[Federal Register Volume 65, Number 16 (Tuesday, January 25, 2000)]
[Notices]
[Pages 4002-4005]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-1698]



[[Page 4002]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42345; File No. SR-NASD-99-33]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment Nos. 1 and 2 to the Proposed Rule Change by the 
National Association of Securities Dealers, Inc. Relating to the 
Establishment of Trade and Quote Halt Authority for the NASD's OTCBB 
Service

January 18, 2000.
    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 14, 1999, the National Association of 
Securities Dealers, Inc. (``NASD'' or ``Association''), through its 
wholly-owned subsidiary, 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 Nasdaq. On November 16, 1999, Nasdaq 
filed Amendment No. 1 to the proposed rule change.\3\ On December 3, 
1999, Nasdaq filed Amendment No. 2 to the proposed rule change.\4\ 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\ See letter from John F. Malitzis, Esq., Assistant General 
Counsel, Nasdaq to Nancy Sanow, Senior Special Counsel, Division of 
Market Regulation, SEC dated November 12, 1999. (Amendment No. 1 
added language to proposed NASD Rule 6545(a)(2) giving the NASD the 
authority to halt the trading of a derivative or component of a 
security listed on a foreign market or exchange if the foreign 
securities exchange or market imposes a trading halt in the listed 
securities.)
    \4\ See letter from John F. Malitzis, Esq., Assistant General 
Counsel, Nasdaq to Nancy Sanow, Senior Special Counsel, Division of 
Market Regulation, SEC dated December 3, 1999. (Amendment No. 2 
revised the definition of ``quotation medium'' in Rule 6545(c)(ii) 
and conformed the language in footnote 12 to reflect the 
requirements of NASD Rule 6740 and SEC Rule 15c2-11.)
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The NASD and Nasdaq are proposing to amend the rules of the NASD to 
establish authority to halt trading in certain specific circumstances 
in securities included in the OTC Bulletin Board Service (``OTCBB''). 
The NASD and Nasdaq are also proposing to make changes to the Plan Of 
Allocation And Delegation Of Functions By NASD To Subsidiaries to 
clarify that the Stockwatch section of Nasdaq would have authority to 
effectuate OTCBB halts. Below is the text of the proposed rule change. 
Proposed new language is in italics; proposed deletions are in 
[brackets].

Rule 6545. Trading and Quotation Halt in OTCBB-Eligible Securities

(a) Authority for Initiating a Trading and Quotation Halt

    In circumstances in which it is necessary to protect investors 
and the public interest, Nasdaq may direct members, pursuant to the 
procedures set forth in paragraph (b), to halt trading and 
quotations in the over-the-counter (``OTC'') market of a security or 
an American Depository Receipt (``ADR'') that is included in the OTC 
Bulletin Board (``OTCBB'') if:
    (1) The OTCBB security or the security underlying the OTCBB ADR 
is listed on or registered with a foreign securities exchange or 
market, and the foreign securities exchange, market, or regulatory 
authority overseeing such issuer, exchange, or market, halts trading 
in such security for regulatory reasons because of public interest 
concerns (``Foreign Regulatory Halt''); provided, however, that 
Nasdaq will not impose a trading and quotation halt if the Foreign 
Regulatory Halt was imposed solely for material news, a regulatory 
filing deficiency, or operational reasons; or
    (2) The OTCBB security or the security underlying the OTCBB ADR 
is a derivative or component of a security listed on or registered 
with a national securities exchange, The Nasdaq Stock Market, or 
foreign securities exchange or market (``listed security'') and the 
national securities exchange, The Nasdaq Stock Market or foreign 
securities exchange or market, imposes a trading halt in the listed 
security \5\or
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    \5\ See Amendment No. 1, supra note 3.
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    (3) The issuer of the OTCBB security or the security underlying 
the OTCBB ADR fails to comply with the requirements of SEC Rule 10b-
17 regarding untimely Announcements of Record Dates.

(b) Procedure for Initiating a Trading and Quotation Halt

    (1) When a halt is initiated under subparagraph (a)(1) of this 
rule, upon receipt of information from a foreign securities exchange 
or market on which the OTCBB security or the security underlying the 
OTCBB ADR is listed or registered, or from a regulatory authority 
overseeing such issuer, exchange, or market, Nasdaq will promptly 
evaluate the information and determine whether a trading and 
quotation halt in the OTCBB security is appropriate.
    (2) Should Nasdaq determine that a basis exists under this rule 
for initiating a trading and quotation halt, the commencement of the 
trading and quotation halt will be effective simultaneous with the 
issuance of appropriate public notice.
    (3) Trading and quotations in the OTC market may resume when 
Nasdaq determines that the basis for the halt no longer exists, or 
when five business days have elapsed from the date Nasdaq initiated 
the trading and quotation halt in the security, whichever occurs 
first. Nasdaq shall disseminate appropriate public notice that the 
trading and quotation halt is no longer in effect.

(c) Violation of OTCBB Trading and Quotation Halt Rule

    If a security is subject to a trading and quotation halt 
initiated pursuant to this rule, it shall be deemed conduct 
inconsistent with just and equitable principles of trade and a 
violation of Rule 2110 for a member:
    (i) To effect, directly or indirectly, a trade in such security; 
or
    (ii) To publish a quotation, a priced bid and/or offer, an 
unpriced indication of interest (including ``bid wanted'' and 
``offer wanted'' indications), or a bid or offer accompanied by a 
modifier to reflect unsolicited customer interest, in any quotation 
medium. For purposes of this Rule, ``quotation medium'' shall mean 
any: system of general circulation to brokers or dealers that 
regularly disseminates quotations of identified brokers or dealers; 
or publication, alternative trading system or other device that is 
used by brokers or dealers to disseminate quotations to others.\6\
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    \6\ See Amendment No. 2, supra note 4.
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Plan Of Allocation And Delegation Of Functions By NASD To Subsidiaries

I-III. No Change

IV. Stockwatch

    The Stockwatch section handles the trading halt functions for 
The Nasdaq Stock market securities [and], exchange-listed securities 
traded in the over-the-counter market (i.e., the Third Market), and 
securities quoted in the Over-the-Counter Bulletin Board. Review of 
all questionable market activity, possible rule infractions or any 
other matters that require any type of investigative or regulatory 
follow-up will be referred to and conducted by NASD Regulation, 
which will assume sole responsibility for the matter until 
resolution. This responsibility will include examinations, 
investigations, document requests, and any enforcement actions that 
NASD Regulation may deem necessary. NASD Regulation staff at all 
times will have access to all records and files of the stockwatch 
function.

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

    In its filing with the Commission, Nasdaq 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. Nasdaq has prepared summaries, set forth in Sections A, 
B, and C below, of the most significant aspects of such statements.

[[Page 4003]]

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

1. Purpose
    Background. As part of the NASD's ongoing effort to address abuses 
in thinly traded, thinly capitalized securities and to increase 
investor protection in the trading of over-the-counter (``OTC'') 
market, the NASD, Nasdaq, and NASD Regulation have been reviewing 
whether to establish trading and quotation halt authority for 
securities that are not listed on an exchange or on Nasdaq, but are 
traded by NASD members in the OTC market. Nasdaq specifically focused 
on expanding its current trading halt authority, which generally 
extends to Nasdaq-listed securities and exchange-listed securities 
traded off an exchange \7\ (i.e., third market), to those securities 
quoted on the OTCBB. The OTCBB is an NASD system which, pursuant to 
delegated authority. the Nasdaq Stock Market, Inc. is responsible for 
operating.
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    \7\See NASD Rule 4120. NASD Rule 4120 provides that Nasdaq may 
halt trading: (1) In the over-the-counter market of a security 
listed on Nasdaq to permit the dissemination of material news; (2) 
in the over-the-counter market of a security listed on a national 
securities exchange during a trading halt imposed by such exchange 
to permit the dissemination of material news; (3) by: (i) 
Consolidated Quotation System (``CQS'') market makers in a CQS 
security when a national securities exchange imposes a trading halt 
in that CQS security because of an order imbalance or influx 
(``operational trading halt''); or (ii) Nasdaq market makers in a 
security listed on Nasdaq, when the security is a derivative or 
component of a CQS security and a national securities exchange 
imposes an operational trading halt in that CQS security; (4) in an 
American Depository Receipt (``ADR'') or other security listed on 
Nasdaq, when the Nasdaq-listed security or the security underlying 
the ADR is listed on or registered with a national or foreign 
securities exchange or market, and the national or foreign 
securities exchange or market, or regulatory authority overseeing 
such exchange or market, halts trading in such security for 
regulatory reasons; or (5) in a security listed on Nasdaq when 
Nasdaq requests from the issuer information relating to (i) material 
news; (ii) the issuer's ability to meet Nasdaq listing qualification 
requirements, as set forth in NASD Rule 4300 and 4400 Series; or 
(iii) or any other information which is necessary to protect 
investors and the public interest.
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    Based on this review, the NASD and Nasdaq are proposing to expand 
Nasdaq's authority so that Nasdaq may impose quotation and trading 
halts in OTCBB securities when: (1) The OTCBB security is dually listed 
or registered and a foreign regulatory authority or market halts 
trading in the security; (2) the OTCBB security is a derivative or 
component of a security listed on Nasdaq, a domestic exchange, or 
foreign exchange/market (e.g., a convertible security or warrant) and 
Nasdaq, the exchange, or foreign exchange/market halts trading in the 
underlying security; \8\ or (3) the OTCBB issuer does not timely 
provide the NASD with information required by Exchange Act Rule 10b-
17.\9\
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    \8\ See Amendment No. 1, supra note 3.
    \9\ Separately, NASD Regulation focused on establishing 
authority to impose trading and quotation halts in non-Nasdaq, non-
OTCBB, OTC securities. Based on its review, NASD Regulation is 
issuing Notice to Members 99-69, in which it is soliciting comments 
on whether NASD Regualtion should have authority to halt trading in 
non-Nasdaq, non-OTCBB, OTC securities: (1) When the security is 
dually listed and a foreign regulatory authority or market halts 
trading; or (2) when the security is a derivative of a Nasdaq or 
exchange-listed security and Nasdaq or a national securities 
exchange halts trading in the underlying security. NASD Regulation 
is seeking comments from its membership prior to filing a rule 
proposal with the Commission because NASD Regulation's proposal is 
broader than that proposed in this filing. See Amendment No. 1, 
supra note 3.
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    Currently, NASD Rule 4120 authorizes Nasdaq to impose trading halts 
in Nasdaq-listed securities and securities listed on a national 
securities exchange and traded in the third market. There are, however, 
no rules that grant Nasdaq authority to impose trading or quotation 
halts in OTCBB securities. Additionally, unlike the Nasdaq market, 
there is no listing agreement between Nasdaq and OTCBB issuers, and 
thus Nasdaq does not have the ability to compel such issuers to 
disclose information to Nasdaq. Accordingly, it is difficult for Nasdaq 
to unilaterally imposes halts in the OTCBB because, in most cases, 
information from the issuer is necessary to assess the situation and 
determine if a a halt and/or resumption of trading is appropriate.\10\ 
In light of the foregoing the NASD and Nasdaq are proposing to vest 
Nasdaq with proscribed trading-halt authority.
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    \10\ Under section 12(k) of the Act, the Commission may impose 
trading suspensions in the U.S. securities markets. See 15 U.S.C. 
781-12(k). Additionally, NASD Rule 3340 prohibits members from 
trading any security as to which a trading halt is in effect. When 
the Commission suspends trading in an OTCBB security, Nasdaq 
announces the halt via the NEWS frame on the Nasdaq Workstation II 
and prohibits trading and quotations on the OTCBB.
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    Foreign Regulatory Authority Halts. First, the NASD and Nasdaq are 
proposing to impose trading and quotation halts in OTCBB eligible 
securities when a foreign market or regulatory authority has imposed a 
halt in the security in their market for regulatory reasons. This 
authority would permit Nasdaq to halt an OTCBB security or OTCBB ADRs 
when a foreign market on which the OTCBB issue is also traded, or a 
regulatory authority which has oversight authority for the OTCBB 
security, halts trading in the security or the security underlying the 
ADR for ``regulatory'' reasons. (Nasdaq currently has similar trading-
halt authority for Nasdaq-listed securities.) \11\ Under the proposal, 
upon receipt of information from a foreign securities market on which 
the OTCBB security or the security underlying the OTCBB ADR is listed 
or registered or from a regulatory authority overseeing such issuer, 
exchange, or market, Nasdaq's Stockwatch section will evaluate the 
information (generally, a trade-halt order issued by the foreign market 
or regulatory authority) and determine whether a halt in the OTCBB 
security is appropriate. Nasdaq will impose such a halt only when the 
foreign market or regulatory authority has imposed its halt because of 
potential fraudulent conduct or other public interest concerns. Nasdaq 
will not impose a halt if the foreign entity's halt is based on the 
dissemination of material news, an issuer's failure to meet regulatory 
filing requirements imposed by a foreign market or regulatory 
authority, or for operational reasons (e.g. order imbalance in the 
foreign market).\12\
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    \11\ See NASD Rule 4210(a)(4).
    \12\ The NASD and Nasdaq do not propose to halt for material 
news because Nasdaq does not have a formal listing agreement with 
OTCBB issuers, and thus cannot compel the full disclosure and 
dissemination of material news. The NASD and Nasdaq do not propose 
to halt trading if an issuer fails to meet filing/disclosure 
requirements imposed by a foreign regulatory authority or market, 
because Nasdaq would, in essence, be importing filing obligations of 
a foreign regulatory authority on OTCBB issuers when such 
requirements may not currently exist in the United States for such 
issuers. Lastly, the NASD and Nasdaq are not proposing to halt 
trading based on a foreign exchange's operational halt, such as an 
order imbalance, because Nasdaq generally does not halt for 
operational reasons.
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    For this and the proposed halts described below, an OTCBB halt 
would be lifted if Nasdaq determines that the basis of the halt no 
longer exists or upon the passage of five trading days, which ever 
occurs first.\13\ If a stock is halted for five days and then the halt 
is lifted, at the time the halt is lifted, market makers will be 
required to fulfill their obligations under Exchange Act Rule 15c2-11 
prior to initiating a priced or unpriced quotation in the security.\14\

[[Page 4004]]

Nasdaq will notify market participants and the public of halts through 
the NASD Regulation and Nasdaq Websites (e.g., OTCBB.com, 
Nasdaqtrader.com, NASDR.com), as well as the Nasdaq NEWS frame on the 
Nasdaq Workstation II.
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    \13\ Of course, if an issuer failed to meet the eligibility 
requirements contained in NASD rules 6530 and 6540, which impose 
certain regulatory filing requirements for securities to be included 
in the OTCBB, the security would be removed from the OTCBB.
    \14\ That is, if Nasdaq directs all members to cease quoting a 
security for five or more business days, pursuant to NASD Rule 6740 
and Exchange Act Rule 15c2-11, members will be required to file a 
Form 211 prior to the resumption of quotations in the OTCBB. See 17 
CFR 240.15c2-11, The NASD and Nasdaq note that the Commission 
recently issued for comment a reproposal of amendments to Exchange 
Act Rule 15c2-11. See Securities Exchange Act Release No. 41110 
(February 25, 1999), 64 FR 11124 (March 8, 1999). The NASD and 
Nasdaq will monitor developments regarding Exchange Act Rule 25c2-11 
and plan to make any necessary changes to conform the rules proposed 
in this filing with any changes to Exchange Act Rule 15c2-11.
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    Halts in Derivative Securities. Nasdaq currently has the authority 
to halt trading in a Nasdaq-listed derivative security when a national 
securities exchange or Nasdaq halts trading in the underlying equity 
security that is listed on the exchange or Nasdaq.\15\ Halt authority 
only extends to derivatives listed on Nasdaq, and does not extend to 
derivatives quoted in the OTCBB. Thus, for example, Nasdaq or an 
exchange may halt trading in a security, but trading may continue in 
the OTCBB derivative security. Since the trading price of the OTCBB 
derivative is dependent on the price of the underlying listed security, 
it is difficult to accurately price the derivative security when there 
is no current pricing information on the underlying security. Such 
difficulty in pricing may lead to disorderly markets and investor 
confusion. According, the NASD and Nasdaq are proposing to halt trading 
and quotations in OTCBB securities when the OTCBB security is a 
derivative or component of a security listed on Nasdaq, a domestic 
exchange, or Nasdaq, foreign market/exchange, and the exchange, or 
foreign market/exchange imposes a trading halt in the underlying listed 
security.\16\
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    \15\ See NASD Rule 4120(a)(3)(ii).
    \16\ See Amendment No. 1, supra note 3.
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    OTCBB Halts for Failure to Comply With Exchange Act Rule 10b-17. 
Finally, the NASD and Nasdaq are proposing to halt quotations and 
trading in an OTCBB security if the issuer fails to comply with the 
requirements of Exchange Act Rule 10b-17 regarding Untimely 
Announcements of Record Dates.\17\ Exchange Act Rule 10b-17 requires 
issuers to give, in a timely fashion, the NASD information relating to: 
(1) A dividend or other distribution in cash or in kind; (2) a stock 
split or reverse split; and (3) a rights or other subscription 
offering. Under Exchange Act Rule 10b-17, the issuer is required to 
provide this information to the NASD no later than 10 days prior to the 
record date or, in case of a rights subscription or other offering if 
such 10 days advance notice is not practical, on or before the record 
date.\18\
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    \17\ See 17 CFR 240.10b-17.
    \18\ Id.
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    For both Nasdaq-listed and OTCBB securities, Nasdaq publishes the 
record date of the action and the ex-date in its ``Daily List'' on the 
Nasdaq Websites. This provides information to broker-dealers, clearing 
agencies, and the public regarding the record date and settlement of 
such trades. For Nasdaq-listed securities, if an issuer does not 
provide the information in a timely manner, Nasdaq may request the Rule 
10b-17 information from the issuer and halt trading pending receipt of 
such information.\19\ Nasdaq may then issue a Uniform Practice Code 
(``UPC'') notice informing members of the status of the record date and 
underlying event in order to clarify any confusion in the marketplace 
regarding the pricing or settlement of these trades.
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    \19\ See NASD Rule 4210(a)(5).
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    While OTCBB issuers are also required to give the NASD information 
proscribed by Exchange Act Rule 10b-17 in a timely manner, Nasdaq does 
not currently have authority to institute trading halts in an OTCBB 
security when such information has not been timely provided. In the 
past, OTCBB issuers have failed to provide the NASD with the 
information required by Exchange Act Rule 10b-17, such as a stock split 
or the payment of a cash dividend, which has caused confusion in the 
marketplace because the information has been disseminated unevenly. 
When this has occurred, some market participants had become aware of 
the information (which impacts the pricing of the security) and had 
adjusted their quotes and/or trading activity accordingly. Others, 
however, had been unaware of this information and did not adjust their 
quotes and/or trading activity, thus resulting in anomalous pricing. In 
these situations, unlike Nasdaq-listed stocks, Nasdaq was not able to 
halt trading, gather information and issue a clarifying UPC notice. 
Rather, trading continued despite the uneven distribution of 
information or the distribution of misinformation, while Nasdaq staff 
attempted to gather information to clarify the situation. To minimize 
the potential for disorderly markets and investor confusion, the NASD 
and Nasdaq are proposing to halt trading and quotations in an OTCBB 
security when the issuer fails to give the NASD notice of the 
information specified in Exchange Act Rule 10b-17.
    Finally, the NASD and Nasdaq are proposing to amend the Plan Of 
Allocation And Delegation Of Functions By NASD To Subsidiaries to 
clarify that the Stockwatch section of Nasdaq would have authority to 
effectuate OTCBB halts
2. Statutory Basis
    The NASD and Nasdaq believe that the proposed rule change is 
consistent with the provisions of Section 15A(b)(6) of the Act,\20\ 
which requires, among other things, that the Association's rules must 
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, the NASD and 
Nasdaq believe that the proposal is consistent with the provisions of 
Section 15A(b)(11) of the Act.\21\ Section 15A(b)(11) 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. As noted 
above, because the proposed rule change will expand Nasdaq's authority 
to initiate trading halts in OTCBB issues based on regulatory halts 
imposed by other markets or regulatory authorities, the proposed rule 
will prevent fraudulent practices and protect investors. Moreover, the 
proposal will authorize Nasdaq to halt trading when there is a failure 
to timely provide the NASD with information mandated by Exchange Act 
Rule 10b-17, which if not timely and evenly disseminated could have a 
dramatic impact on the pricing and trading of OTCBB issues. Thus, the 
proposal is designed to protect investors and to produce fair and 
informative quotations, prevent fictitious or misleading quotations and 
to promote orderly procedures for collecting, distributing, and 
publishing quotations.
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    \20\ 15 U.S.C. 78o-3(b)(6).
    \21\ 15 U.S.C. 78o-3(b)(11).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The NASD and Nasdaq do 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

    Written comments were neither solicited nor received.

[[Page 4005]]

 III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the publication of this notice in the 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 the the Secretary, Securities and Exchange 
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-0609. 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 No. SR-NASD-99-33 and schould 
be submitted by February 15, 2000.
    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).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-1698 Filed 1-24-00; 8:45 am]
BILLING CODE 8010-01-M