[Federal Register Volume 70, Number 176 (Tuesday, September 13, 2005)]
[Notices]
[Pages 54096-54098]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-4980]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52385; File No. SR-NASD-2005-082]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change and Amendment 
No. 1 Thereto To Clarify the Listing Standards Applicable to Companies 
in Bankruptcy Proceedings

September 7, 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 June 22, 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. On August 23, 
2005, Nasdaq filed Amendment No. 1 to the proposed rule change.\3\ 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\ In Amendment No. 1, Nasdaq made a non-substantive correction 
to the text of the proposed rule and a correction to the stated 
purpose of the proposed rule change.
---------------------------------------------------------------------------

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

    Nasdaq proposes to clarify the listing standards applicable to 
companies in bankruptcy proceedings. Nasdaq will implement the proposed 
rule immediately upon approval.
    The text of the proposed rule change is set forth below. Proposed 
new language is italicized.\4\
---------------------------------------------------------------------------

    \4\ Changes to NASD Rule 4340 are marked to the rule text, which 
the Commission recently approved in Securities Exchange Act Release 
No. 52342 (August 26, 2005), 70 FR 52456 (September 2, 2005) (SR-
NASD-2004-125). Changes to NASD Rule 4350 are marked to the current 
version of the rule text. No other pending rule filings would affect 
the text of these rules. Telephone conversation of September 7, 
2005, between Arnold Golub, Associate Vice President, Nasdaq and 
David Michehl, Attorney, Division of Market Regulation, Commission.
---------------------------------------------------------------------------

4340. Application for Re-inclusion by Listed Issuers

    (a) Reverse Mergers. An issuer must apply for initial inclusion 
following a transaction whereby the issuer combines with a non-Nasdaq 
entity, resulting in a change of control of the

[[Page 54097]]

issuer and potentially allowing the non-Nasdaq entity to obtain a 
Nasdaq Listing (for purposes of this rule, such a transaction is 
referred to as a ``Reverse Merger''). In determining whether a Reverse 
Merger has occurred, Nasdaq shall consider all relevant factors 
including, but not limited to, changes in the management, board of 
directors, voting power, ownership, and financial structure of the 
issuer. Nasdaq shall also consider the nature of the businesses and the 
relative size of the Nasdaq issuer and non-Nasdaq entity.
    (b) Bankruptcy. Nasdaq may use its discretionary authority under 
Rule 4300 to deny listing to an issuer that has filed for protection 
under any provision of the federal bankruptcy laws or comparable 
foreign laws, even though the issuer's securities otherwise meet all 
enumerated criteria for continued inclusion in Nasdaq. In the event 
that Nasdaq determines to continue the listing of such an issuer during 
a bankruptcy reorganization, the issuer shall nevertheless be required 
to satisfy all requirements for initial inclusion, including the 
payment of initial listing fees, upon emerging from bankruptcy 
proceedings.

4350. Qualitative Listing Requirements for Nasdaq National Market and 
Nasdaq SmallCap Market Issuers Except for Limited Partnerships

    (a)--(h) No change.
    (i) Shareholder Approval
    (1)--(6) No change.
    (7) Shareholder approval shall not be required for any share 
issuance by a company if such issuance is part of a court-approved 
reorganization under the federal bankruptcy laws or comparable foreign 
laws.
* * * * *

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
    When a Nasdaq-listed issuer files for protection under the 
bankruptcy laws, Nasdaq staff generally notifies the company that its 
securities are subject to delisting.\5\ The company is afforded an 
opportunity to request review of that decision before a Nasdaq Listing 
Qualifications Hearing Panel (``Panel''), which stays its delisting. On 
occasion, Panels have allowed companies to retain their listing through 
the bankruptcy proceeding, provided they demonstrate: their ability to 
maintain compliance with the continued listing standards throughout the 
proceeding; a likelihood that the current equity holders will maintain 
a significant position in the post-bankruptcy company; and, a 
likelihood to emerge from the bankruptcy proceedings in the reasonably 
near term, such as may be the case in a ``pre-packaged'' bankruptcy 
plan.\6\ Nonetheless, upon emerging from bankruptcy, these companies 
are often substantially changed, including new board members, 
management, financial structure, and shareholders. As such, Nasdaq 
believes that the reorganization could potentially lead to an entity 
that is effectively a new issuer. These concerns are the same ones 
presented when considering whether a transaction is a reverse merger 
and, in those cases, the company is required to reapply and meet the 
initial inclusion standards.\7\ Nasdaq therefore believes that a 
reorganized company should be required to apply for listing and meet 
all initial inclusion criteria upon discharge from bankruptcy 
proceedings.
---------------------------------------------------------------------------

    \5\ Nasdaq's delisting notice generally is based on one or more 
of the following concerns: (i) Public interest concerns raised by 
the bankruptcy filing; (ii) concerns regarding the residual equity 
interest of the existing listed securities holders; or (iii) 
concerns about the company's ability to sustain compliance with all 
requirements for continued listing.
    \6\ In that regard, the Commission recently approved rules that 
would limit a Panel's discretion to grant exceptions to the listing 
standards to 90 days. See Securities Exchange Act Release No. 51268 
(February 28, 2005), 70 FR 10716 (March 4, 2005) (SR-NASD-2004-125).
    \7\ See NASD Rule 4330(f), which was recently renumbered in SR-
NASD-2004-125 as NASD Rule 4340.
---------------------------------------------------------------------------

    Nasdaq also proposes to clarify that any securities issued by a 
Nasdaq-listed issuer pursuant to a court-approved plan of 
reorganization are exempt from Nasdaq's shareholder approval rules. In 
such cases, the bankruptcy court has jurisdiction over the protection 
of shareholders, and it would be inconsistent with the overarching 
federal bankruptcy policy to give shareholders an ability to contradict 
the court's approval of a plan of reorganization that involves the 
issuance of shares. This approach would be consistent with that taken 
in Section 1145 of Chapter 11 of the Bankruptcy Code,\8\ which exempts 
securities issued in bankruptcy reorganizations from Section 5 of the 
Securities Act of 1933.\9\
---------------------------------------------------------------------------

    \8\ 11 U.S.C. 1145.
    \9\ 15 U.S.C. 77e.
---------------------------------------------------------------------------

2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A of the Act,\10\ in general, and with 
Section 15A(b)(6) of the Act,\11\ in particular, in that it is designed 
to prevent fraudulent and manipulative acts and practices, promote just 
and equitable principles of trade, remove impediments to a free and 
open market and a national market system, and, in general, protect 
investors and the public interest. Nasdaq believes that the proposed 
rule change is consistent with these requirements in that it is 
designed to remove ambiguity surrounding the standards applicable to 
companies involved in bankruptcy proceedings and requires such 
companies to meet the heightened initial inclusion standards upon 
emerging from bankruptcy, thereby protecting investors and the public 
interest.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78o-3.
    \11\ 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, as amended.

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:

[[Page 54098]]

    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-2005-082 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-2005-082. 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 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-2005-082 and should be submitted on or before 
October 4, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
---------------------------------------------------------------------------

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

Jonathan G. Katz,
Secretary.
[FR Doc. E5-4980 Filed 9-12-05; 8:45 am]
BILLING CODE 8010-01-P