[Federal Register Volume 71, Number 249 (Thursday, December 28, 2006)]
[Notices]
[Pages 78242-78245]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-22197]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54952; File No. SR-NASD-2006-039]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Granting Approval to Proposed Rule Change and 
Amendment Nos. 1 and 2 Thereto To Amend NASD Rules To Modify and Expand 
NASD's Authority To Initiate Trading and Quotation Halts in OTC Equity 
Securities

December 18, 2006.

I. Introduction

    On March 22, 2006, the National Association of Securities Dealers, 
Inc. (``NASD'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to: (1) Amend NASD rules to modify and expand 
NASD's authority to direct its members to halt trading and quotation in 
certain over-the-counter (``OTC'') equity securities (``OTC Equity 
Securities''); \3\ and (2) adopt factors that NASD may consider in 
determining, in its discretion, whether to impose a trading and 
quotation halt in OTC Equity Securities. On May 23, 2006, NASD filed 
with the Commission Amendment No. 1 to the proposed rule change.\4\ The 
proposed rule change, as amended, was published for comment in the 
Federal Register on June 7, 2006.\5\ The Commission received one 
comment letter in response to the proposal.\6\ On November 8, 2006, 
NASD filed Amendment No. 2 to the proposed rule change.\7\ The text of 
Amendment No. 2 to the proposed rule change is available on NASD's Web 
site at http://www.nasd.com, at NASD's Office of the Secretary, and at 
the Commission's Public Reference Room. This order approves the 
proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See NASD Rule 6610(d).
    \4\ Amendment No. 1 replaced and superseded the original rule 
filing in its entirety.
    \5\ See Securities Exchange Act Release No. 53920 (June 1, 
2006), 71 FR 33026 (``Notice'').
    \6\ See Letter from R. Cromwell Coulson, Chief Executive Office, 
Pink Sheets LLC (``Pink Sheets''), to Nancy M. Morris, Secretary, 
Commission, dated July 10, 2006.
    \7\ In Amendment No. 2, which supplemented the proposed rule 
change as filed, NASD made typographical, non-substantive changes to 
the rule text contained in the proposed rule change. Two of the 
technical changes that are the subject of Amendment No. 2 were 
incorporated into the rule text that was published in the Notice. 
See Notice, supra note 5, at note 5 and accompanying text (citing to 
a conversation between Kosha Dalal, Associate General Counsel, NASD, 
and Tim Fox, Special Counsel, Division of Market Regulation, 
Commission, on June 1, 2006). In addition, in Amendment No. 2, NASD 
responded to the comments raised in the Pink Sheets Letter. In light 
of the purely technical nature of Amendment No. 2, the Commission is 
not publishing Amendment No. 2 for public comment.
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II. Description of the Proposal

    NASD proposes to expand the scope of its authority with respect to 
trading and quotation halts in OTC Equity Securities. Currently, NASD 
Rule 6545 provides NASD with limited trading and quotation halt 
authority solely for securities quoted on the OTC Bulletin Board 
(``OTCBB''). Specifically, under NASD Rule 6545, NASD can direct NASD 
members to halt trading and quotations in OTCBB securities only where: 
(1) The OTCBB security (or security underlying an OTCBB American 
Depository Receipt (``ADR'')) is listed on or registered with a foreign 
securities exchange or market and the foreign securities exchange or 
market or regulatory authority halts trading in the security; (2) the 
OTCBB security (or the security underlying the OTCBB ADR) is a 
derivative or component of a security listed on or registered with The 
NASDAQ Stock Market LLC or a national securities exchange or foreign 
securities exchange or market and that exchange or market halts trading 
in the underlying security; or (3) the issuer of the OTCBB security (or 
security underlying the OTCBB ADR) fails to comply with the 
requirements of Rule 10b-17 under the Act.\8\ NASD Rule 6545 provides 
NASD with authority to halt trading and quotations of OTCBB securities 
in the foregoing

[[Page 78243]]

circumstances for up to five business days.
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    \8\ 17 CFR 240.10b-17. Rule 10b-17 generally requires the issuer 
of a class of publicly-traded securities to provide NASD with notice 
no later than 10 days prior to the record date of a dividend or 
distribution.
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    NASD proposes to expand the scope of its authority to direct NASD 
members to halt trading and quotations to cover all OTC Equity 
Securities,\9\ which includes ADRs that trade in the OTC market as well 
as securities quoted in quotation mediums other than the OTCBB (e.g., 
the Pink Sheets).\10\ Further, NASD proposes to modify and expand the 
scope of its trading and quotation halt authority beyond halts related 
to non-compliance with Rule 10b-17 under the Act,\11\ while limiting 
such authority only to those extraordinary events that have a material 
effect on the market for the OTC Equity Security or that have the 
potential to cause major disruption to the marketplace and/or cause 
significant uncertainty in the settlement and clearance process. In 
addition, NASD proposes to increase from five business days to ten 
business days the maximum length a trading and quotation halt can be 
imposed under NASD Rule 6660. Finally, NASD proposes to adopt IM-6660-1 
that sets forth certain factors that it will consider in determining, 
in its discretion, whether to direct NASD members to halt quoting and 
trading in an OTC Equity Security.\12\ According to NASD, NASD staff 
would weigh the relevant information and make a determination whether 
halting trading in the security is appropriate and may consult with 
NASD's Uniform Practice Code (``UPC'') Committee (or any successor 
thereto) as it deems necessary or appropriate.\13\ In its proposal to 
expand its existing trading and quotation halt authority to all OTC 
Equity Securities, NASD stated its belief that its trading and 
quotation halt authority should apply uniformly to all OTC Equity 
Securities, and affirmed its belief that eliminating this disparity 
will further investor protections in this area of the securities market 
and enhance the quality of the OTC market.
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    \9\ See NASD Rule 6610(d) (defining OTC Equity Security). The 
term ``OTC Equity Security'' also includes certain exchange-listed 
securities that do not otherwise qualify for real-time trade 
reporting because they are not ``eligible securities'' as defined in 
NASD Rule 6410(d). The term ``OTC Equity Security'' does not include 
``restricted securities,'' as defined by Rule 144(a)(3) under the 
Securities Act of 1933, nor any securities designated in the PORTAL 
Market under the NASD Rule 5300 Series.
    \10\ Because the current NASD Rule 6500 Series relates solely to 
OTCBB securities, NASD is proposing to renumber NASD Rule 6545 as 
NASD Rule 6660, which would become part of the NASD rules relating 
to OTC Equity Securities.
    \11\ 17 CFR 240.10b-17.
    \12\ The proposed factors in IM-6660-1 that NASD may consider in 
determining whether to impose a trading and quotation halt under 
NASD Rule 6660(a)(3) include, but are not limited to: (1) the 
material nature of the event; (2) the material facts surrounding the 
event are undisputed and not in conflict; (3) the event has caused 
widespread confusion in the trading of the security; (4) there has 
been a material negative effect on the market for the subject 
security; (5) the potential exists for a major disruption to the 
marketplace; (6) there is significant uncertainty in the settlement 
and clearance process for the security; and/or (7) such other 
factors as NASD deems relevant in making its determination.
    \13\ The UPC Committee is a standing committee of NASD, 
currently consisting of six professionals in the securities 
industry. The UPC Committee has the authority to advise NASD on 
issues of interest and concern to the securities industry, including 
interpretations with respect to the UPC. According to NASD, NASD 
staff may present matters relating to possible trading and quotation 
halts to the UPC Committee from time to time. However, the role of 
the UPC Committee in this regard is advisory only. NASD stated that 
NASD staff would retain full power and authority to make all 
determinations under proposed NASD Rule 6660 and IM-6660-1.
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    NASD noted that, under the proposal, it would exercise significant 
discretion in determining whether a particular event affecting a 
security warranted a trading and quotation halt, and it would impose a 
halt only when it determines that halting trading and quotations in the 
security is the appropriate mechanism to protect investors and ensure a 
fair and orderly marketplace. According to NASD, its expanded trading 
and quotation halt authority would not be used to correct informational 
imbalances resulting from corporate news about an issuer because NASD 
does not have a listing or other agreement with the issuer and thus 
cannot compel the issuer to disclose material information.
    NASD intends to announce the effective date of the proposed rule 
change in a Notice to Members to be published no later than 60 days 
following Commission approval of the proposal. The effective date will 
be 30 days following publication of the Notice to Members announcing 
Commission approval of the proposal.

III. Summary of Comments and NASD's Response

    The Pink Sheets generally supported NASD's proposed rule change, 
but recommended several modifications. First, the Pink Sheets objected 
(except in the case of foreign regulatory halts) to NASD's proposal to 
impose a trading and quotation halt for more than four business days 
\14\ because of the loss of ``piggyback'' eligibility under Rule 15c2-
11 under the Act.\15\ According to the Pink Sheets, if a NASD member 
cannot rely on the piggyback provision, the member would have to comply 
with the provisions of Rule 15c2-11, including submitting a new NASD 
Form 211 to NASD, before initiating or resuming quotations in the 
security. The Pink Sheets also suggested that, because NASD's proposed 
rule change does not provide a forum to facilitate the exercise of due 
process, NASD trading and quotation halts should be limited to four 
business days. In addition, the Pink Sheets noted that trading and 
quotation halts are an effective anti-fraud weapon and should be used 
accordingly. Finally, the Pink Sheets indicated that its proposed four 
business day limit on NASD trading and quotation halts should not apply 
in the case of foreign regulatory halts.
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    \14\ The Commission notes that under existing NASD Rule 6545, 
NASD can direct NASD members to halt trading and quotations in OTCBB 
securities for up to five business days.
    \15\ 17 CFR 240.15c2-11. Under the ``piggyback'' provision of 
Rule 15c2-11, broker-dealers can publish quotations for securities 
subject to the Rule as long as the security has been quoted on each 
of at least twelve days within the previous thirty calendar days 
with no more than four successive business days without a quotation.
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    NASD, in Amendment No. 2, responded to the Pink Sheets' 
comments.\16\ NASD reaffirmed its view that its proposed rule change is 
appropriate and furthers investor protection. In response to the Pink 
Sheets' concern about the potential loss of piggyback eligibility under 
Rule 15c2-11, NASD noted that it is critical to require market makers 
to review current information regarding the issuer, as set forth in 
Rule 15c2-11 under the Act. NASD indicated that such a ``restart'' of 
the Rule 15c2-11 process is appropriate and consistent with the 
operation of Rule 15c2-11 following a Commission-imposed trading 
suspension under Section 12(k) of the Act.\17\ NASD also responded to 
the Pink Sheets' assertion that its proposed trading and quotation halt 
authority should be used more than just sparingly by explaining that 
its proposal clearly delineates the situations under which it would 
exercise its authority under the proposed rule. NASD noted that it 
intends to exercise the proposed trading and quotation halt authority 
in very limited circumstances to protect the market and investors, and 
does not believe this authority should be used liberally whenever there 
is a ``problem'' with a security.
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    \16\ See Amendment No. 2, supra note 7.
    \17\ 15 U.S.C. 78l(k).
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    In addressing the Pink Sheets'' concern that NASD trading and 
quotation halts in OTC Equity Securities would not be subject to due 
process, NASD stated that the proposed authority is consistent with its 
statutory obligations as a self-regulatory organization, including, 
among others, its responsibility under Section

[[Page 78244]]

15A(b)(11) of the Act \18\ to ``ensure fair and informative quotations, 
to prevent fictitious or misleading quotations, and to promote orderly 
procedures for collecting, distributing, and publishing quotations.'' 
Further, NASD noted that not all determinations made by NASD staff are 
explicitly subject to a hearing process, and that decisions like 
trading and quotation halts require certainty and finality so that the 
marketplace can operate fairly and efficiently. NASD noted that a 
hearing process, even if adopted as part of its proposed rule, would 
not stay the trading and quotation halt or the Rule 15c2-11 process.
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    \18\ 15 U.S.C. 78o-3(b)(11).
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    Finally, NASD explained that the term ``foreign regulatory halt'' 
in proposed NASD Rule 6660(a)(1) would include the Canadian provincial 
exchanges or markets. NASD noted, however, that, as proposed, it would 
not impose its own trading and quotation halt if a foreign regulatory 
halt covering a given security was imposed for material news, a 
regulatory filing deficiency, or operational reasons.

IV. Discussion and Commission Findings

    The Commission has reviewed carefully the proposed rule change, the 
comment letter, and NASD's response to the comment letter, and finds 
that the proposed rule change, as amended, is consistent with the Act 
and the rules and regulations thereunder applicable to a national 
securities association, including the provisions of Section 15A(b)(6) 
of the Act,\19\ which requires, among other things, that NASD rules be 
designed to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing transactions in securities, and, in 
general, to protect investors and the public interest, and Section 
15A(b)(11) of the Act,\20\ which requires, among other things, that 
NASD rules relating to quotations be designed to produce fair and 
informative quotations, to prevent fictitious or misleading quotations, 
and to promote orderly procedures for collecting, distributing, and 
publishing quotations.\21\
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    \19\ 15 U.S.C. 78o-3(b)(6).
    \20\ 15 U.S.C. 78o-3(b)(11).
    \21\ In approving this proposed rule change, as amended, the 
Commission notes that it has considered the proposed rule's impact 
on efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    The Commission believes that NASD's proposal to permit trading and 
quotation halts in OTC Equity Securities can benefit the marketplace 
and investors when an extraordinary event occurs that has had a 
material effect on the market for the OTC Equity Security or has caused 
or has the potential to cause major disruption to the marketplace or 
significant uncertainty in the settlement and clearance process. NASD 
Rule 6660 is designed to provide the marketplace with the opportunity 
to widely digest and disseminate the information that precipitated the 
market condition and provide NASD with the opportunity to consider 
whether further regulatory action is warranted in a particular 
circumstance.\22\ The Commission believes that NASD's proposed trading 
and quotation halt rule for OTC Equity Securities, when appropriately 
applied under the circumstances specified in the proposed rule, is 
designed to foster the integrity of quotations for these securities and 
to promote the protection of investors and the public interest.
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    \22\ The Commission notes that quotations in an OTC Equity 
Security may not automatically resume when a trading and quotation 
halt expires. In particular, if a trading and quotation halt was in 
effect for more than four consecutive business days, the 
``piggyback'' exception in Rule 15c2-11(f)(3) under the Act would 
not be available and, in that case, broker-dealers would be required 
to comply with the requirements of Rule 15c2-11 and NASD Rule 6740 
before initiating or resuming quotations for the subject security.
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    In particular, the Commission believes that NASD's proposal to 
expand its trading and quotation halt authority to situations involving 
extraordinary events with respect to OTC Equity Securities should 
enable NASD to impose trading and quotation halts in OTC Equity 
Securities under a broader set of circumstances than it may impose 
today for OTCBB securities. The Commission believes that the proposal 
is intended to strike a reasonable balance between NASD's interest in 
imposing trading and quotation halts for OTC Equity Securities under 
circumstances warranting a halt, while establishing a clear standard 
that limits the imposition of trading and quotation halts for these 
securities to exigent circumstances.
    In the Commission's view, the proposed factors set forth in 
proposed IM-6660-1, to be considered by NASD when determining whether a 
trading and quotation halt would be the appropriate mechanism to 
protect investors and ensure a fair and orderly marketplace, would help 
provide transparency to NASD's trading and quotation halt process. The 
Commission believes that NASD's proposed factors are tailored to assist 
NASD's determination of whether an extraordinary event has occurred 
that warrants the imposition of a trading and quotation halt. The 
Commission further believes that NASD's ability to consult with the UPC 
Committee (or any successor thereto), in an advisory capacity only, as 
it deems necessary, is an appropriate mechanism for NASD staff to 
benefit from the insight of market professionals, while NASD retains 
ultimate authority to determine whether to impose a trading and 
quotation halt.
    The Commission believes that it is appropriate for NASD to expand 
its authority to halt trading and quotation to all OTC Equity 
Securities. This proposal would enable NASD to impose trading and 
quotation halts in OTC Equity Securities that are quoted in trading 
venues other than, or in addition to, the OTCBB, and would thereby 
assist NASD in carrying out its self-regulatory responsibilities for 
the over-the-counter marketplace.
    The Commission further believes that extending from five to ten the 
maximum number of business days for which NASD may impose a trading and 
quotation halt is reasonably designed to protect investors and the 
public interest and to foster the integrity of quotations for OTC 
Equity Securities. This change would provide NASD with the ability to 
impose a trading and quotation halt of up to ten business days in the 
event that NASD believes that, under the circumstances, a halt of this 
length is necessary to protect investors and ensure a fair and orderly 
marketplace.
    Finally, the Commission notes that the proposal permits NASD to 
halt trading and quoting of an OTC Equity Security when NASD determines 
that an extraordinary event has occurred that, under NASD Rule 6660, 
justifies the imposition of such a halt. In such case, imposition of a 
trading and quotation halt would provide a measure of certainty and 
finality to the marketplace and investors. The Commission notes that 
NASD's administration of its proposed rule is subject to continuing 
Commission oversight, and that NASD, as a registered national 
securities association, remains bound by its obligations as a self-
regulatory organization under the Act and all relevant rules and 
regulations thereunder.
    For the reasons described above, the Commission believes that 
NASD's proposed rule change promotes the protection of investors and 
the public interest by expanding NASD's authority to direct NASD 
members to halt quotation and trading in an OTC Equity Security under 
appropriate circumstances.

[[Page 78245]]

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\23\ that the proposed rule change (SR-NASD-2006-039), as amended, 
be, and it hereby is, approved.
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    \23\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E6-22197 Filed 12-27-06; 8:45 am]
BILLING CODE 8011-01-P