[Federal Register Volume 70, Number 25 (Tuesday, February 8, 2005)]
[Notices]
[Pages 6743-6744]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-512]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51123; File No. SR-NASD-2004-169]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Granting Approval to Proposed Rule Change and 
Amendment No. 3 Thereto To Adopt Additional Listing Standards 
Applicable to the Securities of the Nasdaq Stock Market, Inc. or an 
Affiliate

February 2, 2005.

I. Introduction

    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'') pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to adopt additional listing 
standards that would apply to securities of Nasdaq or its affiliate 
listed on The Nasdaq Stock Market. 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 
proposed rule change

[[Page 6744]]

was published for notice and comment in the Federal Register on 
December 29, 2004.\5\ The Commission received no comments on the 
proposal.
    This order approves the proposed rule change, as amended.

II. Description of the Proposal

    Nasdaq proposes to adopt new Rule 4370 that would impose additional 
reporting requirements on Nasdaq should Nasdaq or an affiliate of 
Nasdaq (collectively, the ``Nasdaq Affiliates'' or ``Nasdaq 
Affiliate'') \6\ list a security on The Nasdaq Stock Market. In the 
event that a Nasdaq Affiliate lists a security on The Nasdaq Stock 
Market (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 the Rule 4200, 4300 and 4400 Series,\7\ 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.
    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. Nasdaq would be required to notify the Commission within 
five business days of its receipt of a plan of compliance from the 
Nasdaq Affiliate and 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.
    In addition, Nasdaq would be required to commission an annual 
review and report by an independent accounting firm of the compliance 
of the Affiliate Security with the Rule 4200, 4300 and 4400 Series. 
Nasdaq would be required to furnish promptly a copy of the report to 
the Commission.
    Solely for the purposes of Rule 4370, Nasdaq proposes to exclude 
from the definition of ``Affiliate Security'' 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).\8\
    Nasdaq believes that the additional requirements contained in Rule 
4370 would provide additional assurance that any securities listed on 
The Nasdaq Stock Market 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.

III. Discussion and Commission Findings

    The Commission has reviewed carefully the proposed rule change, as 
amended, and finds that it is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to a national 
securities association.\9\ In particular, the Commission believes that 
the proposal, as amended, is consistent with Section 15A(b)(6) of the 
Act,\10\ which requires that an association's rules be designed to 
prevent fraudulent and manipulative acts and practices, promote just 
and equitable principles of trade, remove impediments to, and perfect 
the mechanism of, a free and open market and, in general, protect 
investors and the public interest. The Commission also finds that the 
proposed rule change, as amended, is consistent with Section 15A(b)(2) 
of the Act,\11\ which requires a national securities association to be 
so organized and have the capacity to be able to carry out the purposes 
of the Act and to enforce compliance by its members and persons 
associated with its members with the provisions of the Act, the rules 
and regulations thereunder, and the rules of the association.
    The listing of an Affiliate Security on The Nasdaq Stock Market 
could potentially create a conflict of interest between the NASD's, 
Nasdaq's, and NASD Regulation, Inc.'s (``NASDR'') regulatory 
responsibilities to vigorously oversee the listing and trading of an 
Affiliate Security on The Nasdaq Stock Market, and their own commercial 
or economic interests. Such ``self-listing'' may raise questions as to 
the NASD's, Nasdaq's, and NASDR's ability to independently and 
effectively enforce the Commission's and the NASD's rules against an 
affiliate of Nasdaq. In addition, such listing has the potential to 
exacerbate possible conflicts that may arise when these entities 
oversee competitors that may also be listed on The Nasdaq Stock Market.
    The Commission believes that the proposed rule change, by requiring 
heightened reporting by Nasdaq to the Commission with respect to 
oversight of the listing and trading on The Nasdaq Stock Market of an 
Affiliate Security, will help protect against concerns that Nasdaq will 
not effectively enforce its rules with respect to the listing and 
trading of these securities. In addition, the requirement that an 
independent accounting firm review such issuer's compliance with 
Nasdaq's listing standards adds a degree of independent oversight to 
Nasdaq's regulation of the listing of these securities, which may 
mitigate any potential or actual conflicts of interest.\12\

IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\13\ that the proposed rule change (File No. SR-NASD-2004-169), as 
amended, be and hereby is, approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
Margaret H. McFarland,
Deputy Secretary.
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    \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 modified the text of the proposed 
rule to make clear that the exclusion in the definition of an 
Affiliate Security would encompass both portfolio depository 
receipts and index fund shares. The amendment also further clarifies 
and explains the proposed rule change. Amendment No. 3 was 
incorporated into the notice.
    \5\ See Securities Exchange Act Release No. 50897 (December 21, 
2004), 69 FR 78076.
    \6\ The NASD currently would be considered a Nasdaq Affiliate 
for purposes of the proposed rule change.
    \7\ These rules include quantitative (minimum bid price, number 
of round lot holders, number of publicly held shares, market value, 
etc.) and qualitative (concerning independent directors, audit 
committee, shareholder meetings, etc.) requirements for initial and 
continued inclusion of securities in The Nasdaq Stock Market, as 
well as issuer designation requirements.
    \8\ These securities are types of exchange-traded funds 
(``ETFs'').
    \9\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78o-3(b)(6).
    \11\ 15 U.S.C. 78o-3(b)(2).
    \12\ On December 8, 2004, the Commission published for comment a 
proposed rulemaking that would impose reporting and other 
requirements on a self-regulatory organization (``SRO'') that 
chooses to list or trade its own securities, the securities of any 
trading facility, the securities of an affiliate of the SRO, or the 
securities of an affiliate of a trading facility of the SRO. Unlike 
the NASD's proposed rule change, the Commission's proposed rule 
would apply to investment companies that track an index, such as 
exchange-traded funds. See Securities Exchange Act Release No. 
50699, 69 FR 71126 (December 8, 2004). The NASD would, of course, 
have to conform its rules to any rules the Commission may adopt in 
the future.
    \13\ 15 U.S.C. 78s(b)(2).
    \14\ 17 CFR 200.30-3(a)(12).
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 [FR Doc. E5-512 Filed 2-7-05; 8:45 am]
BILLING CODE 8010-01-P