[Federal Register Volume 70, Number 163 (Wednesday, August 24, 2005)]
[Notices]
[Pages 49701-49703]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-4627]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52291; File No. SR-NASD-2005-011]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change and Amendment 
Nos. 1, 2, and 3 Thereto To Limit the Eligibility for Quotation on the 
OTCBB of the Securities of an Issuer That Is Repeatedly Delinquent In 
Its Periodic Reporting Obligations

August 18, 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 28, 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 
submitted Amendment No. 1 to this filing on May 10, 2005.\3\ Nasdaq 
submitted Amendment No. 2 to this filing on June 24, 2005.\4\ Nasdaq 
submitted Amendment No. 3 to this filing on August 15, 2005.\5\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1, which replaced the original filing in its 
entirety, clarified the proposed rule text in response to comments 
received from the Commission staff, clarified how Nasdaq will notify 
issuers about the proposed rule, and stated that the proposed rule 
would be implemented for those filings for periods ending on or 
after June 1, 2005.
    \4\ Amendment No. 2, which replaced the original filing and 
Amendment No. 1 in their entirety, further clarified the proposed 
rule text in response to comments received from the Commission 
staff, and set forth in the proposed rule text that filings for 
reporting periods ending before June 1, 2005 will not be considered 
under the proposed rule change.
    \5\ Amendment No. 3, which supplemented the filing as modified 
by Amendment No. 2, amended the proposed rule text to provide that 
filings for reporting periods ending before October 1, 2005 will not 
be considered under the proposed rule change.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    Nasdaq proposes to limit the eligibility for quotation on the Over-
the-Counter Bulletin Board (``OTCBB'') of the securities of an issuer 
that is repeatedly late in filing required periodic reports. Nasdaq 
proposes to implement the proposed rule in connection with filings for 
reporting periods ending on or after October 1, 2005.\6\
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    \6\ The Commission notes that the NASD has submitted a proposed 
rule change (SR-NASD-2005-089), which was published for public 
comment in the Federal Register on July 29, 2005, that would amend 
the NASD's Plan of Allocation and Delegation of Functions by the 
NASD to Subsidiaries (``Delegation Plan'') and amend several NASD 
rules with respect to the OTCBB. Currently, the Delegation Plan 
allocates responsibility for activities related to or in support of 
the trading in over-the-counter (``OTC'') equity securities, 
including the OTCBB, to Nasdaq. Under the NASD's proposal, the NASD 
would assume direct authority for OTC equity securities, rather than 
delegate it to Nasdaq. Nasdaq would, however, continue to provide 
certain operational systems and support to the OTCBB pursuant to 
contract. See Securities Exchange Act No. 52119 (July 25, 2005), 70 
FR 43918 (July 29, 2005) (public notice of File No. SR-NASD-2005-
089).
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    The text of the proposed rule change, as amended, is set forth 
below. Proposed new language is in italics, deletions are in 
[brackets].
* * * * *

6530. OTCBB-Eligible Securities

    A member shall be permitted to quote the following categories of 
securities in the Service:
    (a) any domestic equity security that satisfies the requirements of 
subparagraph (1) and either subparagraph (2) or (3) or (4) below:
    (1)-(3) No change.
    (4) the issuer of the security is a bank or savings association (or 
a holding company for such an entity) that is not required to file 
reports with the Commission pursuant to Section 13 or 15(d) of the Act 
and, subject to a sixty calendar day grace period, the issuer of the 
security is current with all required filings with its appropriate 
Federal banking agency or State bank supervisor (as defined in 12 
U.S.C. 1813).
    (b)-(d) No change.
    (e) [Paragraphs (a)(2) and (3) and (4) above will not apply with 
respect to any domestic equity security quoted in the Service on the 
effective date of this rule change until six months after that date.] 
Notwithstanding the foregoing paragraphs, a member shall not be 
permitted to quote a security if:
    (1) while quoted on the OTCBB, the issuer of the security has 
failed to file a complete required annual or quarterly report by the 
due date for such report (including, if applicable, any extensions 
permitted by SEC Rule 12b-25) three times in the prior two-year period; 
or
    (2) the security has been removed from the OTCBB due to the 
issuer's failure to satisfy paragraph (a)(2), (3) or (4), above, two 
times in the prior two-year period.
    Following the removal of an issuer's securities pursuant to this 
paragraph (e), such securities shall not be eligible for quotation 
until the issuer has timely filed in a complete form all required 
annual and quarterly reports due in a one-year period. For purposes of 
this paragraph, a report filed within any applicable extensions 
permitted by SEC Rule 12b-25 will be considered timely filed. 
Furthermore, filings for reporting periods ending before October 1, 
2005 will not be considered for purposes of this paragraph (e).
* * * * *

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
    In January of 1999, the Commission approved amendments to NASD 
Rules 6530 and 6540 requiring all issuers of securities quoted on the 
OTCBB to be current in their filings with the Commission or other 
appropriate

[[Page 49702]]

regulator (the ``Eligibility Rule'').\7\ When a security becomes 
ineligible for quoting on the OTCBB due to the Eligibility Rule, either 
because a filing is not made or because a filing is incomplete,\8\ 
Nasdaq appends an additional character ``E'' designator to the 
security's symbol.\9\ This identifier notifies investors and other 
market participants that the issuer is not current in its reporting 
obligations. If the issuer does not comply within the applicable grace 
period provided by the Eligibility Rule (typically 30 days),\10\ Nasdaq 
removes the issuer's securities from quotation on the OTCBB. 
Approximately 80% of issuers achieve compliance within the grace 
period, while 20% are removed.
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    \7\ See Securities Exchange Act Release No. 40878 (January 4, 
1999), 64 FR 1255 (January 8, 1999) (SR-NASD-98-51). These 
amendments were fully implemented for all securities quoted on the 
OTCBB as of June 2000.
    \8\ In order for a filing to be complete, it must, for example, 
contain all required certifications, attestations, and financial 
statements, including an auditor's review pursuant to SAS-100 (for 
quarterly reports) or an unqualified auditor's opinion (for annual 
reports). See, e.g., Rule 13a-14 under the Act, 17 CFR 240.13a-14, 
and Rules 10-01(d) and 2-02(c) of Regulation S-X, 17 CFR 210.10-
01(d) and 2-02(c). In addition, the auditor must be registered with 
the Public Company Accounting Oversight Board. See Section 102(a) of 
the Sarbanes-Oxley Act of 2002, 15 U.S.C. 7212(a).
    \9\ Nasdaq also appends an ``E'' to a security's symbol when it 
fails to receive notice that an issuer, which files with a regulator 
other than the Commission, has timely filed. In the case of those 
issuers, the Nasdaq generally receives notice of a regulatory filing 
from the applicable market maker or the issuer itself, and will 
investigate any instance where it has not received such notice. See 
Telephone conversation between Tim Fox, Attorney, Commission, and 
Arnold Golub, Associate Vice President, Nasdaq on May 20, 2005.
    \10\ The Eligibility Rule provides a 60-day grace period to 
banks, savings association and insurance companies that do not file 
with the Commission, but are required to file with other regulators. 
See NASD Rule 6530(a)(3) and (4).
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    Nasdaq reports that it has identified a high level of non-
compliance with the Eligibility Rule. Specifically, over the two-year 
period ended August 31, 2004, Nasdaq identified over 3,000 instances of 
delinquent or otherwise incomplete filings by 1,806 OTCBB issuers, of 
which 1,067 were still quoted as of August 31, 2004. Of the 1,806 
issuers, 1,035 were late in filing one time, 548 issuers were 
delinquent twice and 223 were delinquent three or more times. Given 
this high rate of recidivism, Nasdaq proposes to make certain 
securities ineligible for quotation on the OTCBB for a period of one 
year.
    First, Nasdaq proposes to make the securities of those OTCBB 
issuers that are delinquent in a required filing three times in a two-
year period ineligible for quotation on the OTCBB for a period of one 
year.\11\ Accordingly, the securities of a company would be removed 
from the OTCBB the third time that the company does not file by the due 
date (including, if applicable, any extensions permitted by Rule 12b-25 
under the Act) in a two-year period, without the benefit of any grace 
period for this third delinquency.\12\ In applying the look-back 
associated with this provision, Nasdaq would consider reports 
characterized by due dates (including, if applicable, any extensions 
permitted by Rule 12b-25 under the Act) that fell within the prior two-
year period.
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    \11\ A filing would not be considered delinquent if made within 
any applicable extensions permitted pursuant to Rule 12b-25 under 
the Act. Nasdaq also appends an ``E'' to a security's symbol when it 
does not receive notice that an issuer that files with a regulator 
other than the Commission has timely filed. Nasdaq will not consider 
such occurrences to be a delinquent filing for purposes of the 
proposed rule if the issuer did, in fact, timely file with the 
appropriate regulator. Nonetheless, these issuers can help alleviate 
confusion by providing Nasdaq with a copy of the filing made with 
the appropriate regulator on or before its due date.
    \12\ Prior to such removal, Nasdaq intends to provide issuers 
with 7 calendar days to request review of the determination by a 
hearings panel. See File No. SR-NASD-2005-067, which proposes to 
clarify the availability of a process to review eligibility 
determinations under NASD Rule 6530. This filing, which has not yet 
been published by the Commission for public comment, is available on 
Nasdaq's Web site at http://www.nasdaq.com.
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    Second, Nasdaq also proposes to make the securities of those OTCBB 
issuers whose securities are removed from the OTCBB for failure to file 
two times in a two-year period ineligible for quotation on the OTCBB 
for a period of one year.\13\ The heightened test for this category 
reflects the greater length of the filing delinquencies, i.e., these 
issuers were unable to regain compliance, even within the applicable 
``grace'' period. In applying the look-back associated with this 
provision, Nasdaq would consider the date the security is removed, 
without regard to when the delinquent reports were actually due.
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    \13\ An issuer that is not removed because it files a late 
report after requesting a hearing pursuant to the NASD Rule 9700 
Series but before a decision has been issued in the matter would not 
be considered to have failed to file pursuant to proposed NASD Rule 
6530(e)(2), but it would still be considered to have filed late for 
purposes of proposed NASD Rule 6530(e)(1).
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    Under the proposed rule change, as amended, only filings for which 
the grace period ends while the issuer is quoted on the OTCBB would be 
considered.\14\ Following its removal for violating one of the proposed 
requirements, a security would not be eligible for re-inclusion unless 
the issuer has timely filed in a complete form all required annual and 
quarterly reports for a period of one year. Thus, the securities of an 
issuer could not be re-included for a minimum of one year and the 
securities of, for example, most domestic issuers would not be eligible 
for re-inclusion until the issuer has timely filed at least one Form 
10-K and three Forms 10-Q. Under the proposed rule change, as amended, 
while a late filing during the period when an issuer is ineligible 
would reset the ineligibility period, once an issuer that is removed 
for violating one of the proposed requirements is re-included, Nasdaq 
would not consider late filings due prior to the date of re-inclusion 
under the proposed rule.\15\
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    \14\ Thus, for example, an OTCBB-quoted issuer that has no prior 
late filings fails to file its Form 10-K for the period ended 
December 31, 2005, prior to the end of the applicable grace period. 
The issuer is removed from the OTCBB under existing NASD Rule 
6530(a)(2), and thereafter also files its Form 10-Q for the period 
ended March 31, 2006, after the due date. The issuer is subsequently 
re-included on the OTCBB. Only the late filing for the period ended 
December 31, 2005, would count for purposes of the proposed rule 
change because the issuer was not quoted on the OTCBB when the grace 
period for the March 31, 2006 filing expired. See Telephone 
conversation between Tim Fox, Attorney, Division of Market 
Regulation, Commission, and Arnold Golub, Associate Vice President, 
Nasdaq, on August 17, 2005.
    \15\ See Telephone conversation between Tim Fox, Attorney, 
Division of Market Regulation, Commission, and Arnold Golub, 
Associate Vice President, Nasdaq, on August 17, 2005.
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    Nasdaq proposes to implement the proposed rule in connection with 
filings for periods ending on or after October 1, 2005.\16\ Filings for 
periods ending before October 1, 2005 would not be considered in 
determining the number of times a company has made late filings. Upon 
implementation, a company would be provided notification whenever 
Nasdaq determines that it is late in a periodic filing. Such notice 
would explain the effect of such a late filing under the proposed rule. 
Nasdaq would also provide information about the proposed rule on the 
issuer section of the OTCBB Web site, at http://www.otcbb.com.
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    \16\ See Amendment No. 3.
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    Finally, Nasdaq proposes to clarify its current position that the 
60-day grace period applicable to banks and savings associations also 
applies to holding companies for such entities. Nasdaq believes that 
this clarification is appropriate because, like banks and savings 
associations, these holding companies must also file publicly available 
periodic reports with the appropriate state or federal regulator.
2. Statutory Basis
    Nasdaq believes that the proposed rule change, as amended, is 
consistent with the provisions of Section 15A of the Act,\17\ in 
general, and with Section

[[Page 49703]]

15A(b)(6) of the Act,\18\ 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. Nasdaq represents that the proposed 
rule change, as amended, is designed to increase the quality and 
timeliness of disclosure available to investors by OTCBB issuers and to 
prevent the securities of issuers that repeatedly fail to timely comply 
with their obligations under the securities laws from being quoted on 
the OTCBB.
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    \17\ 15 U.S.C. 78o-3.
    \18\ 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, as amended, 
will result in 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

    Written comments were neither solicited nor received by Nasdaq.

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, as amended, or
    (B) institute proceedings to determine whether the proposed rule 
change, as amended, 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-2005-011 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.

All submissions should refer to File Number SR-NASD-2005-011. 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 Room. Copies of such 
filing also will be available for inspection and copying at the 
principal office of the Nasdaq. 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-2005-011 and should be submitted on or before 
September 14, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-4627 Filed 8-23-05; 8:45 am]
BILLING CODE 8010-01-P