[Federal Register Volume 69, Number 249 (Wednesday, December 29, 2004)]
[Notices]
[Pages 78076-78078]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-28442]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50897; File No. SR-NASD-2004-169]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change To Adopt 
Additional Listing Standards Applicable to the Securities of the Nasdaq 
Stock Market, Inc. or an Affiliate

December 21, 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 November 2, 2004, the National Association of Securities Dealers, 
Inc. (``NASD''), 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, II, 
and III below, which Items have been prepared by Nasdaq. On December 
14, 2004, and December 15, 2004, Nasdaq filed Amendments No. 1 and No. 
2, respectively.\3\ On December 15, 2004, Nasdaq filed Amendment No. 3 
to the proposal.\4\ The Commission is publishing this notice to solicit 
comments on the proposed rule change, as amended, from interested 
persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 and Amendment No. 2 were deficient for 
technical reasons and were withdrawn on December 14 and December 15, 
2004, respectively.
    \4\ Amendment No. 3 slightly modifies the text of the proposed 
rule to make clear that the exclusion in the definition of an 
Affiliate Security would encompass other exchange traded funds 
listed on The Nasdaq Stock Market. The amendment also further 
clarifies and explains the proposed rule change. Amendment No. 3 is 
incorporated into this notice.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    Nasdaq proposes to adopt additional listing standards that would 
apply to a security listed on Nasdaq by Nasdaq or its affiliate 
(collectively defined in the proposed rule as ``Nasdaq Affiliates'').
    The text of the proposed rule change is below. Proposed new 
language is in italics; proposed deletions are in brackets.\5\
* * * * *
---------------------------------------------------------------------------

    \5\ Changes are marked to the rule text that appears in the 
electronic NASD manual found at http://www.nasd.com.
---------------------------------------------------------------------------

Rule 4370. Additional Requirements for Nasdaq-Listed Securities Issued 
by Nasdaq or Its Affiliates

    (a) For purposes of this Rule 4370, the terms below are defined as 
follows:
    (1) ``Nasdaq Affiliate'' means Nasdaq and any entity that directly 
or indirectly, through one or more intermediates, controls, is 
controlled by, or is under common control with Nasdaq, where 
``control'' means that the one entity possesses, directly or 
indirectly, voting control of the other entity either through ownership 
of capital stock or other equity securities or through majority 
representation on the board of directors or other management body of 
such entity.
    (2) ``Affiliate Security'' means any security issued by a Nasdaq 
Affiliate, with the exception of Portfolio Depository Receipts, as 
defined in Rule 4420(i)(1)(A), and Index Fund Shares as defined in Rule 
4420(j)(1)(A).
    (b) Upon initial and throughout continued inclusion of the 
Affiliate Security in The Nasdaq Stock Market, Nasdaq shall:
    (1) file a report each month with the Commission detailing Nasdaq's 
monitoring of:

[[Page 78077]]

    (A) the Nasdaq Affiliate's compliance with the provisions of the 
Rule 4200, 4300 and 4400 Series; and
    (B) the trading of the Affiliate Security, which shall include 
summaries of all related surveillance alerts, complaints, regulatory 
referrals, trades cancelled or adjusted pursuant to Rule 11890, 
investigations, examinations, formal and informal disciplinary actions, 
exception reports and trading data of such security.
    (2) engage on independent accounting firm once a year to review and 
prepare a report on the Affiliate Security to ensure that the Nasdaq 
Affiliate is in compliance with the Rule 4200, 4300 and 4400 Series and 
promptly forward to the Commission a copy of the report prepared by the 
independent accounting firm.
    (c) In the event that Nasdaq determines that the Nasdaq Affiliate 
is not in compliance with any of the Rule 4200, 4300 and 4400 Series, 
Nasdaq shall file a report with the Commission at the same time that 
Nasdaq notifies the Nasdaq Affiliate of its non-compliance. The report 
shall identify the date of non-compliance, type of non-compliance and 
any other material information conveyed to the Nasdaq Affiliate in the 
notice of non-compliance. Within five (5) business days of receipt of a 
plan of compliance from the Nasdaq Affiliate, Nasdaq shall notify the 
Commission of such receipt, whether the plan of compliance was accepted 
by Nasdaq or what other action was taken with respect to the plan and 
the time period provided to regain compliance with the Rule 4200, 4300 
and 4400 Series, if any.
* * * * *

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.

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

1. Purpose
    Nasdaq is proposing a rule change to adopt a new Rule 4370 that 
would impose additional reporting requirements on Nasdaq should Nasdaq 
or an affiliate of Nasdaq list a security on The Nasdaq Stock Market 
(collectively, the ``Nasdaq Affiliates'').\6\ In the event that a 
Nasdaq Affiliate lists a security on Nasdaq (the ``Affiliate 
Security''), the proposed rule change would require Nasdaq to file a 
report with the Commission on a monthly basis detailing Nasdaq's 
monitoring of (1) the Nasdaq Affiliate's compliance with the provisions 
of Rule 4200, 4300 and 4400 Series (which include bid price 
requirements, and quantitative and qualitative maintenance 
requirements) and (2) the trading of the Affiliate Security, including 
summaries of all related surveillance alerts, complaints, regulatory 
referrals, trades cancelled or adjusted pursuant to NASD Rule 11890, 
investigations, examinations, formal and informal disciplinary actions, 
exception reports and trading data.
---------------------------------------------------------------------------

    \6\ The NASD currently would be considered a Nasdaq Affiliate 
for purposes of the proposed rule change.
---------------------------------------------------------------------------

    Nasdaq also would be required to commission an annual review and 
report by an independent accounting firm of the compliance of the 
Affiliate Security with Rule 4200, 4300 and 4400 Series. Nasdaq would 
be required to furnish promptly a copy of the report to the Commission.
    Nasdaq also would be required to notify the Commission at the same 
time it notifies the Nasdaq Affiliate if Nasdaq determines that the 
Nasdaq Affiliate was not in compliance with any of its listing 
standards. The proposed rule change also would require Nasdaq to notify 
the Commission within five business days of its receipt of a plan of 
compliance from the Nasdaq Affiliate. Nasdaq's notification also would 
advise the Commission on whether the plan of compliance was accepted by 
Nasdaq or what other action was taken with respect to the plan and the 
time period provided to regain compliance with the Rule 4200, 4300 and 
4400 Series, if any. Nasdaq believes that the additional requirements 
contained in the proposed rule change would provide additional 
assurance that any Affiliate Securities listed on Nasdaq by a Nasdaq 
Affiliate comply with Nasdaq's listing standards on an on-going basis. 
Nasdaq believes that the proposed rule change would eliminate any 
perception of a potential conflict of interest if a Nasdaq Affiliate 
seeks to list a security on The Nasdaq Stock Market.
    Nasdaq is proposing to exclude from the definition of Rule 4370--
solely for purposes of this rule--securities that meet the definition 
of ``Portfolio Depository Receipts'' under NASD Rule 4420(i)(1)(A) and 
``Index Fund Shares'' under NASD Rule 4420(j)(1)(A). These securities, 
commonly referred to as ``exchange traded funds'' or ``ETFs,'' are 
issued by open-end management investment companies based on a portfolio 
of securities. Often this portfolio mirrors a foreign or domestic stock 
index. An ETF is designed to provide investment results that correspond 
generally to the price and yield performance of the underlying 
portfolio of securities. Nasdaq believes that such securities do not 
present the same concerns as other securities, even if issued by a 
Nasdaq Affiliate. ETFs, which do not represent investments in an 
individual company, are already exempt from a number of listing 
standards including corporate governance rules standards, such as the 
requirement to have a board of directors comprised of a majority of 
independent directors and to have a code of conduct applicable to all 
employees and directors.\7\ Nasdaq does not believe that the additional 
reporting requirements in the proposed rule change would provide any 
value in this context because ETFs would not constitute an investment 
in a Nasdaq Affiliate. Further, these issuers are already subject to a 
comprehensive scheme of regulation pursuant to the Investment Company 
Act of 1940.
---------------------------------------------------------------------------

    \7\ NASD Rule 4350(a)(2).
---------------------------------------------------------------------------

2. Statutory Basis
    Nasdaq believes that the proposed rule change, as amended, is 
consistent with the provisions of Section 15A of the Act,\8\ in 
general, and with Section 15A(b)(6) of the Act,\9\ in particular, in 
that it is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, remove 
impediments to a free and open market and a national market system, 
and, in general, to protect investors and the public interest, and does 
not permit unfair discrimination among issuers. Specifically, the rule 
change would provide additional reporting safeguards for certain listed 
securities where conflicts of interest might arise.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78o-3.
    \9\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

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

[[Page 78078]]

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.

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

    Within 35 days of the date of 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 such 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 proposed rule 
change, as amended, 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-2004-169 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-2004-169. 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-2004-169 and should be 
submitted on or before January 19, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
---------------------------------------------------------------------------

    \6\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-28442 Filed 12-28-04; 8:45 am]
BILLING CODE 8010-01-M