[Federal Register Volume 64, Number 92 (Thursday, May 13, 1999)]
[Notices]
[Pages 25942-25945]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-12064]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41367; File No. SR-NASD-98-88]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the National Association of Securities Dealers, Inc., 
Relating to Listing and Continued Listing Determinations

May 4, 1999.
    On November 27, 1998, the National Association of Securities 
Dealers, Inc. (``NASD'' or ``Association'') filed with the Securities 
and Exchange Commission (``SEC'' or ``Commission'') a proposed rule 
change pursuant to

[[Page 25943]]

Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ 
and Rule 19b-4 thereunder concerning the procedures followed by the 
Association in listing and delisting an issuer.\2\ The NASD amended the 
proposal on December 15, 1998.\3\ Notice of the proposal, as amended, 
was published in the Federal Register on January 8, 1999 
(``Notice'').\4\ The Commission did not receive any comment letters on 
the fling.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Robert E. Aber, Senior Vice President and 
General Counsel, Nasdaq, to Katherine A. England, Assistant 
Director, Division of Market Regulation, Commission, dated December 
15, 1998.
    \4\ See Securities Exchange Act Release No. 40874 (December 31, 
1998), 64 FR 1258.
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I. Introduction and Background

    The NASD is proposing to replace its existing rules setting forth 
the procedures by which issuers may be denied listing on, or delisted 
from, the Nasdaq Stock Market. The proposed revised code of listings 
procedures (``Revised Listings Code'') codifies procedures that are 
already used by the Association in practice. In addition, the Revised 
Listing Code contains greater detail about the review process and adds 
a number of provisions, including those for the maintenance of the 
record on review, fees for reviews, and prohibitions on communications 
outside of the official proceeding.\5\ This proposal is designed to 
address shortfalls in the NASD's listings procedures identified in the 
Commission's 21(a) Report and a previous report on the NASD's 
governance structure.\6\
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    \5\ The Association is also proposing to temporarily move the 
existing Rule 4800 Series relating to other grievances concerning 
the Association's automated systems to the Rule 9700 Series, and 
reference to the delisting procedures in the current Rule 4800 
Series will be removed prior to this relocation. The NASD and NASD 
Regulation, Inc. plan to file changes to the Rule 9500 Series in the 
near future and, upon approval of those changes, the Rule 9700 
Series will be deleted and non-listing related grievances and 
denials of access involving Nasdaq's automated systems will be 
reviewed through Rule 9500 Series procedures.
    \6\ See Commission's Report and Appendix to Report Pursuant to 
Section 21(a) of the Securities Exchange Act of 1934 Regarding the 
NASD and The Nasdaq Stock Market dated August 8, 1996; Securities 
Exchange Act Release No. 37538 (August 8, 1996) (SEC Order 
Instituting Public Proceedings Pursuant to Section 19(h)(1) of the 
Securities Exchange Act of 1934, Making Findings and Imposing 
Remedial Sanctions, In the Matter of National Association of 
Securities Dealers, Inc., Administrative Proceeding File No. 3-
9056); and Report of the NASD Select Committee on Structure and 
Governance to the NASD Board of Governors (1995).
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II. Description of the Proposal

    The revised Rule 4800 Series applies only to decisions to deny, 
limit, or prohibit the listing of an issuer's securities on the Nasdaq 
Stock Market. The substantive criteria for listing on the Nasdaq Stock 
Market are contained in other portions of the Rule 4000 Series. Rule 
4810 of the Revised Listings Code describes the limited purpose of the 
new Rule 4800 Series as well as certain general provisions.
    Rule 4810 also provides that an issuer may request an extension of 
time to comply with any of the standards contained in the Rule 4000 
Series or an exception to those standards. It is solely within the 
NASD's discretion whether to grant such an extension. In determining 
whether to grant an extension or exception, the NASD reviewing body at 
each level of review will consider the original issue cited, but may 
also consider any additional issues, regardless of whether they were 
considered earlier in the proceeding.\7\ The Revised Listings Code 
provides that the NASD will notify the issuer if additional issues are 
being considered in determining whether to grant a request for an 
exception or exemption, and the issue will be given an opportunity to 
respond to such issues.
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    \7\ The levels of review are described in the following 
paragraphs.
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    Rule 4810 particularly notes that ``the issuer may be subject to 
additional or more stringent criteria for the initial or continued 
inclusion of particular securities based on any event, condition, or 
circumstance that exists or occurs that makes initial or continued 
inclusion of the securities inadvisable or unwarranted in the opinion 
of the Association, even though the securities meet all enumerated 
criteria for initial or continued inclusion in the Nasdaq Stock 
Market.''\8\
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    \8\ See revised Rule 4810, Purpose and General Provisions.
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    Revised Rule 4815 through 4860 provide the general procedures that 
the Association and an issuer must follow with respect to any 
determination by the NASD to deny initial or continued listing to an 
issuer, including retention of records for the various Association 
adjudicators.\9\ Under revised Rule 4815, Nasdaq staff in the Listing 
Qualifications Department or Listing Investigation Department will 
notify an issuer in writing of any decision to limit or prohibit the 
initial or continued listing of its securities. This notification will 
describe the specific grounds for the determination.
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    \9\ See revised Rule 4830(b) (the record for a proceeding before 
a Listing Qualification Panel is kept by the Nasdaq Hearings 
Department); revised Rule 4840(d) (the record for a proceeding 
before the Review Council is kept by the Nasdaq Office of General 
Counsel); and revised Rule 4850(b) (the record for a proceeding 
before the NASD Board is kept by the Nasdaq Office of General 
Counsel).
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    Revised Rule 4820 provides that within 7 calendar days of receipt 
of this notification, the issuer may request a hearing for review of 
the determination.\10\ If an issuer requests a review, the staff 
determination will generally be stayed pending the outcome of the 
review.\11\ If no request for review is made, the determination will 
take effect after the time to request review has expired.
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    \10\ The fee for such a review remains at its existing level of 
$1,400 for a review based on written submission and $2,300 for a 
review based on an oral presentation. The NASD is proposing to 
relocate the fee provisions from Rule 4530 to revised Rule 4820(c).
    \11\ The Association is permitted, however, to suspend a 
security's inclusion in Nasdaq if the securities are not in 
compliance with the qualification requirements of Rule 4310 or Rule 
4320, or those requirements imposed by the NASD under Rule 4330(a). 
In that event, Nasdaq will notify the issuer prior to the suspension 
or as soon as practicable thereafter. See Rule 4330(b). Furthermore, 
Nasdaq may halt trading in a security pending the dissemination of 
material news or when Nasdaq requests information from an issuer 
relating to material news, qualification matters, or other 
information necessary to protect the public interest. See Rule 
4120(a)(5).
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    Revised Rule 4830 provides that all requests for review will be 
considered by an independent panel (``Listing Panel'') composed of at 
least two persons who are not employees of the NASD or its 
subsidiaries. The Nasdaq Board of Directors will designate potential 
panelists. Panelists may include both securities and non-securities 
professionals, such as NASD members, issuers, attorneys, or 
accountants. The Listing Panel hearing will, to the extent practicable, 
be scheduled within 45 days of the date that the request for hearing is 
filed. After the hearing, the Listing Panel will issue a written 
decision that is effective immediately (unless the decision itself 
provides otherwise).
    Under revised Rule 4840, an issuer may request review of the 
Listing Panel's decision by the Nasdaq Listing and Hearing Review 
Council (``Review Council'') within 15 days.\12\ In addition, any 
member of the Review Council may decide to review a decision of the 
Listing Panel within 45 days of the date of the issuance of that 
decision. Review Council review of a matter generally

[[Page 25944]]

does not stay the Listing Panel decision (unless the call for review 
specifies otherwise). The NASD is proposing to impose a $1,400 fee for 
a Review Council review. This fee is in addition to the current $1,400 
fee for the Listing Panel's review of the Nasdaq staff's initial 
determination.\13\
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    \12\ The Review Council is a compositionally balanced panel of 
no fewer than eight and no more than 18 members. Of these members, 
at least five must be Non-Industry, and not more than 50 percent may 
be engaged in market-making activity or employed by a member whose 
revenues from market-making activity exceed ten percent of its total 
revenues. See Nasdaq By-Laws Article 5.2(a).
    \13\ The new fee is designed to recoup the costs of processing 
the request for review, including preparing and copying the record 
on review for the Review Council, covering staff resources within 
the Nasdaq Office of General Counsel for reviewing the record, 
advising the Review Council, preparing the decision, and covering a 
proportionate part of the expense of Review Council meetings. The 
fee is designed to be revenue neutral, to directly offset the costs 
associated with the Review Council's review.
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    Under the Revised Listing Code, the Review Council will review 
matters based on the written record and will issue a decision to 
affirm, modify, or reverse the Listing Panel's decision. Alternatively, 
the Review Council can choose to hold additional hearings, or remand 
the matter to Nasdaq staff or to the Listing Panel.\14\ This decision, 
although subject to a call for review by the NASD Board of Governors 
(``NASD Board''), will be effective immediately, unless it specifies to 
the contrary.
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    \14\ The Review Council may, at its sole discretion, also hold 
additional hearings.
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    Any member of the NASD Board may choose to review a Review Council 
decision for review at its next meeting that is at least 15 calendar 
days or more following the date of the Review Council decision. An 
issuer may not request that the NASD Board review the Review Council 
decision. If the NASD Board does not determine to review a Review 
Council decision, the issuer will be notified that the Review Council 
decision represents the final action of the NASD. If the NASD Board 
does call a Review Council decision for review, the NASD Board will 
generally review the matter based on the record before the Review 
Council. Ordinarily, the issuer will not be permitted to supplement the 
record on review.\15\ The NASD Board may affirm, modify, or reverse the 
Review Council decision and may remand the matter to the Review 
Council, the Listing Panel, or Nasdaq staff.
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    \15\ The NASD Board may, at its sole discretion, request 
additional information from the issuer or from Nasdaq staff and may, 
at its sole discretion, hold additional hearings.
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    Revised Rule 4870 defines what is included in the record on review 
at each level of a Rule 4800 proceeding. At each level of review, the 
issuer will be provided a list of documents included in the record on 
review. In addition, any subsequent public filings made by the issuer 
and any subsequent information released to the public by the issuer may 
be added to the record on review, as well as any subsequent 
correspondence between the Association and the issuer. Furthermore, at 
any level of review, the deciding body may take note of the issuer's 
current Nasdaq Stock Market bid price and number of market makers at 
the time of consideration. The written record, as well as any documents 
excluded from the written record, will be maintained until the date 
upon which the decision becomes final, including, if applicable, upon 
conclusion of any review by the Commission or a federal court.\16\
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    \16\ Time is computed within the Revised Listings Code based on 
calendar days. In computing any period of time, the day of the act, 
event, or default from which the period of time begins is not 
included. The last day of the period is included, unless it is a 
Saturday, Sunday, federal holiday, or NASD holiday. An NASD holiday 
is any day on which the Nasdaq Stock Market or the executive offices 
of the NASD are closed for the entire day.
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    The Revised Listings Code prohibits any communication relevant to 
the merits of a proceeding amongst anyone participating in or advising 
in the consideration of a listing or delisting matter (including 
members of the Listing Panel, Review Council, or NASD Board and NASD 
employees), unless the issuer and the appropriate Nasdaq staff have 
been provided notice and an opportunity to participate in the 
communication.\17\ This proposed limitation is designed to prevent 
information outside of the record from being considered in rendering a 
decision in a matter. The NASD indicates that they currently expect 
Nasdaq staff to waive participation in such communications. The Revised 
Listings Code also specifies that if an issuer submits a proposal to 
resolve matters at issue in a Rule 4800 Series proceeding, 
communications about that submission will be excluded from the 
prohibitions discussed above.\18\
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    \17\ See revised Rule 4890, Prohibited Communications.
    \18\ The NASD is also proposing to make conforming changes to 
Rules 4330 and 4480, and Rule 4530 will be removed because the 
substance of that Rule has been relocated to Rule 4820(c).
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III. Discussion

    The Commission finds that the proposal is consistent with the Act 
and in particular with those provisions applicable to a national 
securities association. Specifically, the Commission believes that the 
proposal is consistent with the requirements of Section 15A(b)(6) of 
the Act \19\ because it is designed to promote just and equitable 
principles of trade and, in general, to protect investors and the 
public interest. The Commission believes that the amendments, by 
codifying, expanding, and clarifying existing procedures, strike a 
reasonable balance between the Association's obligation to protect 
investors and their confidence in the market, with its parallel 
obligation to perfect the mechanism of a free and open market. The 
amendments provide fair procedures for issuers, while giving Nasdaq the 
ability to deny, limit, or delist an issuer that has failed to meet the 
substantive standards outlined in the Rule 4000 Series.
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    \19\ 15 U.S.C. 78o-3(b)(6).
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    For the most part, the Revised Listings Code codifies present 
Association procedures. The general system of review remains basically 
the same. In the past, many of these procedures were not codified, and 
instead were explained through correspondence during the course of a 
listing or delisting proceeding. As a result, it was often unclear how 
certain of the practices or procedures were applied in particular 
cases. The Revised Listings Code clearly sets forth the procedures 
applicable to all issuers.
    One of the most important clarifications addresses an issuer's 
ability to request an extension of time to comply with any of the 
standards set forth in the Rule 4000 Series or an exception to those 
standards at any time during the pendency of a Rule 4800 Series 
proceeding. While extensions and exceptions have always been granted, 
their availability was not readily apparent. The Commission believes it 
is essential for issuers to understand that they may request an 
extension of, or exception to, the NASD's codified procedures. Although 
the decision to grant such extensions and exceptions is within the 
discretion of the Association, the Commission notes that the NASD must 
exercise that discretion in a manner consistent with the Act generally 
and, in particular, with Section 15A(b)(6).\20\
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    \20\ Id. No Association rule may unreasonably discriminate 
against one group of issuers versus another.
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    The impact of decisions at each level of review is also clarified 
in the Revised Listings Code. Review of a Listing Panel determination 
by the Review Council, and review of a Review Council decision by the 
NASD Board does not stay the previous determination. The ability to 
issue immediately a decision will allow the Association to act swiftly 
to delist a non-compliant issuer that is still trading on the Nasdaq 
Stock Market, or to permit an issuer that was wrongly delisted by the 
Nasdaq staff to return to the Nasdaq Stock Market more quickly.
    Another important clarification is that each adjudicator, from the 
Nasdaq staff

[[Page 25945]]

through the NASD Board, has the discretion to supplement the record. 
Thus, at each level of a proceeding under the Rule 4800 Series, the 
Listing Panel, Review Council, or the NASD Board, as part of its 
respective review, may:

    1. Request additional information from the issuer;
    2. Consider the issuer's bid price, market makers or any 
information that the issuer releases to the public, including any 
additional quantitative deficiencies reflected in the released 
information; and
    3. Consider any failure to meet any quantitative standard or 
qualitative consideration set forth in the Rule 4000 Series, 
including failures previously not considered in the proceeding.

    The issuer will be afforded notice of such consideration and given 
an opportunity to respond to actions taken by the adjudicator. The 
Commission believes that the ability to supplement the record with the 
most up-to-date information regarding the issuer will help to ensure 
that the reviewing body's decision is informed and appropriate under 
the circumstances.
    There are also several new features in the Revised Listings Code. 
One of the most important restricts communication between Association 
adjudicators and parties to a listing determination.\21\ For example, 
the revised rules restrict communication between adjudicators and 
either the Nasdaq staff or the issuer, unless both are given the 
opportunity to participate. In addition, any prohibited communication 
must be entered in the record of the proceeding. The Commission 
believes that these safeguards will help to ensure greater fairness and 
openness in Association listings proceedings.
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    \21\ See revised Rule 4890, Prohibited Communications.
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    The Revised Listings Code also adds a comprehensive explanation of 
the content of the official record of a listing proceeding,\22\ as well 
as how the record is maintained through various levels of review.\23\ 
This provision is another important improvement that should help to 
ensure that issuers are made aware of those factors that are considered 
in a listing or delisting decision, which in turn should assist them in 
challenging a decision that is adverse to them.
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    \22\ See revised Rule 4870, Record on Review.
    \23\ See revised Rule 4830(b).
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    Finally, the Revised Listings Code imposes fees for Association 
review.\24\ The Commission believes that these fees are consistent with 
Section 15A(b)(5) of the Act, which permits the allocation of fees on 
issuers using any facility or system that the Association operates or 
controls. Specifically, the Commission believes that the proposal 
provides for the equitable allocation of reasonable fees among issuers 
using the resources of the Association. The Commission also believes 
that these fees are reasonable under the circumstances in that they are 
designed to recoup the costs of processing requests for review and 
holding the subsequent hearings.
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    \24\ See revised Rules 4820(c) and 4840(b).
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    The renumbering of the existing Rule 4800 Series to the Rule 9700 
Series, as revised, will be effective immediately upon approval of this 
revised rule change.\25\ The revised Rule 4800 Series will be made 
effective immediately upon approval for matters where the issuer has 
not yet received a Staff Determination, as defined in Rule 4815 of the 
Revised Listings Code. For issuers that have received notification from 
the staff that they will be delisted or denied initial inclusion prior 
to the date of approval, or that otherwise have matters pending before 
the Listing Panel or the Review Council prior to the date of approval 
of these rule changes, the existing Rule 4800 Series will continue to 
apply for 180 days. The Commission believes that this staggered 
schedule is appropriate because it will allow the Association to make 
an orderly transition from the existing rules to the Revised Listings 
Code.
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    \25\ See supra note 5, discussing relocation of the current Rule 
4800 Series, Grievances Concerning The Automated Systems, to the 
Rule 9700 Series.
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IV. Conclusion

    The Commission believes that the proposed rule change is consistent 
with Act, and, particularly, with Section 15A.\26\ in approving the 
proposal, the Commission has considered its impact on efficiency, 
competition, and capital formation.\27\
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    \26\ 15 U.S.C. Sec. 78o-3.
    \27\ 15 U.S.C. Sec. 78c(f).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\28\ that the proposed rule change (SR-NASD-98-88) is approved.

    \28\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-12064 Filed 5-12-99; 8:45 am]
BILLING CODE 8010-01-M