[Federal Register Volume 70, Number 36 (Thursday, February 24, 2005)]
[Notices]
[Pages 9122-9125]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-752]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51221; File No. SR-NASD-2005-018]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change To Permit Foreign Private Issuers To Follow Certain Home 
Country Practices

February 17, 2005.
    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 January 31, 2005, 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. Nasdaq filed 
the proposed rule change pursuant to section 19(b)(3)(A) of the Act \3\ 
and Rule 19b-4(f)(6) thereunder,\4\ which renders it effective upon 
filing with the Commission. 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\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to modify NASD Rule 4350(a)(1) and (5) and 
Interpretive Material (``IM'') 4350-6(1) to permit foreign private 
issuers to follow certain home country practices.
    The text of the proposed rule change is below. Proposed new 
language is in italics; proposed deletions are in [brackets].
4350. Qualitative Listing Requirements for Nasdaq National Market and 
Nasdaq Small Cap Market Issuers Except for Limited Partnerships
* * * * *
    (a) Applicability
    (1) Foreign Private Issuers. [Nasdaq shall have the ability to 
provide exemptions from Rule 4350 to a foreign private issuer when 
provisions of this Rule are contrary to a law, rule or regulation of 
any public authority exercising jurisdiction over such issuer or 
contrary to generally accepted business practices in the issuer's 
country of domicile, except to the extent that such exemptions would be 
contrary to the federal securities laws, including without limitation 
those rules required by Section 10A(m) of the Act and Rule 10A-3 
thereunder. A foreign issuer that receives an exemption under this 
subsection] A foreign private issuer may follow its home country 
practice in lieu of the requirements of Rule 4350, provided, however, 
that such an issuer shall: comply with Rules 4350(b)(1)(B), 4350(j) and 
4350(m), have an audit committee that satisfies Rule 4350(d)(3), and 
ensure that such audit committee's members meet the independence 
requirement in Rule 4350(d)(2)(A)(ii). A foreign private issuer that 
follows a home country practice in lieu of one or more provisions of 
Rule 4350 shall disclose in its annual reports filed with the 
Commission each requirement of Rule 4350 that it does not follow [from 
which it is exempted] and describe the home country practice[, if any,] 
followed by the issuer in lieu of such requirements. In addition, a 
foreign private issuer making its initial public offering or first U.S. 
listing on Nasdaq shall [disclose any such exemptions] make the same 
disclosures in its registration statement.
    (2) through (4) No change.
    (5) Effective Dates/Transition. In order to allow companies to make 
necessary adjustments in the course of their regular annual meeting 
schedule, and consistent with SEC Rule 10A-3, Rules 4200 and 4350 are 
effective as set out in this subsection. During the transition period 
between November 4, 2003 and the effective date of Rules 4200 and 4350, 
companies that have not brought themselves into compliance with these 
Rules shall continue to comply with Rules 4200-1 and 4350-1, which 
consist of sunsetting sections of previously existing Rules 4200 and 
4350.
    The provisions of Rule 4200(a) and Rule 4350(c), (d) and (m) 
regarding director independence, independent committees, and 
notification of noncompliance shall be implemented by the following 
dates:
     July 31, 2005 for foreign private issuers and small 
business issuers (as defined in SEC Rule 12b-2); and
     For all other listed issuers, by the earlier of: (1) The 
listed issuer's first annual shareholders meeting after January 15, 
2004; or (2) October 31, 2004.
    In the case of an issuer with a staggered board, with the exception 
of the audit committee requirements, the issuer shall have until their 
second annual meeting after January 15, 2004, but not later than 
December 31, 2005, to implement all new requirements relating to board 
composition, if the issuer would be required to change a director who 
would not normally stand for election at an earlier annual meeting. 
Such issuers shall comply with the audit committee requirements 
pursuant to the implementation schedule bulleted above.
    A company listing in connection with its initial public offering 
shall be permitted to phase in its compliance with the independent 
committee requirements set forth in Rule 4350(c) on the same schedule 
as it is permitted to phase in its compliance with the independent 
audit committee requirement pursuant to SEC Rule 10A-3(b)(1)(iv)(A). 
Accordingly, a company listing in connection with its initial public 
offering shall be permitted to phase in its compliance with the 
independent committee requirements set forth in Rule 4350(c) as 
follows: (1) One independent member at the time of listing; (2) a 
majority of independent members within 90 days of listing; and (3) all 
independent members within one year of listing. Furthermore, a company 
listing in connection with its initial public offering shall have 
twelve months from the date of listing to comply with the majority 
independent board requirement in Rule 4350(c). It should be noted, 
however, that pursuant to SEC Rule 10A-3(b)(1)(iii) investment 
companies are not afforded the exemptions under SEC Rule 10A-

[[Page 9123]]

3(b)(1)(iv). Issuers may choose not to adopt a compensation or 
nomination committee and may instead rely upon a majority of the 
independent directors to discharge responsibilities under Rule 4350(c). 
For purposes of Rule 4350 other than Rule 4350(d)(2)(A)(ii) and Rule 
4350(m), a company shall be considered to be listing in conjunction 
with an initial public offering if, immediately prior to listing, it 
does not have a class of common stock registered under the Act. For 
purposes of Rule 4350(d)(2)(A)(ii) and Rule 4350(m), a company shall be 
considered to be listing in conjunction with an initial public offering 
only if it meets the conditions in SEC Rule 10A-3(b)(1)(iv)(A) under 
the Act, namely, that the company was not, immediately prior to the 
effective date of a registration statement, required to file reports 
with the Commission pursuant to Section 13(a) or 15(d) of the Act.
    Companies that are emerging from bankruptcy or have ceased to be 
Controlled Companies within the meaning of Rule 4350(c)(5) shall be 
permitted to phase-in independent nomination and compensation 
committees and majority independent boards on the same schedule as 
companies listing in conjunction with their initial public offering. It 
should be noted, however, that a company that has ceased to be a 
Controlled Company within the meaning of Rule 4350(c)(5) must comply 
with the audit committee requirements of Rule 4350(d) as of the date it 
ceased to be a Controlled Company. Furthermore, the executive sessions 
requirement of Rule 4350(c)(2) applies to Controlled Companies as of 
the date of listing and continues to apply after it ceases to be 
controlled.
    Companies transferring from other markets with a substantially 
similar requirement shall be afforded the balance of any grace period 
afforded by the other market. Companies transferring from other listed 
markets that do not have a substantially similar requirement shall be 
afforded one year from the date of listing on Nasdaq. This transition 
period is not intended to supplant any applicable requirements of Rule 
10A-3 under the Act.
    [The limitations on corporate governance exemptions to foreign 
private issuers shall be effective July 31, 2005. However, the] The 
requirement that a foreign private issuer disclose that it does not 
follow an otherwise applicable provision of Rule 4350 [the receipt of a 
corporate governance exemption from Nasdaq] shall be effective for new 
listings and filings made after January 1, 2004.
    Rule 4350(n), requiring issuers to adopt a code of conduct, shall 
be effective May 4, 2004.
    Rule 4350(h), requiring audit committee approval of related party 
transactions, shall be effective January 15, 2004.
    The remainder of Rule 4350(a) and Rule 4350(b) are effective 
November 4, 2003.
    (b) through (n) No change.
* * * * *
IM-4350-6. Applicability
    1. Foreign Private Issuer Exception [Exemptions] and Disclosure. A 
foreign private issuer (as defined in Rule 3b-4 under the Act) listed 
on Nasdaq may [obtain exemptions from Nasdaq's corporate governance 
standards if such rules would require the issuer to do anything 
contrary to the laws, rules, regulations or generally accepted business 
practices of its home country. Issuers may request exemptions under 
this provision by submitting a letter from their home country counsel 
briefly describing the company's practice and the applicable laws, 
rules, regulations or generally accepted business practices of the home 
country.] follow the practice in such issuer's home country (as defined 
in General Instruction F of Form 20-F) in lieu of some of the 
provisions of Rule 4350, subject to several important exceptions. 
First, such an issuer shall comply with Rule 4350(b)(1)(B) (Disclosure 
of Going Concern Opinion), Rule 4350(j) (Listing Agreement) and Rule 
4350(m) (Notification of Material Noncompliance). Second, such an 
issuer shall have an audit committee that satisfies Rule 4350(d)(3). 
Third, members of such audit committee shall meet the criteria for 
independence referenced in Rule 4350(d)(2)(A)(ii) (the criteria set 
forth in Rule 10A-3(b)(1), subject to the exemptions provided in Rule 
10A-3(c) under the Act). Finally, a foreign private issuer that elects 
to follow home country practice in lieu of a requirement of Rule 4350 
shall submit to Nasdaq a written statement from an independent counsel 
in such issuer's home country certifying that the issuer's practices 
are not prohibited by the home country's laws. In the case of new 
listings, this certification is required at the time of listing. For 
existing issuers, the certification is required at the time the company 
seeks to adopt its first non-compliant practice. In the interest of 
transparency, the rule requires a foreign private issuer to [disclose 
the receipt of a corporate governance exemption] make appropriate 
disclosures in the issuer's annual filings with the Commission 
(typically Form 20-F or 40-F), and at the time of the issuer's original 
listing in the United States, if that listing is on Nasdaq, in its 
registration statement (typically Form F-1, 20-F, or 40-F). [The 
disclosure should] The issuer shall disclose each requirement of Rule 
4350 that it does not follow and include a brief statement of [what 
alternative measures, if any, the issuer has taken] the home country 
practice the issuer follows in lieu of [the] these corporate governance 
requirement(s) [from which it was exempted. For example, the issuer 
might state that it complies with the relevant standards of its home 
market].
    (2) through (5) No change.
* * * * *

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
    The purpose of the proposed rule change is to permit foreign 
private issuers to follow their home country corporate governance 
practices in lieu of certain practices prescribed by NASD Rule 4350 
without the need to seek an individual exemption from Nasdaq. The 
proposed exception is not intended to exempt issuers from complying 
with those aspects of NASD Rule 4350 that are mandated by the U.S. 
securities laws and regulations. As such, issuers would still be 
required to maintain an audit committee that has the responsibilities 
and the authority, and sets the procedures referenced in NASD Rule 
4350(d)(3).\5\ Members of such an audit committee would have to meet 
the criteria for independence referenced in NASD Rule 4350(d)(2)(A)(ii) 
(i.e., the criteria set forth in Rule 10A-3(b)(1) under the Act, 
subject to the exemptions provided in Rule 10A-3(c) under the Act). The 
proposed exception would

[[Page 9124]]

also not be applicable to the requirement to disclose the receipt of a 
going concern opinion,\6\ to the requirement of a Listing Agreement in 
the form designated by Nasdaq,\7\ and, as of July 31, 2005, to the 
requirement of prompt notification of material non-compliance with the 
requirements of NASD Rule 4350.\8\
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    \5\ The audit committee requirement will not become applicable 
to foreign private issuers and, thus, will not be a condition to the 
proposed exception until July 31, 2005.
    \6\ See NASD Rule 4350(b)(1)(B).
    \7\ See NASD Rule 4350(j).
    \8\ See NASD Rule 4350(m).
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    A foreign private issuer wishing to follow its home country 
practices, rather than the practices set forth in NASD Rule 4350, would 
need to make the appropriate disclosures in its annual reports filed 
with the Commission and, if applicable, in its registration statement. 
Such an issuer would also need to provide Nasdaq with a letter from an 
outside counsel in that issuer's home country certifying that the 
issuer's practices are not prohibited by the home country's laws.
    A foreign private issuer that previously received from Nasdaq an 
exemption pursuant to the existing NASD Rule 4350(a) may continue to 
rely on that exemption. However, if an issuer wishes to be exempted 
from any requirement of NASD Rule 4350 not covered by the previously 
granted exemption, then this issuer must fully comply with the 
procedures of the proposed rule. Of course, an issuer may not rely on a 
previously provided exemption if the requirement to which this 
exemption applies was changed after the exemption was issued.
    The proposed rule change follows closely the related practices of 
the New York Stock Exchange (``NYSE'') and the American Stock Exchange 
(``Amex'') but would provide for additional public disclosure 
concerning issuers' practices.\9\ Both of these exchanges permit a 
foreign private issuer to follow its home country practices in lieu of 
the exchanges' own corporate governance rules (except where that would 
be contrary to the U.S. securities laws) without seeking a formal 
exemption from the exchange. Both exchanges also require disclosures of 
``significant'' non-complying practices and a certification from home 
country counsel that the issuer's practices are not prohibited by the 
home country's laws. Once the proposed rule change is implemented, 
Nasdaq's process with respect to foreign private issuers will become 
substantially similar to those of the NYSE and Amex, except that the 
proposed rule would call for public disclosure of ``each requirement'' 
that the issuer does not follow, while the rules of the NYSE and Amex 
only require disclosure of ``any significant ways in which * * * [the 
issuer's] corporate governance practices differ.'' \10\ In addition, 
the proposed rule would not permit a foreign private issuer to avoid 
the requirement of NASD Rule 4350(b)(1)(B) that it publicly disclose 
the receipt of a going concern opinion. This disclosure is not required 
by the NYSE.
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    \9\ See NYSE Listed Company Manual Sections 103.00, 303A.00 and 
303A.11, and Amex Company Guide Section 110.
    \10\ See NYSE Listed Company Manual Section 303A.11 and Amex 
Company Guide Section 110.
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    The proposed rule change also makes clear that a foreign issuer 
that is not a foreign private issuer must comply with each of the 
applicable requirements of NASD Rule 4350 and is not eligible for any 
exception based on its country's practice.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of section 15A of the Act,\11\ in general and with 
section 15A(b)(6) of the Act,\12\ in particular, in that it is designed 
to promote just and equitable principles of trade, and to remove 
impediments to a free and open market and a national market system. 
Specifically, the proposal will facilitate listings on Nasdaq by 
foreign private issuers, thereby increasing the level of competition 
for such listings among U.S. markets.
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    \11\ 15 U.S.C. 78o-3.
    \12\ 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, as amended.

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

    Written comments on the proposed rule change were neither solicited 
nor received.

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

    The proposed rule change has been designated by Nasdaq as a ``non-
controversial'' rule change pursuant to section 19(b)(3)(A) of the Act 
\13\ and subparagraph (f)(6) of Rule 19b-4 thereunder.\14\
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6).
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    The foregoing rule change: (1) Does not significantly affect the 
protection of investors or the public interest, (2) does not impose any 
significant burden on competition, and (3) by its terms does not become 
operative for 30 days after the date of this filing, or such shorter 
time as the Commission may designate, if consistent with the protection 
of investors and the public interest. Consequently, the proposed rule 
change has become effective pursuant to section 19(b)(3)(A) of the Act 
\15\ and Rule 19b-4(f)(6) thereunder.\16\
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

IV. 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 No. SR-NASD-2005-018 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 No. SR-NASD-2005-018. 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

[[Page 9125]]

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 Room, 450 Fifth Street, 
NW., Washington, DC 20549. Copies of such filing will also 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 No. SR-NASD-2005-018 and 
should be submitted on or before March 17, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E5-752 Filed 2-23-05; 8:45 am]
BILLING CODE 8010-01-P