[Federal Register Volume 69, Number 192 (Tuesday, October 5, 2004)]
[Notices]
[Pages 59630-59634]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2488]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50468; File No. SR-NASD-2004-144]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval to a Proposed Rule Change by the National 
Association of Securities Dealers, Inc., Relating to the Listing and 
Trading of Theravance, Inc., Common Stock

September 29, 2004.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on September 24, 2004, 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 (``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by Nasdaq. The 
Commission is publishing this notice and order to solicit comments on 
the proposed rule change from interested persons and to grant 
accelerated approval to the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to list and trade the common stock (``Common 
Stock'') of Theravance, Inc. (``Theravance''). The Common Stock 
includes call and put rights.

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 III below. Nasdaq 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
    Nasdaq proposes to list and trade the Common Stock under the NASD 
rules that generally apply to the listing, designation for the Nasdaq 
National Market, and trading of the first class of common stock.\3\ As 
described more fully below, the Common Stock currently includes an 
unusual feature, call and put rights. Nasdaq believes that the call and 
put rights make it desirable to apply certain additional requirements 
in connection with the listing of the Common Stock. Pursuant to its 
authority under NASD Rule 4300, ``Qualification Requirements for Nasdaq 
Stock Market Securities,'' to apply additional or more stringent 
criteria for the initial or continued inclusion of particular 
securities, Nasdaq proposes to apply to the Common Stock certain 
requirements of NASD Rule 4420(f), ``Other Securities,'' in addition to 
all of the other requirements normally applicable to common stock. 
Under NASD Rule 4420(f), Nasdaq may approve for listing and trading 
innovative securities that cannot be readily categorized under 
traditional listing guidelines.\4\
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    \3\ See the 4300 and 4400 series of the NASD's rules.
    \4\ See Securities Exchange Act Release No. 32988 (September 29, 
1993); 58 FR 52124 (October 6, 1993) (File No. SR-NASD-93-15) (order 
approving listing standards for hybrid securities products) (``1993 
Order'').
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    Theravance has entered into an agreement with GlaxoSmithKline

[[Page 59631]]

(``GSK''), whereby GSK has the right to require Theravance to redeem 
50% of the Common Stock held by each holder of Common Stock. Upon 
notice of such a redemption, each stockholder will automatically be 
deemed to have submitted for redemption 50% of the Common Stock held by 
the stockholder at $54.25 per share. This right is referred to as the 
``call.'' If GSK does not exercise this right, each holder of Common 
Stock has the right in August 2007 to require Theravance to redeem up 
to 50% of the holder's Common Stock at $19.375 per share. This right is 
referred to as the ``put.'' In either case, GSK is contractually 
obligated to pay Theravance the funds necessary to redeem the shares of 
Common Stock from Theravance's stockholders. However, GSK's maximum 
obligation for the shares of Common Stock subject to the put is $525 
million.
    As described in the registration statement filed by Theravance,\5\ 
if GSK elects to exercise its call right, it must provide written 
notice to Theravance between June 1, 2007, and July 1, 2007, and must 
provide adequate funds in cash to pay the aggregate redemption price of 
the shares of Common Stock to be called. GSK must specify the date that 
the call will occur, which must be no later than July 31, 2007. Upon 
receipt of notice from GSK to effect the call, Theravance must provide 
notice by mail of the proposed call to holders of record of Common 
Stock between ten and 30 days prior to the call date specified by GSK.
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    \5\ See File No. 333-116384.
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    If GSK does not exercise its call right, each holder of Common 
Stock may exercise the put right described above during the period 
beginning on August 1, 2007, and ending on the 30th business day 
thereafter or as may be required under the Act or under the Hart-Scott-
Rodino Antitrust Improvements Act of 1976 (``Hart-Scott-Rodino 
Act'').\6\
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    \6\ 15 U.S.C. 18a.
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    As set forth in the registration statement,\7\ prior to the 
expiration of the put period, the existence of the put right will 
likely be influential in determining the market price at which the 
Common Stock will trade. However, the market price of the Common Stock 
is not guaranteed and may be adversely affected in the event that the 
ability of Common Stock holders to exercise the put right or to receive 
proceeds upon exercise of the call right is impaired or diminished. 
After the expiration of the put period, the market price of the Common 
Stock, to the extent still outstanding, may decline significantly. 
Although shareholders are granted the option to exercise their put 
rights of Common Stock during the period described above, provided that 
GSK has opted not to exercise its call right, there are no price 
protections after that period.
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    \7\ 7 See note 5, supra.
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    After September 1, 2012, GSK will have no restrictions on its 
ability to sell or transfer the Common Stock in the open market, in 
privately negotiated transactions or otherwise, and these sales or 
transfers could create a substantial decline in the price of the 
outstanding shares of Common Stock or, if these sales or transfers are 
made to a single buyer or group of buyers, could transfer control of 
the Common Stock to a third party.
    In addition, the existence of the call right may limit the Common 
Stock from trading much above the call price of $54.25 per share even 
if Theravance's future growth and/or market conditions were to 
otherwise warrant a per share valuation in excess of that price. If the 
call right is exercised, the holders of Common Stock would participate 
in this increased valuation only to the extent of the $54.25 per share 
Common Stock redemption price for 50% of their shares.
    Upon the occurrence of a triggering event (an insolvency event as 
described in the registration statement), the right of Theravance's 
shareholders to exercise the put with respect to 50% of their Common 
Stock will accelerate and commence immediately and continue for the 65 
business days after such event or until a later date as required under 
the Act or under the Hart-Scott-Rodino Act. In the event the put 
notification is accelerated due to an insolvency event, GSK remains 
obligated to provide Theravance the funds necessary to effect the 
redemption of all shares of the Common Stock that are properly put or 
elect and arrange to purchase the Common Stock at the expiration of the 
period in which the put can be exercised, in compliance with applicable 
law.\8\
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    \8\ 8 Nasdaq clarified two minor typographical errors in this 
sentence. Telephone conversation between Alex Kogan, Associate 
General Counsel, Nasdaq, and Yvonne Fraticelli, Special Counsel, 
Office of Market Supervision, Division of Market Regulation, 
Commission, on September 28, 2004.
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    In addition to all of the requirements normally applicable under 
Nasdaq rules to the listing and trading of common stock, the Common 
Stock initially will be made subject to certain additional listing 
criteria, which are essentially the listing criteria for ``other 
securities'' under NASD Rule 4420(f). Specifically, under NASD Rule 
4420(f)(1):

    (A) The issuer shall have assets in excess of $100 million and 
stockholders' equity of at least $10 million. In the case of an 
issuer which is unable to satisfy the income criteria set forth in 
paragraph (a)(1), Nasdaq generally will require the issuer to have 
the following: (i) assets in excess of $200 million and 
stockholders' equity of at least $10 million; or (ii) assets in 
excess of $100 million and stockholders' equity of at least $20 
million;
    (B) There must be a minimum of 400 holders of the security, 
provided, however, that if the instrument is traded in $1,000 
denominations, there must be a minimum of 100 holders;
    (C) For equity securities designated pursuant to this paragraph, 
there must be a minimum public distribution of 1,000,000 trading 
units; and
    (D) The aggregate market value/principal amount of the security 
will be at least $4 million.
    As envisioned in NASD Rule 4420(f)(3), prior to the commencement of 
trading of the Common Stock, Nasdaq will distribute a circular to 
members providing guidance regarding the features of the Common Stock 
and members' responsibilities, including suitability recommendations, 
when handling transactions and highlighting the characteristics and 
risks of the Common Stock. In particular, Nasdaq will inform members 
that customer confirmations involving the Common Stock should identify 
the security as a callable and puttable instrument and that a customer 
may contact the member for more information concerning the security.\9\
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    \9\ 9 See IM-2110-6, ``Confirmation of Callable Common Stock.''
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    Furthermore, given the put and call features of the Common Stock, 
the circular will indicate that Nasdaq suggests that transactions in 
the Common Stock be recommended only to investors whose accounts have 
been approved for options trading. If a customer has not been approved 
for options trading, or does not wish to open an options account, the 
member should ascertain whether the Common Stock is suitable for the 
customer. Pursuant to NASD Rule 2310, ``Recommendations to Customers 
(Suitability),'' and IM-2310-2, ``Fair Dealing with Customers,'' 
members must have reasonable grounds for believing that a 
recommendation to a customer regarding the purchase, sale or exchange 
of any security is suitable for such customer upon the basis of the 
facts, if any, disclosed by such customer as to his other security 
holdings and as to his financial situation and needs. In addition, 
members recommending a transaction in the Common Stock must, among 
other things, have a reasonable basis for believing that the customer 
can

[[Page 59632]]

evaluate the special characteristics of, and is able to bear the 
financial risks of, such transaction.
    The circular will identify the following specific risks associated 
with the Common Stock. The circular will note that members should 
inform their customers that the price at which the Common Stock will 
trade may be influenced, prior to the expiration of the put period, by 
the existence of the put right. The circular will also note that the 
final rate of return on the Common Stock may be less than the market 
price of the Common Stock, and that after the expiration of the put 
period the market price of the Common Stock may decline significantly. 
Furthermore, customers should be aware that after September 1, 2012, 
GSK will have no restrictions on its ability to sell or transfer the 
Common Stock in the open market, in privately negotiated transactions 
or otherwise, and that these sales or transfers could create a 
substantial decline in the price of the outstanding shares of the 
Common Stock or, if these sales or transfers were made to a single 
buyer or group of buyers, could transfer control of the Common Stock to 
a third party.
    The Common Stock will be subject to all of the initial and 
continued listing requirements otherwise applicable to the first class 
of common stock designated for the Nasdaq National Market under NASD 
Rule 4420(a), (b) or (c), including, but not limited to, all otherwise 
applicable corporate governance requirements.\10\ The Common Stock will 
be subject to all applicable fees set forth in NASD Rule 4310, 
``Qualification Requirements for Domestic and Canadian Securities.'' 
\11\ Nasdaq will rely on its current surveillance procedures governing 
equity securities, and it represents that its surveillance procedures 
are adequate to properly monitor the trading of the Common Stock.
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    \10\ Pursuant to Rule 10A-3 under the Act, 17 CFR 240.10A-3, and 
Section 3 of the Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 
116 Stat. 745 (2002), Nasdaq will prohibit the initial or continued 
listing of any security of an issuer that is not in compliance with 
the requirements set forth therein.
    \11\ Because the Common Stock is not being designated under NASD 
Rule 4420(f), it will not be subject to the fee schedule for ``other 
securities'' contained in NASD Rule 4530, ``Other Securities.''
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2. Statutory Basis
    Nasdaq believes the proposal is consistent with the provisions of 
Section 15A of the Act,\12\ in general, and with Section 15A(b)(6) of 
the Act,\13\ in particular, in that the proposal is 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, in general, to protect 
investors and the public interest. Nasdaq believes that the callable 
and puttable feature of the Common Stock justify the additional listing 
requirements described in the proposal, and that investors will benefit 
from the application of the requirements.
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    \12\ 15 U.S.C. 78o-3.
    \13\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change will impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

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

    No written comments were solicited or received.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-NASD-2004-144 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-NASD-2004-144. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 in the Commission's Public Reference Section, 450 Fifth 
Street, NW., Washington, DC 20549. Copies of such filing also will be 
available for inspection and copying at the principal office of the 
NASD. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
NASD-2004-144 and should be submitted on or before October 26, 2004.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    Nasdaq has asked the Commission to approve the proposal on an 
accelerated basis to enable Nasdaq to accommodate the timetable for 
listing the Common Stock. In addition, Nasdaq believes that the 
proposal raises no new or novel issues. In this regard, Nasdaq notes 
that a national securities exchange previously has listed and traded 
callable puttable common stock.\14\ Nasdaq also states that it 
previously has listed callable puttable common stock and callable 
common stock.\15\
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    \14\ According to Nasdaq, Genentech, Inc. callable puttable 
common stock was listed on the New York Stock Exchange, Inc. 
(``NYSE'') from October 1995 through July 2000.
    \15\ According to Nasdaq, Dreyer's Grand Ice Cream Holding, Inc. 
callable puttable common stock was listed on Nasdaq in February 
2003; Genomic Solutions callable common stock was listed on Nasdaq 
in May 2000; Spiros Development Company, Inc. units, consisting of 
one warrant and one share of callable common stock, were listed on 
Nasdaq in December 1997; Aramed, Inc. units, consisting of one 
warrant and one share of callable common stock, were listed on 
Nasdaq from October 1993 through November 1995; SciGenics, Inc. 
units, consisting of one warrant and one share of callable common 
stock, were listed on Nasdaq from September 1991 through December 
1995; and Neozyme Corporation units, consisting of one warrant and 
one share of callable common stock, were listed on Nasdaq from 
January 1991 through December 1993. In addition, AT&T Canada, Inc. 
callable Deposit Receipts were listed on Nasdaq in June 1999.
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    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 and, in 
particular, with the requirements of Section 15A(b)(6) of the Act \16\ 
in that it is designed to promote just and equitable principles of 
trade, to remove impediments to and perfect the mechanism of a free and 
open market

[[Page 59633]]

and a national market system and, in general, to protect investors and 
the public interest.\17\
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    \16\ 15 U.S.C. 78o-3(b)(6).
    \17\ In approving the proposed rule, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
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    The Commission notes that the Common Stock has both call and put 
features. In particular, as described more fully above, GSK has the 
right to require Theravance to redeem 50% of the Common Stock held by 
each stockholder at $54.25 per share. If GSK elects to exercise its 
call right, it must provide written notice of its election to 
Theravance between June 1, 2007, and July 1, 2007, and the call must 
occur no later than July 31, 2007. If GSK declines to exercise its call 
right, each holder of Common Stock has the right to require Theravance 
to redeem up to 50% of the holder's Common Stock at $19.375 per share. 
Upon the occurrence of an insolvency event, as described in the 
registration statement filed by Theravance,\18\ the put rights of the 
holders of Common Stock will accelerate and commence immediately.
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    \18\ See note 5, supra.
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    The listing and trading of a non-traditional equity security like 
the Common Stock raises several regulatory issues. For the reasons 
discussed below, the Commission believes that Nasdaq's proposal 
adequately addresses the concerns raised by the listing and trading of 
the Common Stock.
    As noted above, in addition to being subject to the Nasdaq rules 
applicable to the initial and continued listing and trading of common 
stock, the Common Stock initially also will be subject to certain 
listing criteria applicable to ``other securities'' under NASD Rule 
4420(f). The Commission notes that the protections of NASD Rule 4420(f) 
were designed to address the concerns attendant to the trading of 
innovative securities like the Common Stock.\19\ By imposing the 
listing criteria and compliance requirements described above, as well 
as heightened suitability for recommendations,\20\ the Commission 
believes that Nasdaq has adequately addressed the potential issues that 
could arise from the listing and trading of the Common Stock.
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    \19\ See 1993 Order, supra note 4. See also Securities Exchange 
Act Release No. 47350 (February 11, 2003), 68 FR 8061 (February 19, 
2003) (File No. SR-NASD-2003-16) (order approving the listing 
standards applicable to Dreyer's Grand Ice Cream Holdings, Inc. 
callable puttable common stock) (``2003 Order'').
    \20\ As discussed above, Nasdaq will advise members and 
employees thereof recommending a transaction in the Common Stock to: 
(1) determine that the transaction is suitable for the customer; and 
(2) have a reasonable basis for believing that the customer can 
evaluate the special characteristics of, and is able to bear the 
financial risks of, the transaction.
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    The Commission notes that Nasdaq will distribute a circular to its 
members that provides guidance regarding members' compliance 
responsibilities and requirements, including heightened suitability 
recommendations, when handling transactions in callable puttable common 
stock, and that highlights the special risks and characteristics 
associated with the Common Stock. Specifically, among other things, the 
circular will inform members that customer confirmations involving the 
Common Stock should identify the security as a callable and puttable 
instrument and that a customer may contact the member for more 
information concerning the security.
    Nasdaq represents that the circular also will indicate that, given 
the put and call features of the Common Stock, Nasdaq will suggest that 
transactions in the Common Stock be recommended only to investors whose 
accounts have been approved for options trading. Nasdaq further 
represents that, if a customer has not been approved for options 
trading, or does not wish to open an options account, the member should 
ascertain whether the Common Stock is suitable for the customer 
pursuant to NASD Rule 2310 and IM-2310-2. The Commission believes that 
the distribution of the circular should help to ensure that only 
customers with an understanding of the risks attendant to the trading 
of the Common Stock and who are able to bear the financial risks 
associated with transactions in the Common Stock will acquire and trade 
the Common Stock.
    As noted above, Nasdaq represents that the circular will identify 
certain specific risks associated with the Common Stock. Specifically, 
the circular will note that members should inform their customers that 
the price at which the Common Stock will trade may be influenced by the 
existence of the put right prior to the expiration of the put period. 
The circular also will note that the final rate of return on the Common 
Stock may be less than the market price of the Common Stock, and that 
after the expiration of the put period the market price of the Common 
Stock may decline significantly. In addition, customers should be aware 
that after September 1, 2012, GSK will have no restrictions on its 
ability to sell or transfer the Common Stock in the open market, in 
privately negotiated transactions or otherwise, and that these sales or 
transfers could create a substantial decline in the price of the 
outstanding shares of the Common Stock or, if these sales or transfers 
are made to a single buyer or group of buyers, could transfer control 
of the Common Stock to a third party.
    The Commission believes that, to some extent, the financial risks 
associated with the Common Stock could be minimized by the proposed 
listing criteria. In this regard, the Commission notes that in addition 
to satisfying the initial and continued listing requirements for the 
first class of common stock designated for the Nasdaq National Market 
under NASD Rule 4420(a), (b), or (c), including all otherwise 
applicable corporate governance requirements, the Common Stock also 
must meet the additional initial asset, equity, and distribution 
requirements described above.
    The Commission notes that Nasdaq intends to rely on its current 
surveillance procedures governing equity securities to monitor trading 
in the Common Stock. Nasdaq represents that its surveillance procedures 
are adequate to properly monitor the trading of the Common Stock.
    The Commission finds good cause for approving the proposal prior to 
the thirtieth day after the date of publication of notice thereof in 
the Federal Register. The Commission believes that approving the 
proposal on an accelerated basis will accommodate the proposed 
timetable for listing the Common Stock. In addition, as described more 
fully above, the Commission notes that common stock with put and call 
features has been listed and traded on the NYSE and Nasdaq, and that 
the compliance and suitability requirements for the Common Stock are 
similar to those that Nasdaq adopted previously for a common stock with 
put and call features.\21\ Accordingly, the Commission believes that 
good cause exists, consistent with Sections 15A(b)(6) and 19(b)(2) of 
the Act,\22\ to approve the proposal on an accelerated basis.
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    \21\ See 2003 Order, supra note 19.
    \22\ 15 U.S.C. 78o-3(b)(6) and 78s(b)(2).
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V. 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,\23\ that the proposed rule change (SR-NASD-2004-144) is approved 
on an accelerated basis.
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    \23\ 15 U.S.C. 78s(b)(2).


[[Page 59634]]


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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. E4-2488 Filed 10-4-04; 8:45 am]
BILLING CODE 8010-01-P