 8, 1999)]
[Notices]
[Pages 1255-1258]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-414]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40878; File No. SR-NASD-98-51]


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

January 4, 1999.

I. Introduction

    On October 7, 1998, the National Association of Securities Dealers, 
Inc. (``NASD''), through its wholly-owned subsidiary, the Nasdaq Stock 
Market, Inc. (``Nasdaq'') submitted to the Securities and Exchange 
Commission (``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Exchange Act'' or ``Act'') \1\ 
and Rule 19b-4 thereunder,\2\ proposed amendments to NASD Rules

[[Page 1256]]

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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change, including Amendment No. 1, appeared in 
the Federal Register on November 4, 1998.\3\ The Commission received 
three comments concerning the proposed rule change.\4\ This order 
approves the proposed rule change, as amended.
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    \3\ Securities Exchange Act Rel. No. 40606 (October 27, 1998), 
63 FR 59610.
    \4\ Electronic comment letters from Edward Zorek, Tai Jim, and 
R. Jeffrey Bacon were received by the Commission at rule-
[email protected] on November 11, 1998, November 28, 1998, and 
November 29, 1998, respectively. The substance of the comments 
received is discussed in Section III. Summary of Comments.
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II. Description of Proposal

    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 examation 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 
traded over-the-counter that are neither listed on Nasdaq nor on a 
primary national securities exchange. Eligible securites 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 
strick 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\ DPP's 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 unjustied 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 believes that this loss is outweighted 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 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 the 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. 78l(g)(2)(G).
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    To remain eligible for quotation on the OTCBB, an 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 at 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

[[Page 1257]]

deadline for the issuer to submit a report to the appropriate 
regulator.
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    \12\ EDGAR is the SEC's 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 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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III. Summary of Comments

    The Commission received three comments on the proposed 
amendments.\14\ All three commenters supported the proposal; noting 
that the proposed amendments should help to reduce fraud in OTCBB 
traded securities.
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    \14\ See supra note 4.
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IV. Discussion

    The Commission believes that the proposal is consistent with 
Section 15A of the Act \15\ as it will protect investors and the public 
interest by requiring issuers listed on the OTCBB to file reports 
containing current financial information with the Commission or 
appropriate regulatory agency. Specifically, the Commission believes 
the proposal is consistent with the requirements of Section 15A(b)(6) 
and (11) of the Act.\16\ Section 15A(b)(6) 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, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system, and, in 
general, to protect investors and the public interest.\17\ Section 
15A(b)(11) requires that the rules of the association be designed to 
produce fair and informative quotations, to prevent fictitious or 
misleading quotations, and to promote orderly procedures for 
collecting, distributing, and publishing quotations.\18\
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    \15\ 15 U.S.C. 78o-3.
    \16\ 15 U.S.C. 78o-3(b)(6) and (11).
    \17\ 15 U.S.C. 78o-3(b)(6).
    \18\ 15 U.S.C. 78o-3(b)(11).
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    Under proposed Rule 6530, market makers will not be permitted to 
quote OTCBB traded securities unless the issuer has made current 
filings with the appropriate regulatory agency. The filing requirement 
ensures that companies trading on the OTCBB market will have current, 
public information that investors can access, from the appropriate 
regulatory agency, when considering whether to invest in an OTCBB 
traded security. Proposed Rule 6530 should provide investors in OTCBB 
securities with more information on which to base investment decisions. 
The Commission also believes that limiting quotations on the OTCBB to 
the securities of issuers that report to the SEC or applicable 
regulatory authority may help to reduce fraud and manipulation. As a 
result of the reporting requirement, financial data on issuers will be 
available and issuers that provide false or misleading information in 
their required filings may be subject to liability for making those 
statements.\19\ The Commission finds that proposed Rule 6530 is 
consistent with the Act because it will protect investors and the 
public interest.\20\
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    \19\ See, e.g., SEC v. Savoy Industries, Inc., 587 F.2d 1149 
(D.C. Cir. 1978), cert denied, 440 U.S. 913 (1979); Exchange Act 
Rule 10b-5, 17 CFR 240.10b-5.
    \20\ 15 U.S.C. 78o-3(b)(6).
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    Proposed Rule 6530 provides that domestic securities that were 
previously trading on the OTCBB will not be subject to the proposal 
until six months after the approval date. Neither foreign issuers nor 
issuers of securities not currently trading on the OTCBB will be able 
to take advantage of the phase-in provision; these issuers will be 
obligated to immediately comply with Rule 6530, as amended. The 
Commission believes that the phase-in period is reasonable and 
consistent with the Act. The Commission believes that the phase-in 
period for issuers of domestic securities that were previously trading 
on the OTCBB will provide these issuers with ample notice of the rule 
change and adequate time to comply with the new rules' requirements. 
Regarding issuers of domestic securities not currently quoted on the 
OTCBB and foreign securities, the Commission believes it is consistent 
with the Act and in the public interest that they be required to comply 
with the amendments to Rule 6530 effective immediately. The Commission 
finds that the phase-in period for issuers previously quoted on the 
OTCBB and immediate effectiveness of the amendments to Rule 6530 with 
respect to other issuers is reasonable, and consistent with Section 
15A(b)(6) of the Act.\21\
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    \21\ 15 U.S.C. 78o-3(b)(6).
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    Proposed amendments to Rule 6540 will permit NASD members to quote 
only the securities of issuers that satisfy the requirements of 
proposed Rule 6530. As proposed, Rule 6540 will also necessitate that 
NASD members provide the NASD copies of reports filed with the 
Commission or other applicable regulatory authority. These reports can 
be provided by any market maker in the security to the NASD. Once a 
market maker has properly filed all necessary reports with the NASD, 
all market makers in the security may quote the security, as long as 
the reports remain current. The Commission believes that the rule 
should ensure that market makers have current financial information 
available to them regarding issuers quoted on the OTCBB and enable NASD 
market makers to reflect this information in their quote. The 
Commission finds that proposed Rule 6540 is consistent with Section

[[Page 1258]]

15A(b)(11) of the Act \22\ in that it is designed to produce fair and 
informative quotations, to prevent fictitious or misleading quotations 
and to promote orderly procedures for collecting, distributing, and 
publishing quotations.
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    \22\ 15 U.S.C. 78o-3(b)(11).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\23\ that the proposed rule change (SR-NASD-98-51) is approved, as 
amended.

    \23\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-414 Filed 1-7-99; 8:45 am]
BILLING CODE 8010-01-M