[Federal Register Volume 66, Number 53 (Monday, March 19, 2001)]
[Notices]
[Pages 15515-15516]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-6663]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44067; File No. SR-NASD-01-01]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the National Association of Securities Dealers, Inc. to Amend 
NASD Rule 4330(f) to Require a Nasdaq Issuer to Apply for Initial 
Inclusion Following a Reverse Merger With a Non-Nasdaq Entity

March 13, 2001.

I. Introduction

    On October 9, 2001, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association''), through its subsidiary, the Nasdaq 
Stock Market, Inc. (``Nasdaq''), filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act),'' \1\ and Rule 19b-4 
thereunder,\2\ a proposal to amend paragraph (f) of NASD Rule 4330, 
``Suspension or Termination of Inclusion of a Security and Exceptions 
to Inclusion Criteria,'' to require a Nasdaq issuer to apply for 
initial inclusion following a Reverse Merger, as defined below, with a 
non-Nasdaq entity, and to make conforming changes to IM-4300, 
``Interpretive Material Regarding Future Priced Securities.'' The 
proposed rule change was published for comment in the Federal Register 
on February 7, 2001.\3\ No comments were received on the proposal. This 
order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 43907 (January 30, 
2001), 66 FR 9398.
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II. Description of the Proposed Rule Change

    NASD Rule 4330(f) requires a Nasdaq issuer to comply with all 
applicable initial inclusion requirements under Nasdaq rules if the 
issuer enters into a merger, consolidation, or other types of 
acquisition with a non-Nasdaq entity which results in a change of 
control and either a change in business or a change in the financial 
structure of the Nasdaq issuer.
    Nasdaq notes that it adopted NASD Rule 4330(f) \4\ in 1993 to 
address concerns associated with non-Nasdaq entities seeking a 
``backdoor listing'' on Nasdaq through a business combination involving 
a Nasdaq issuer.\5\ In these combinations, a non-Nasdaq entity 
purchased a Nasdaq issuer in a transaction that resulted in the non-
Nasdaq entity obtaining a Nasdaq listing without qualifying for initial 
listing or being subject to the background checks and scrutiny normally 
applied to issuers seeking initial listing.
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    \4\ When the Nasdaq adopted the rule, it appeared in Section 
3(f) of Part II to Schedule D of the NASD By-Laws.
    \5\ See Securities Exchange Act Release No. 32264 (May, 4, 
1993), 58 FR 27760 (May 11, 1993) (order approving File No. SR-NASD-
93-07).
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    According to Nasdaq, some issuers and their counsel have expressed 
uncertainty regarding the circumstances under which NASD Rule 4330(f) 
is applicable. Therefore, Nasdaq proposes to amend NASD Rule 4330(f) to 
indicate that an issuer must apply for initial inclusion following a 
transaction whereby the issuer combines with a non-Nasdaq entity, 
resulting in a change of control of the Nasdaq issuer \6\ and the 
potential for the non-Nasdaq entity to acquire a Nasdaq listing (for 
purposes of NASD Rule 4330(f), such transaction is referred to as a 
``Reverse Merger''). To provide further clarification, NASD Rule 
4330(f), as amended, sets forth a list of non-exclusive factors which 
Nasdaq will consider when determining whether a Reverse Merger has 
occurred. These factors include changes in the management, board of 
directors, voting power, ownership, and financial structure of the 
Nasdaq issuer. Nasdaq will also consider the nature of the businesses 
and the relative size of the Nasdaq issuer and non-Nasdaq entity. 
Nasdaq believes that these proposed amendments will clarify NASD Rule 
4330(f) for issuers while continuing to prevent ``backdoor listings'' 
on Nasdaq.
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    \6\ It is not necessary to obtain a majority interest in order 
for a change of control to occur.
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    Nasdaq also proposes to make conforming changes to IM-4300.

III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
association.\7\ In particular, the Commission finds that the proposal 
is consistent with Section 15A(b)(6) of the Act,\8\ which requires, 
among other things, that the rules of an association be designed to 
prevent fraudulent and manipulative acts and practices and to protect 
investors and the public interest.
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    \7\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78o-3(b)(6).
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    According to Nasdaq, some issuers have expressed uncertainty 
regarding

[[Page 15516]]

the applicability of NASD Rule 4330(f) when a Nasdaq issuer combines 
with a non-Nasdaq entity. To clarify NASD Rule 4330(f), the proposal 
amends NASD Rule 4330(f) to indicate that issuers must apply for 
initial inclusion following a Reverse Merger. NASD Rule 4330(f), as 
amended, provides a non-exclusive list of factors Nasdaq will consider 
to determine whether a Reverse Merger has occurred.
    The Commission believes that the proposal should clarify NASD Rule 
4330(f) and provide guidance to issuers concerning the circumstances 
under which an issuer that combines with a non-Nasdaq entity must apply 
for initial inclusion. At the same time, the Commission believes that 
NASD Rule 4330(f), as amended, will continue to protect investors and 
the public interest by helping to prevent ``backdoor listings'' on 
Nasdaq.
    The Commission finds that the conforming changes to IM-4300 will 
make IM-4300 consistent with NASD rule 4330(f), as amended, and provide 
guidance concerning the circumstances under which the conversion of a 
Future Priced Security could result in a Reverse Merger.

IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposal 
is consistent with the requirements of the Act and rules and 
regulations thereunder.
    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\9\ that the proposed rule change (SR-NASD-01-01) is approved.
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    \9\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-6663 Filed 3-16-01; 8:45 am]
BILLING CODE 8010-01-M