[Federal Register Volume 71, Number 225 (Wednesday, November 22, 2006)]
[Proposed Rules]
[Pages 67762-67768]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-19740]



[[Page 67761]]

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Part IV





Securities and Exchange Commission





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 17 CFR Part 230



 Covered Securities Pursuant to Section 18 of the Securities Act of 
1933; Proposed Rule

  Federal Register / Vol. 71, No. 225 / Wednesday, November 22, 2006 / 
Proposed Rules  

[[Page 67762]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 230

[Release No. 33-8754; File No. S7-18-06]
RIN 3235-AJ73


Covered Securities Pursuant to Section 18 of the Securities Act 
of 1933

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``SEC'' or 
``Commission'') proposes for comment an amendment to a Rule under 
Section 18 of the Securities Act of 1933 (``Securities Act''), as 
amended, to designate certain securities listed on The NASDAQ Stock 
Market LLC (``Nasdaq'') as covered securities for purposes of Section 
18 of the Securities Act. Covered securities under Section 18 of the 
Securities Act are exempt from state law registration requirements.

DATES: Comments should be received on or before December 22, 2006.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number S7-18-06 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number S7-18-06. This file number 
should be included on the subject line if e-mail is used. To help us 
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/proposed.shtml). Comments 
are also available for public inspection and copying in the 
Commission's Public Reference Room, 100 F Street, NE., Washington, DC 
20549. All comments received will be posted without change; we do not 
edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Heather Seidel, Senior Special 
Counsel, (202) 551-5608, Hong-anh Tran, Special Counsel, (202) 551-5637 
or Michou Nguyen, Special Counsel, (202) 551-5634, Division of Market 
Regulation (``Division''), Commission, 100 F Street, NE., Washington, 
DC 20549-6628.

SUPPLEMENTARY INFORMATION:

I. Introduction

    In 1996, Congress amended Section 18 of the Securities Act to 
exempt from state registration requirements securities listed, or 
authorized for listing, on the New York Stock Exchange LLC (``NYSE''), 
the American Stock Exchange LLC (``Amex''), or the National Market 
System of The NASDAQ Stock Market LLC (``Nasdaq/NGM'') \1\ 
(collectively, the ``Named Markets''), or any national securities 
exchange designated by the Commission to have substantially similar 
listing standards to those markets.\2\ More specifically, Section 18(a) 
of the Securities Act provides that ``no law, rule, regulation, or 
order, or other administrative action of any State * * * requiring, or 
with respect to, registration or qualification of securities * * * 
shall directly or indirectly apply to a security that--(A) is a covered 
security.'' \3\ Covered securities are defined in Section 18(b)(1) of 
the Securities Act to include those securities listed, or authorized 
for listing, on the Named Markets, or securities listed, or authorized 
for listing, on a national securities exchange (or tier or segment 
thereof) that has listing standards that the Commission determines by 
rule are ``substantially similar'' to the Named Markets.\4\
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    \1\ As of July 1, 2006, the National Market System of The NASDAQ 
Stock Market LLC is known as the National Global Market. See 
Securities Exchange Act Release Nos. 53799 (May 12, 2006), 71 FR 
29195 (May 19, 2006) and 54071 (June 29, 2006), 71 FR 38922 (July 
10, 2006).
    \2\ See National Securities Markets Improvement Act of 1996, 
Pub. L. 104-290, 110 Stat. 3416 (October 11, 1996).
    \3\ 15 U.S.C. 77r(a).
    \4\ 15 U.S.C. 77r(b)(1)(A) and (B). In addition, securities of 
the same issuer that are equal in seniority or senior to a security 
listed on a Named Market or national securities exchange designated 
by the Commission as having substantially similar listing standards 
to a Named Market are covered securities for purposes of Section 18 
of the Securities Act. 15 U.S.C. 77r(b)(1)(C).
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    Pursuant to Section 18(b)(1)(B) of the Securities Act, the 
Commission adopted Rule 146.\5\ Rule 146(b) lists those national 
securities exchanges, or segments or tiers thereof, that the Commission 
has determined to have listing standards substantially similar to those 
of the Named Markets and thus securities listed on such exchanges are 
deemed covered securities.\6\ Nasdaq has petitioned the Commission to 
amend Rule 146(b) to determine that its listing standards for 
securities listed on the Nasdaq Capital Market (``NCM'') \7\ are 
substantially similar to those of the Named Markets and, accordingly, 
that securities listed pursuant to such listing standards are covered 
securities for purposes of Section 18(b) of the Securities Act.\8\ If 
the Commission makes this determination, then securities listed on the 
NCM would be exempt from state law registration requirements.\9\
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    \5\ Securities Exchange Act Release No. 39542 (January 13, 
1998), 63 FR 3032 (January 21, 1998).
    \6\ 17 CFR 230.146(b).
    \7\ The Nasdaq Capital Market was previously named the Nasdaq 
SmallCap Market.
    \8\ See letter from Edward S. Knight, Executive Vice President 
and General Counsel, Nasdaq, to Nancy M. Morris, Secretary, 
Commission, dated March 1, 2006 (File No. 4-513).
    \9\ 15 U.S.C. 77r.
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II. Background

    In 1998, the Chicago Board Options Exchange, Incorporated 
(``CBOE''), Pacific Exchange, Inc. (``PCX'') (now known as NYSE Arca, 
Inc.), the Philadelphia Stock Exchange, Inc. (``Phlx''), and the 
Chicago Stock Exchange (``CHX'') petitioned the Commission to adopt a 
rule determining that specified portions of the exchanges' listing 
standards were substantially similar to the listing standards of the 
Named Markets.\10\ In response to the petitions, and after extensive 
review of the petitioners' listing standards, the Commission adopted 
Rule 146(b), determining that the listing standards of the CBOE, Tier 1 
of the PCX, and Tier 1 of the Phlx were substantially similar to those 
of the Named Markets and that securities listed pursuant to those 
standards would be deemed covered securities for purposes of Section 18 
of the Securities Act.\11\ Further, in 2004, the International Stock 
Exchange, Inc. (``ISE'') petitioned the Commission to amend Rule 146(b) 
to determine that its listing standards for securities listed on ISE 
are substantially similar to those of the Named Markets and, 
accordingly,

[[Page 67763]]

that securities listed pursuant to such listing standards are covered 
securities for purposes of Section 18(b) of the Securities Act.\12\ The 
Commission subsequently amended Rule 146(b) to designate options listed 
on ISE as covered securities.\13\
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    \10\ See letter from David P. Semak, Vice President, Regulation, 
PCX, to Arthur Levitt, Jr., Chairman, Commission, dated November 15, 
1996; letter from Alger B. Chapman, Chairman, CBOE, to Jonathan G. 
Katz, Secretary, Commission, dated November 18, 1996; letter from J. 
Craig Long, Esq., Foley & Lardner, Counsel to CHX, to Jonathan G. 
Katz, Secretary, Commission, dated February 4, 1997 (``CHX 
Petition''); and letter from Michele R. Weisbaum, Vice President and 
Associate General Counsel, Phlx, to Jonathan G. Katz, Secretary, 
Commission, dated March 31, 1997.
    \11\ Securities Exchange Act Release No. 39542, supra note 5.
    \12\ See letter from Michael Simon, Senior Vice President and 
General Counsel, ISE, to Jonathan G. Katz, Secretary, Commission, 
dated October 9, 2003.
    \13\ Securities Act Release No. 8442 (July 14, 2004), 69 FR 
43295 (July 20, 2004).
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    Nasdaq has petitioned the Commission to amend Rule 146(b) with a 
determination that its listing standards for securities listed on the 
NCM are substantially similar to those of the Named Markets, and that 
NCM securities are ``covered securities'' under Section 18(b) of the 
Securities Act.

III. Discussion

    Under Section 18(b)(1)(A) of the Securities Act,\14\ the Commission 
has the authority to compare the listing standards of a petitioner with 
those of either the NYSE, Amex, or Nasdaq/NGM. The Commission initially 
has compared Nasdaq's listing standards for all NCM securities with 
only one of the Named Markets. If the listing standards in a particular 
category did not meet the standards of that market, the Commission 
compared the standards to the other two markets.\15\ In addition, the 
Commission has interpreted the ``substantially similar'' standard to 
require listing standards at least as comprehensive as those of the 
Named Markets.\16\ If a petitioner's listing standards are higher than 
the Named Markets, then the Commission may still determine that the 
petitioner's listing standards are substantially similar to the Named 
Markets. Finally, the Commission notes that differences in language or 
approach would not necessarily lead to a determination that the listing 
standards of the petitioner are not substantially similar to those of a 
Named Market.
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    \14\ 15 U.S.C. 77r(b)(1)(A).
    \15\ This approach is consistent with the approach that the 
Commission has previously taken. See Securities Act Release Nos. 
7422 (June 9, 1997), 62 FR 32705 (June 17, 1997) and 7494 (January 
13, 1998), 63 FR 3032 (January 21, 1998).
    \16\ Securities Act Release No. 7422, supra note 15.
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    The Commission has reviewed listing standards for securities traded 
on NCM \17\ and, for the reasons discussed below, preliminarily 
believes that the standards overall are not substantially similar to 
those of a Named Market. However, Nasdaq has filed a proposed rule 
change to amend its quantitative listing standards for NCM 
securities.\18\ In view of Nasdaq's proposed rule change, the 
Commission preliminarily believes that it could make a finding that the 
NCM's listing standards are substantially similar to those of a Named 
Market, and thus amend Rule 146(b) to include securities listed on the 
NCM. The Commission also notes that Nasdaq's qualitative listing 
standards for NCM securities are identical to the qualitative listing 
standards for Nasdaq/NGM securities.\19\
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    \17\ See generally Nasdaq Rules 4310, 4320, and 4350.
    \18\ See Securities Exchange Act Release No. 54378 (August 28, 
2006), 71 FR 52351 (September 5, 2006) (``Nasdaq Proposed Rule 
Change''); see also letter from Edward S. Knight, Executive Vice 
President and General Counsel, Nasdaq, to Heather Seidel, Senior 
Special Counsel, Division of Market Regulation (``Division''), 
Commission, dated August 11, 2006 (``Nasdaq Letter'').
    \19\ Such qualitative listing standards relate to, among other 
things, the number of independent directors required, conflicts of 
interest, composition of the audit committee, executive 
compensation, shareholder meeting requirements, voting rights, 
quorum, code of conduct, proxies, shareholder approval of certain 
corporate actions, and the annual and interim reports requirements. 
See Nasdaq Rule 4350.
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A. Common Stock

    As discussed below, the Commission preliminarily believes that 
some, but not all, of the requirements in Nasdaq's quantitative initial 
listing standards for common stock listing on the NCM are substantially 
similar to those of Amex's common stock listing standards. The 
Commission therefore preliminarily believes that the NCM common stock 
initial listing standards are not currently substantially similar to 
those of Amex's common stock listing standards.
    Specifically the Commission preliminarily believes that the NCM 
listing requirements are substantially similar to Amex Standard 1 
through 3 requirements relating to operating history, bid price, round 
lot holders,\20\ and shares held by the public.\21\ However, under the 
NCM standards, an issuer may qualify for listing by satisfying either a 
shareholder equity requirement (at least $5 million),\22\ a market 
value of listed securities test (at least $50 million),\23\ or an 
income test (at least $750,000 in after tax net income from continuing 
operations in the last fiscal year or two out of the last three fiscal 
years).\24\ Amex's common stock listing Standards 1 and 3 not only 
require the satisfaction of an equity test, but Standard 1 also 
requires the satisfaction of an income test (at least $750,000 in pre-
tax income from continuing operations in the last fiscal year or two of 
the last three fiscal years),\25\ and Standard 3 also requires the 
satisfaction of a market value test (at least $50 million).\26\ Amex 
Standard 2 does not require an income test or a market value test but 
does require an operating history of two years \27\ as compared to the 
NCM, which requires only one year.\28\ An additional difference is that 
Amex Standards 2 and 3 require the aggregate market value of publicly 
held shares to be $15 million, whereas Nasdaq's requirement is $5 
million.\29\ The Commission preliminarily believes that these 
differences preclude the Commission from making a determination that 
the NCM common stock initial listing standards are substantially 
similar to those of the Amex.
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    \20\ The Commission notes that the NCM listing standards require 
at least 300 round lot holders, while Amex's listing standards 
require 400 or 800 (depending upon the number of shares held by the 
public), or 300 or 600 for its alternate listing standards. The 
Commission preliminarily does not believe this difference precludes 
a determination of substantial similarity between the standards.
    \21\ See generally Section 101 of the Amex Company Guide and 
Nasdaq Rule 4310.
    \22\ Nasdaq Rule 4310(c)(2)(A)(i).
    \23\ Nasdaq Rule 4310(c)(2)(A)(ii). The market value of listed 
securities refers to the closing bid price multiplied by the number 
of securities listed on Nasdaq or listed on another self-regulatory 
organization (``SRO''). See Nasdaq Rule 4200.
    \24\ Nasdaq Rule 4310(c)(2)(A)(iii).
    \25\ See Amex Rule 101(a)(1)-(2).
    \26\ See Amex Rule 101(c)(1)-(2).
    \27\ See Amex Rule 101(b)(1).
    \28\ See Nasdaq Rule 4310(c)(3).
    \29\ Specifically, Amex Standard 3, which allows an issuer to 
meet a requirement for the market value of listed securities of $50 
million (rather than an income test), requires an aggregate market 
value of publicly held shares of $15 million (Amex Standard 2, which 
requires a two-year operating history, also requires an aggregate 
market value of publicly held shares of $15 million). The NCM 
standard, which permits an issuer to meet either a market value of 
listed securities test or an income test, in either instance only 
requires an aggregate market value of publicly held shares of $5 
million. See Sections 101(b)(4) and (c)(3) of the Amex Company Guide 
and Nasdaq Rule 4310(c)(7)(A).
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    Nasdaq has filed a proposed rule change under Section 19 of the 
Exchange Act \30\ to modify its NCM initial listing standards for 
common stock. Specifically, Nasdaq's proposal would require an issuer 
to have: (i) Shareholder's equity of $4 million and net income from 
continuing operations of $750,000 in the most recently completed fiscal 
year or in two of the last three most recently completed fiscal years; 
(ii) shareholder's equity of $4 million and a market value of listed 
securities of $50 million; or (iii) shareholder's equity of $5 million 
and a two-year operating history.\31\ Moreover, Nasdaq's proposal also 
would increase the aggregate market value of publicly held shares from 
$5 million to $15

[[Page 67764]]

million in scenario (ii) and (iii) above.\32\ If these rule changes 
were approved prior to Commission action on this rule proposal, the 
Commission preliminarily believes it could find the NCM listing 
standards for common stock to be substantially similar to those of 
Amex.
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    \30\ 15 U.S.C. 78s.
    \31\ See Nasdaq Proposed Rule Change, supra note 18.
    \32\ Id.
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    The Commission preliminarily believes that the continued listing 
requirements for common stock listed on the NCM, while not identical, 
are substantially similar to those of Amex. Amex's delisting criteria 
are triggered by poor financial conditions or operating results of the 
issuer.\33\ Specifically, Amex will consider delisting an equity issue 
if: (i) Stockholders' equity is less than $2 million and such issuer 
has sustained losses from continuing operations and/or net losses in 
two of its three most recent fiscal years; (ii) stockholders' equity is 
less than $4 million and such issuer has sustained losses from 
continuing operations and/or net losses in three of its four most 
recent fiscal years; (iii) stockholders' equity is less than $6 million 
if such issuer has sustained losses from continuing operations and/or 
net losses in its five most recent fiscal years; or (iv) the issuer has 
sustained losses which are so substantial in relation to its overall 
operations or its existing financial resources, or its financial 
condition has become so impaired that it appears questionable, in the 
opinion of the Exchange, as to whether such company will be able to 
continue operations and/or meet its obligations as they mature.\34\
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    \33\ See generally Sections 1001 through 1006 of the Amex 
Company Guide.
    \34\ See Section 1003(a) of the Amex Company Guide. Amex also 
will consider delisting if: (i) an issuer has sold or otherwise 
disposed of its principal operating assets or has ceased to be an 
operating company or has discontinued a substantial portion of its 
operations or business; (ii) if substantial liquidation of the 
issuer has been made; or (iii) if advice has been received, deemed 
by the Exchange to be authoritative, that the security is without 
value, or in the case of a common stock, such stock has been selling 
for a substantial period of time at a low price. See Section 1003(c) 
and (f)(v) of the Amex Company Guide.
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    Although the NCM does not have the same continued listing 
provisions, Nasdaq also looks at the financial condition and operating 
results of the issuer. Specifically, for continued inclusion, Nasdaq 
requires shareholder's equity of at least $2.5 million, market value of 
listed securities of at least $35 million, or net income of $500,000 
from continuing operations in the past fiscal year or two out of three 
past fiscal years.\35\ Further, Nasdaq requires a minimum bid price for 
continued listing of $1 per share.\36\ In addition, for continued 
listing, Nasdaq requires an issuer to have a minimum number of publicly 
held shares of at least 500,000 shares with a market value of at least 
$1 million.\37\
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    \35\ Nasdaq Rule 4310(c)(2)(B)(i)-(iii).
    \36\ Nasdaq Rule 4310(c)(4). Amex will consider delisting if the 
price per share is ``low.'' See Amex Rule 1003(f)(v).
    \37\ Nasdaq Rule 4310(c)(7)(A). Amex will consider delisting the 
common stock of an issuer if the aggregate market value of such 
publicly held shares is less than $1 million for more than 90 
consecutive days, the number of publicly held shares is less than 
200,000 shares, or the number of its public stockholders is less 
than 300. See Section 1003(b) of the Amex Company Guide.
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    The Commission preliminarily believes that the differences in the 
maintenance criteria for common stock listed on Amex and on the NCM are 
not material and that, taken as a whole, the criteria are substantially 
similar.\38\
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    \38\ As noted above, the Commission has interpreted the 
substantially similar standard to require listing standards at least 
as comprehensive as those of the Named Markets, and differences in 
language or approach of the listing standards are not dispositive.
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    The Commission requests comment on whether the NCM's common stock 
listing rules are ``substantially similar'' to Amex's rules.

B. Secondary Classes of Common Stock and Preferred Stocks

    The Commission notes that only Nasdaq has listing standards for the 
trading of a secondary class of common stock. A secondary class of 
common stock is a class of common stock of an issuer that has another 
class of common stock listed on an exchange. The Commission compared 
the secondary classes of common stock listing standards of the NCM with 
the listing standards of the Nasdaq/NGM. The Commission also compared 
the NCM listing standards for preferred stocks with those of Nasdaq's 
NGM.
    With respect to the number of round lot holders,\39\ bid price,\40\ 
and number of publicly held shares \41\ requirements,\42\ the 
Commission preliminarily believes that Nasdaq's initial and continued 
listing requirements for secondary classes of common stock and 
preferred stocks listing on the NCM are substantially similar to the 
listing standards for the Nasdaq/NGM. The Commission preliminarily 
believes, however, that the initial and continued listing requirements 
for market value of publicly held shares for NCM are not substantially 
similar to Nasdaq/NGM standards. In particular, the NCM listing 
standards require that there be at least 200,000 publicly held shares 
having a market value of at least $2 million for initial listing and 
100,000 publicly held shares having a market value of $500,000 for 
continued listing.\43\ The Nasdaq/NGM standards require that there 
shall be at least 200,000 publicly held shares having a market value of 
at least $4 million for initial listing and 100,000 publicly held 
shares having a market value of $1 million for continued listing.\44\
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    \39\ Both Nasdaq NCM and NGM require 100 round lot holders. See 
NASD Rules 4310(c)(6)(B) and 4420(k)(4). Nasdaq/NGM also requires 
100 round lot holders for continued listing. Although the NCM 
requirements do not explicitly require a continuing number of round 
lot holders, Nasdaq has filed a proposed rule change to clarify that 
the 100 round lot holders requirement also will apply as a continued 
listing requirement for the NCM preferred and secondary classes of 
common stock standards. See Nasdaq Proposed Rule Change, supra note 
18.
    \40\ While the NCM bid price requirement for initial listing is 
$4 and the Nasdaq/NGM requirement is $5, the Commission preliminary 
does not believe this difference is material. Both NGM and NCM 
require a $1 bid price for continued listing. See Nasdaq Rules 
4310(c)(4), 4420(k)(3), and 4450(h)(3).
    \41\ Both Nasdaq NCM and NGM require 200,000 publicly held 
shares for initial listing, and 100,000 publicly held shares for 
continued listing. See Nasdaq Rules 4310(c)(7)(B), 4420(k)(1), and 
4450(h)(1).
    \42\ The Commission notes that these requirements apply to 
instances when the common stock or common stock equivalent security 
of the issuer is listed on Nasdaq/NGM, NCM, Global Select Market 
(``GSM'') (the GSM is a segment of the NGM, see Securities Exchange 
Act Release Nos. 53799 and 54071, supra note 1), or another national 
securities exchange. If the common stock or common stock equivalent 
is not listed on one of these markets then the security must meet 
the common stock listing requirements for the relevant market 
(either Nasdaq/NGM or NCM). See generally NASD Rules 4310(c)(6)(B) 
and 4420(k).
    \43\ See Nasdaq Rules 4310(c)(7)(B).
    \44\ See NASD Rules 4420(k)(1)-(2) and 4450(h)(1)-(2).
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    Nasdaq has filed a proposed rule change to increase the 
requirements for its NCM listing standards for both preferred and 
secondary classes of common stock for the market value of publicly held 
shares to $3.5 million for initial listing and $1 million for continued 
listing.\45\ Nasdaq also has proposed to amend its initial and 
continued NCM listing rules for secondary classes of common stock and 
preferred stock to require that the common stock or common stock 
equivalent of the issuer either be listed on Nasdaq or be a covered 
security as defined in Rule 146(b).\46\ Given these proposed revisions 
to the NCM's initial and continued listing standards for secondary 
classes of common stock and preferred stocks, the Commission 
preliminarily believes it could find that

[[Page 67765]]

such standards are substantially similar to those of Nasdaq's NGM.
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    \45\ See Nasdaq Proposed Rule Change, supra note 18.
    \46\ Id.
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    The Commission requests comment on whether the NCM secondary 
classes of common stock and preferred stock rules are ``substantially 
similar'' to Nasdaq/NGM's rules.

C. Convertible Debt

    The Commission has compared the NCM listing standards for 
convertible debt to Amex's listing standards for debt.\47\ The 
Commission preliminarily does not believe that Nasdaq's standards are 
substantially similar to Amex's standards. Although the NCM's initial 
listing standards require a higher level of principal amount 
outstanding (the NCM standards require $10 million versus $5 million 
for Amex), Amex also requires that either (i) the issuer of the debt 
security (or an issuer that controls or is under common control with 
such issuer or that has guaranteed such issuer's debt) have equity 
securities listed on Amex, the NYSE, or Nasdaq/NGM, or (ii) that the 
debt security have a certain level of rating.\48\
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    \47\ See generally Nasdaq Rule 4310(c)(5) and Sections 104 and 
1003 of the Amex Company Guide.
    \48\ See Section 104 of the Amex Company Guide and Nasdaq Rule 
4310(c)(5). Amex also will generally not list a convertible bond or 
debenture unless current last sale information is available in the 
United States, with respect to the underlying security into which 
the bond or debenture is convertible. Further, Amex will not list a 
convertible debt issue containing a provision permitting an issuer 
discretion to reduce the conversion price unless the issuer 
establishes a minimum 10-day period within which such price 
reduction will be in effect. See Section 104 of the Amex Company 
Guide. The Commission preliminarily believes that these provisions 
are not material to its determination. See Securities Act Releases 
No. 7494, supra note 15 (the Commission found PCX listing standards 
to be substantially similar to Amex even with the absence of these 
provisions).
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    Specifically, Amex will not list a debt security unless one of the 
following conditions is met: (i) The issuer of the debt security also 
has equity securities listed on Amex, the NYSE, or Nasdaq/NGM; (ii) an 
issuer of equity securities listed on Amex, the NYSE, or Nasdaq/NGM 
directly or indirectly owns a majority interest in, or is under common 
control with, the issuer of the debt security; (iii) an issuer of 
equity securities listed on Amex, the NYSE, or Nasdaq/NGM has 
guaranteed the debt security; (iv) a nationally recognized securities 
rating organization (an ``NRSRO'') has assigned a current rating to the 
debt security that is no lower than an S&P Corporation ``B'' rating or 
equivalent rating by another NRSRO; or (v) if no NRSRO has assigned a 
rating to the issue, an NRSRO has currently assigned an investment 
grade rating to an immediately senior issue or a rating that is no 
lower than an S&P Corporation ``B'' rating, or an equivalent rating by 
another NRSRO, to a pari passu or junior issue.\49\ This requirement is 
designed to ensure that the issuer (or guarantor) of a debt security 
listed on Amex is in reasonably sound financial condition, while also 
providing Amex with considerable flexibility in determining which debt 
issues qualify for listing on the Exchange.\50\ The Commission 
preliminarily believes that the absence of these provisions would make 
the NCM's initial listing standards for debt securities not 
substantially similar to those of Amex.
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    \49\ See Section 104 of the Amex Company Guide.
    \50\ See Securities Exchange Act Release No. 7422, supra note 
15.
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    Nasdaq has filed a proposed rule change to adopt a debt rating 
provision similar to Amex's provision to make its NCM initial listing 
standards more comparable to Amex's initial listing standards.\51\ In 
light of this proposal, the Commission preliminarily believes it could 
find that the NCM's listing standards for convertible debt are 
substantially similar to those of Amex.
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    \51\ See Nasdaq Proposed Rule Change, supra note 18.
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    The Commission preliminarily believes that the continued listing 
requirements for convertible debt securities listed on the NCM are 
substantially similar to the Amex requirements. The NCM requires that 
the principal amount outstanding be maintained at $5 million.\52\ Amex 
generally will delist a bond if the aggregate market value or the 
principal amount of the bond publicly held is less than $400,000, or if 
the issuer is not able to meet its obligations on the listed debt.\53\ 
Although not identical, the Commission preliminarily believes that both 
standards are designed to ensure the continued liquidity of the debt 
security, and are substantially similar.
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    \52\ See Nasdaq Rule 4310(c)(5).
    \53\ See Section 1003(b)(iv) of the Amex Company Guide. Section 
1003(e) of the Amex Company Guide states that convertible bonds will 
be reviewed when the underlying security is delisted and will be 
delisted when the underlying security is no longer the subject of 
real-time reporting in the United States. The Commission does not 
believe that this is material because although Nasdaq does not have 
an identical rule, it does have the discretion to delist beyond its 
standards.
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    The Commission requests comment on whether the NCM convertible debt 
listing rules are ``substantially similar'' to Amex's listing standards 
for debt securities.

D. Warrants

    The Commission has compared the NCM's standards for warrants to 
Nasdaq's NGM standards, and preliminarily believes that the NCM 
standards are not substantially similar to the Nasdaq/NGM standards. 
The NCM initial listing standards require that 100,000 warrants be 
outstanding for initial listing, whereas Nasdaq/NGM requires that there 
be 450,000 warrants outstanding.\54\ Further, the NCM standards require 
the issuer's underlying security to be traded on Nasdaq/NGM, NCM, GSM 
or any national securities exchange.\55\ Nasdaq therefore allows the 
underlying security to be traded on markets that the Commission has not 
determined to be substantially similar to Amex, the NYSE, or Nasdaq/NGM 
under Rule 146(b).\56\ In addition, the NCM does not have any 
continuing maintenance standards for warrants whereas Nasdaq/NGM 
requires that the underlying security of the issuer must continue to be 
listed on Nasdaq/NGM.\57\
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    \54\ See Nasdaq Rules 4310(c)(9)(A)-(B) and 4420(d).
    \55\ See Nasdaq Rule 4310(c)(9)(A)-(B).
    \56\ In contrast, Nasdaq's NGM standards require the issuer of 
the warrant to meet its common stock ``price and earnings'' listing 
requirements. See Nasdaq Rule 4420(d).
    \57\ See Nasdaq Rule 4450(d).
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    Nasdaq has filed a proposed rule change with the Commission to 
increase the required number of warrants outstanding for initial 
listing on the NCM from 100,000 to 400,000.\58\ Nasdaq's proposal also 
would require for initial listing that the security underlying the 
warrant that is to be listed on the NCM be a covered security as 
defined in Rule 146(b) (if it is listed on a market other than 
Nasdaq).\59\ Further, Nasdaq would require that the security of the 
issuer underlying the warrant continue to be listed on Nasdaq or be a 
covered security as defined in Rule 146(b).\60\ Given these proposed 
revisions to the NCM's warrant listing standards, the Commission 
preliminarily believes it could find the NCM's listing standards for 
warrants to be substantially similar to those of Nasdaq/NGM.
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    \58\ See Nasdaq Proposed Rule Change, supra note 18.
    \59\ Id.
    \60\ Id.
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    The Commission requests comment on whether the NCM's listing rules 
for warrants are ``substantially similar'' to Nasdaq/NGM's listing 
rules.

E. Index Warrants

    For index warrants traded on the NCM, Nasdaq has adopted the same 
standards (both initial and continuing) that it applies to index 
warrants traded

[[Page 67766]]

on the Nasdaq/NGM market.\61\ Therefore, the Commission preliminarily 
believes that the listing standards for index warrants traded on the 
NCM are substantially similar to the standards applicable to index 
warrants traded on the Nasdaq/NGM market.
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    \61\ See generally Nasdaq Rule 4310(c)(9)(C).
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F. Units

    The NCM, Amex, and Nasdaq/NGM all evaluate the initial and 
continued listing of a unit by looking to its components.\62\ If all of 
the components of a unit individually meet the standards for listing, 
then the unit would meet the standards for listing.\63\ The Commission 
preliminarily believes that it would be able to make a finding that the 
NCM listing standards for units are substantially similar to a Named 
Market in light of Nasdaq's proposed revisions to its NCM's listing 
standards for the different categories of securities that could make up 
the components of a unit, as discussed above.\64\
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    \62\ A unit is a type of security consisting of two or more 
different types of securities (e.g., a combination of common stocks 
and warrants). See Securities Exchange Act Release No. 48464 
(September 9, 2003), 68 FR 54250 (September 16, 2003).
    \63\ See generally Section 101(g) of the Amex Company Guide and 
Nasdaq Rules 4310(c)(10) and 4420(h)(1)(a)-(c).
    \64\ See Nasdaq Proposed Rule Change, supra note 18.
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G. Other Changes

    Sections (b)(1) and (b)(2) of Rule 146 use the term ``Nasdaq/NMS'' 
to refer to the National Market System of The NASDAQ Stock Market LLC. 
In addition, Rule 146(b)(1)(i) refers to the Pacific Exchange 
Incorporated, Rule 146(b)(1)(ii) refers to the Philadelphia Stock 
Exchange, Incorporated, and Rule 146(b)(1)(iv) refers to the 
International Securities Exchange, Incorporated. As noted above, on 
July 1, 2006, what was the National Market System of The NASDAQ Stock 
Market LLC became known as the Nasdaq Global Market.\65\ Further, in 
April 2006, the Pacific Exchange, Incorporated was renamed NYSE Arca, 
Inc.,\66\ and in September 2006, the International Securities Exchange, 
Incorporated was renamed the International Securities Exchange, LLC. 
The proposed rule change includes changes to Rule 146(b) to account for 
these name changes. Finally, the proposal includes a change to reflect 
the legal name of the Philadelphia Stock Exchange, Inc.
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    \65\ The NGM includes a new segment known as the Nasdaq Global 
Select Market. See Securities Exchange Act Release Nos. 53799 and 
54071, supra note 1.
    \66\ See Securities Exchange Act Release No. 53615 (April 7, 
2006), 71 FR 19226 (April 13, 2006).
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H. Comments

    The Commission has received three comment letters on Nasdaq's 
petition.\67\ The State Regulation of Securities Committee of the 
American Bar Association Section of Business Law (``ABA Committee'') 
expressed support of the petition, assuming that Nasdaq's 
representation of the data and analysis contained in the petition is 
accurate.\68\ The North American Securities Administrator's Association 
(``NASAA''), stated that it does not oppose the Nasdaq petition but is 
concerned generally about what it perceives to be deficiencies in 
listing standards at several of the Named Markets and encourages the 
Commission to undertake an SRO oversight initiative to set uniform 
principles for these Named Markets.\69\
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    \67\ See File No. 4-513, supra note 8.
    \68\ See letter to Nancy M. Morris, Secretary, Commission, from 
Alan M. Parness, Vice Chair, ABA Committee, dated April 3, 2006.
    \69\ See letter to Nancy M. Morris, Secretary, Commission, from 
Patricia D. Struck, NASAA President and Wisconsin Securities 
Administrator, dated March 29, 2006; and electronic mail to Robert 
L.D. Colby, Acting Director, Division Commission, from Randall 
Schumann, Legal Counsel, Wisconsin DFI-Division of Securities, NASAA 
Corporation Finance Section Member, dated June 1, 2006. In addition, 
the Commission's Advisory Committee on Smaller Public Companies 
recommended on April 23, 2006 that the Commission make NCM stocks 
``covered securities.'' SEC Advisory Committee on Smaller Public 
Companies, Final Report, at 97-100 (2006).
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IV. Solicitation of Comments

    The Commission seeks comment generally on the desirability of 
amending Rule 146(b) to include securities of the NCM. As discussed 
above, based on its review of Nasdaq's listing rules for its NCM, the 
Commission preliminarily believes that the current original and 
continued listing standards for the NCM are not substantially similar 
to those of the Amex, the NYSE, or Nasdaq/NGM. The Commission seeks 
comments on its preliminary analysis. The Commission also seeks 
comments on whether the proposed changes to its NCM standards that 
Nasdaq has filed would make the NCM's initial listing and continued 
listing standards substantially similar to those of a Named Market.
    In addition, if the NCM securities are designated as covered 
securities under Rule 146(b)(1), then the NCM's listing standards would 
be subject to Rule 146(b)(2) under the Securities Act. Rule 146(b)(2) 
conditions the designation of securities as ``covered securities'' 
under Rule 146(b)(1) on the identified exchange's listing standards 
continuing to be substantially similar to those of the Named Markets. 
Thus, under Rule 146(b)(2), the designation of certain securities as 
covered securities would be conditioned on Nasdaq maintaining listing 
standards for NCM securities that were found to be substantially 
similar to those of the Named Markets. Commenters may wish to address 
the application and effect of Rule 146(b)(2) on the proposal.
    The Commission also invites commenters to provide views and data as 
to the costs, benefits, and effects associated with the proposed 
amendments. In addition to the questions posed above, commenters are 
welcome to offer their views on any other matter raised by the proposed 
amendment to Rule 146(b). Finally, the Commission requests comment on 
whether it could use a different methodology to determine whether the 
NCM's listing standards are ``substantially similar'' to the Named 
Markets.

V. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 does not apply because the 
proposed amendment to Rule 146(b) does not impose recordkeeping or 
information collection requirements or other collection of information, 
which require the approval of the Office of Management and Budget under 
44 U.S.C. 3501 et seq.

VI. Cost and Benefits of Proposed Rulemaking

    Congress amended Section 18 of the Securities Act to exempt covered 
securities from state registration requirements. These securities are 
listed on the Named Markets or any other national securities exchange 
determined by the Commission to have substantially similar listing 
standards to the Named Markets.\70\ Consistent with statutory 
authority, the Commission proposes to determine (if the Commission were 
to approve the rule changes that Nasdaq has filed) that the listing 
standards for securities listed on the NCM are substantially similar to 
those of either Amex, the NYSE, or Nasdaq/NGM. Securities listed on the 
NCM therefore would be covered securities subject only to federal 
regulation.
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    \70\ 15 U.S.C. 77r(b)(1)(B).
---------------------------------------------------------------------------

    By exempting securities listed on the NCM from state law 
registration requirements, the Commission expects that the listing 
process for those securities would become easier as one layer of 
regulation is eliminated. Moreover, the Commission also expects

[[Page 67767]]

adoption of the rule would reduce the administrative burden the issuers 
of covered securities face inasmuch as compliance with state blue sky 
law requirements would be preempted.\71\
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    \71\ A 1996 Report relating to Securities Market Reform: State 
Registration of Securities--Costs and Benefits stated that up to 1 
percent of an issue's cost, which is generally covered by the 
offering's underwriter, could be apportioned to the legal/
administrative costs of state level regulation. One benefit of this 
proposal would be to eliminate this type of legal/administrative 
cost with respect to NCM securities.
---------------------------------------------------------------------------

    The Commission also preliminarily believes that the proposed 
amendment to Rule 146(b) should permit Nasdaq to compete with other 
markets whose listed securities are exempt from state law registration 
requirements for new securities products and listings. This result 
would likely enhance competition and, potentially, liquidity, thus 
benefiting market participants and the public. The proposed amendment 
would eliminate state registration of securities listed on the NCM. 
There may be a cost to investors through the loss of benefits of state 
registration and oversight, although the cost is difficult to quantify. 
The Commission believes that Congress contemplated these costs in 
relation to the economic benefits of exempting covered securities from 
state regulation. The Commission, however, is considering the costs and 
benefits of the proposed amendment to Rule 146(b) and requests 
commenters to provide views and supporting information as to the costs 
and benefits associated with this proposal.

VII. Consideration of Promotion of Efficiency, Competition, and Capital 
Formation

    As required under the Securities Act,\72\ the Commission has 
preliminarily considered the proposed rule's impact on efficiency, 
competition, and capital formation. National securities exchanges 
compete for the listing of securities. Thus, the Commission 
preliminarily believes that amending Rule 146(b) to designate 
securities traded on the NCM as covered securities (if the Commission 
were to approve the rule changes that Nasdaq has filed) would offer 
potential benefits for investors because it would facilitate the 
ability of Nasdaq to compete for listings, which should increase 
competition and enhance the overall liquidity, and thus the efficiency 
of the U.S. securities markets. The Commission also preliminarily 
believes that the proposed rule would serve to reduce the cost of 
raising capital because it would streamline the registration process 
for issuers listing on the NCM. In addition, the Commission believes 
that the proposed rule amendment, consistent with Congressional action, 
is designed to promote efficiency by removing a layer of duplicative 
regulation. The Commission also preliminarily believes that the 
proposed amendment to Rule 146(b) should permit Nasdaq to compete with 
other markets whose securities are exempt from state law registration 
requirements for new securities products and listings. Finally, the 
proposed amendment to Rule 146(b) should not impair efficiency, 
competition, and capital formation because it would impose no 
recordkeeping or compliance burdens, but would provide a limited 
purpose exemption under the federal securities laws.
---------------------------------------------------------------------------

    \72\ 15 U.S.C. 77b(b).
---------------------------------------------------------------------------

    Thus, the Commission preliminarily believes that the proposed 
amendment to Rule 146(b) would promote efficiency, competition, and 
capital formation. Commenters should consider the proposed amendment's 
effect on efficiency, competition, and capital formation.

VIII. Regulatory Flexibility Act Certification

    Section 603(a) of the Regulatory Flexibility Act \73\ requires the 
Commission to undertake an initial regulatory flexibility analysis of 
the proposed amendment to Rule 146 on small entities, unless the 
Commission certifies that the proposed amendment, if adopted, would not 
have a significant economic impact on a substantial number of small 
entities.\74\ For purposes of Commission rulemaking in connection the 
Regulatory Flexibility Act, an issuer is a small business if its 
``total assets on the last day of its most recent fiscal year were $5 
million or less.'' \75\ An exchange is a small business if it has been 
exempt from the reporting requirements of Rule 601 \76\ and it is not 
affiliated with any person other than a natural person that is not a 
small business.\77\
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    \73\ 5 U.S.C. 603(a).
    \74\ 5 U.S.C. 605(b).
    \75\ 17 CFR 230.157. See also 17 CFR 240.0-10(a).
    \76\ 17 CFR 242.601 (formerly Rule 11Aa3-1 under the Act).
    \77\ 17 CFR 240.0-10(e).
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    The Commission believes that the proposal to amend Rule 146(b) 
would not affect a substantial number of small entities because to list 
its securities on the NCM, an issuer's aggregate market value of 
publicly held shares must be at least $5 million.\78\ If an entity's 
market value of publicly held shares is at least $5 million, it is 
reasonable to believe that its assets are worth at least $5 million. 
Therefore, an entity seeking to list securities on the NCM generally 
will have assets with a market value of at least equal to $5 million 
and thus would not be considered a small entity. Further, Nasdaq itself 
is not a small entity for purposes of the RFA.\79\
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    \78\ As of June 30, 2006, the Division estimates that there were 
557 listed issuers of securities on the NCM.
    \79\ 17 CFR 240.0-10(e).
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    Accordingly, the Commission hereby certifies, pursuant to Section 
605(b) of the Regulatory Flexibility Act,\80\ that amending Rule 146(b) 
as proposed would not have a significant economic impact on a 
substantial number of small entities. The Commission encourages written 
comments regarding this certification. The Commission solicits comment 
as to whether the proposed amendment to Rule 146(b) could have an 
effect that has not been considered. The Commission requests that 
commenters describe the nature of any impact on small entities and 
provide empirical data to support the extent of such impact.
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    \80\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------

IX. Small Business Regulatory Enforcement Fairness Act of 1996

    For purposes of the Small Business Enforcement Fairness Act of 
1996, a rule is ``major'' if it results or is likely to result in:
    (i) An annual effect on the economy of $100 million or more;
    (ii) a major increase in costs or prices for consumers or 
individual industries; or
    (iii) significant adverse effects on competition, investment, or 
innovation.\81\
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    \81\ Pub. L. 104-121, Title II, 110 Stat. 857 (1996) (codified 
in various sections of 5 U.S.C., 15 U.S.C., and as a note to 5 
U.S.C. 601).
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    The Commission requests comment regarding the potential impact of 
the proposed amendment on the economy on an annual basis. Commenters 
should provide empirical data to support their views to the extent 
possible.

X. Statutory Authority

    The Commission is proposing an amendment to Rule 146 pursuant to 
the Securities Act of 1933,\82\ particularly Sections 18(b)(1)(B) and 
19(a).\83\
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    \82\ 15 U.S.C. 77a et seq.
    \83\ 15 U.S.C. 77r(b)(1)(B) and 77s(a).
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Text of the Proposed Rule

List of Subjects in 17 CFR Part 230

    Securities.

    For the reasons set forth in the preamble, Title 17, Chapter II of 
the Code of Federal Regulations is proposed to be amended as follows:

[[Page 67768]]

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

    1. The general authority citation for Part 230 is revised to read 
as follows:

    Authority: 15 U.S.C. 77b, 77c, 77d, 77f, 77g, 77h, 77j, 77r, 
77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78t, 78w, 
78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-30, and 80a-37, 
unless otherwise noted.
* * * * *
    2. Section 230.146 is amended by revising paragraphs (b)(1) and 
(b)(2) to read as follows:


Sec.  230.146  Rules under Section 18 of the Act.

* * * * *
    (b) * * *
    (1) For purposes of Section 18(b) of the Act (15 U.S.C. 77r), the 
Commission finds that the following national securities exchanges, or 
segments or tiers thereof, have listing standards that are 
substantially similar to those of the New York Stock Exchange 
(``NYSE''), the American Stock Exchange (``Amex''), or the National 
Market System of the Nasdaq Stock Market (``Nasdaq/NGM''), and that 
securities listed on such exchanges shall be deemed covered securities:
    (i) Tier I of the NYSE Arca, Inc.;
    (ii) Tier I of the Philadelphia Stock Exchange, Inc.;
    (iii) The Chicago Board Options Exchange, Incorporated;
    (iv) Options listed on the International Securities Exchange, LLC; 
and
    (v) The Nasdaq National Capital Market.
    (2) The designation of securities in paragraphs (b)(1)(i) through 
(v) of this section as covered securities is conditioned on such 
exchanges' listing standards (or segments or tiers thereof) continuing 
to be substantially similar to those of the NYSE, Amex, or Nasdaq/NGM.

    Dated: November 16, 2006.

    By the Commission.
Nancy M. Morris,
Secretary.
 [FR Doc. E6-19740 Filed 11-21-06; 8:45 am]
BILLING CODE 8011-01-P