[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\4\ Amendment No. 1 replaced and superseded the original rule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