[Federal Register Volume 64, Number 5 (Friday, January 8, 1999)]
[Notices]
[Pages 1255-1258]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-414]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40878; File No. SR-NASD-98-51]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Order Granting Approval of Proposed Rule Change and
Amendment No. 1 To Be Proposed Rule Change by the National Association
of Securities Dealers, Inc. Relating to Microcap Initiatives-Amendments
to NASD Rules 6530 and 6540
January 4, 1999.
I. Introduction
On October 7, 1998, the National Association of Securities Dealers,
Inc. (``NASD''), through its wholly-owned subsidiary, the Nasdaq Stock
Market, Inc. (``Nasdaq'') submitted to the Securities and Exchange
Commission (``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Exchange Act'' or ``Act'') \1\
and Rule 19b-4 thereunder,\2\ proposed amendments to NASD Rules
[[Page 1256]]
6530 and 6540 to limit quotations on the OTC Bulletin Board
(``OTCBB'') to the securities of issuers that are current in their
reports filed with the SEC or other regulatory authority, and to
prohibit a member from quoting a security on the OTCBB unless the
issuer has made current filings, respectively.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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The proposed rule change, including Amendment No. 1, appeared in
the Federal Register on November 4, 1998.\3\ The Commission received
three comments concerning the proposed rule change.\4\ This order
approves the proposed rule change, as amended.
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\3\ Securities Exchange Act Rel. No. 40606 (October 27, 1998),
63 FR 59610.
\4\ Electronic comment letters from Edward Zorek, Tai Jim, and
R. Jeffrey Bacon were received by the Commission at rule-
[email protected] on November 11, 1998, November 28, 1998, and
November 29, 1998, respectively. The substance of the comments
received is discussed in Section III. Summary of Comments.
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II. Description of Proposal
The NASD has actively studied the OTC market in an effort to
address abuses in the trading and sales of thinly traded, thinly
capitalized (microcap) securities. These securities are not listed on
Nasdaq or any exchange and trade on the OTCBB, in the ``pink sheets''
published by the National Quotation Bureau, Inc. (``Pink Sheets''), and
in other quotation media where there are no listing requirements. With
respect to its examation of the OTCBB in particular, the NASD noted the
lack of reliable and current financial information about the issuers,
and the perception by the public that the OTCBB is similar to a highly
regulated market, such as the registered exchanges or Nasdaq.\5\
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\5\ In addition, the NASD has filed a proposed rule change
through its subsidiary, NASD Regulation, to require a member to
review current financial statements and other business information
about the issuer of a security that is not listed on Nasdaq or a
national securities exchange before that member could recommend a
transaction to a customer in the security and to provide certain
disclosure information on the trade confirmation for all customer
transactions (solicited and unsolicited) in such securities. See SR-
NASD-98-50.
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The OTCBB provides a real-time quotation medium that NASD member
firms can use to enter, update, and retrieve quotation information
(including unpriced indications of interest) for equity securities
traded over-the-counter that are neither listed on Nasdaq nor on a
primary national securities exchange. Eligible securites include
national, regional, and foreign equity issues, warrants, units, Direct
Participation Programs (``DPPs'') \6\ and American Depositary Receipts
(``ADRs'') \7\ not listed on any other U.S. national securities market
or exchange. Unlike Nasdaq or registered exchanges where individual
companies apply for listing on the market--and must meet and maintain
strick listing standards--there are no listing standards for the OTCBB,
and there currently is no requirement that issuers of securities on the
OTCBB make current, publicly-available reports with the SEC or other
regulator. In fact, over half of the companies that are currently
quoted on the OTCBB are not subject to any public reporting
requirements.
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\6\ DPP's are securities offerings that permit investors to
directly participate in the cash flow and tax consequences of the
underlying investments. DPPs provide for the ``flow through'' of tax
results. Thus, gains and losses are taxed to the investor not the
issuer of the security.
\7\ ADRs are receipts for shares of foreign corporations that
are held by U.S. banks and bought and sold in the U.S. by investors,
without utilizing overseas markets.
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The proposed rule change was developed in an effort to balance the
benefits that the transparency of the OTCBB provides with the public
need for information about the issuers being quoted. The NASD is
concerned that where there is no public information available regarding
a security, the broad-based automated display of quotations in that
security creates an unjustied perception of reliability. While the NASD
realizes that the new rule may result in the lack of real-time
quotations for those securities that become ineligible for the OTCBB,
it believes that this loss is outweighted by the benefit to investors
who would, under the proposed rule, have access to information about
the companies in which they may invest. In addition, transactions in
securities ineligible for the OTCBB would still be subject to real-time
last sale trade reporting. These reports are publicly disseminated
through market data vendors on a real-time basis.
Amendment to Rule 6530
This proposed amendment to Rule 6530 would limit quotations on the
OTCBB to the securities of issuers that make current filings pursuant
to Sections 13 \8\ and 15(d) of the Act,\9\ securities of depository
institutions that are not required to make filings under the Act, but
file publicly-available reports with the appropriate regulatory
agencies, registered closed-end investment companies, and insurance
companies that are exempt from registration under Section 12(g)(2)(G)
of the Act.\10\
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\8\ 15 U.S.C. 78m.
\9\ 15 U.S.C. 78o-(d).
\10\ 15 U.S.C. 78l(g)(2)(G).
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To remain eligible for quotation on the OTCBB, an issuer must
remain current in its filings with the SEC or applicable regulatory
authority. A member would be required to inform the NASD of the
issuer's reporting schedule. Based upon that schedule, the NASD will
affix a modifier on the security's symbol if the NASD has not received
information that the report was timely filed.\11\ The addition of the
modifier to the symbol, as well as any changes to the symbol necessary
to accommodate the modifier, will be publicly reported on the OTCBB
Daily List, which is available to market makers and investors through
the OTCBB web site at http://www.otcbb.com. Once an issuer is
delinquent in filing a required report (e.g., Form 10-K, Form 10-Q,
Form 20-F, Insurance Company Annual Statement, or call report), a
security of the issuer may continue to be quoted on the OTCBB for a 30
or 60 calendar day grace period from the due date of the report,
depending on the type of issuer. After the grace period, quotations in
the security of the delinquent issuer would not be permitted on the
OTCBB.
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\11\ It is contemplated that the modifier will be affixed one to
two days after the report is due.
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Filings for most OTCBB issuers are available through the SEC's
Electronic Data Gathering, Analysis, and Retrieval (``EDGAR'')
system.\12\ Foreign issuers are generally permitted to file in paper
format and copies of these filings are available from the Commission.
Exchange Act filings of banks and thrifts are available upon filing
from the financial institution's primary bank regulatory agency. The
grace period for these issuers is 30 days. In the case of banks and
thrifts that are not required to make Exchange Act filings, members can
obtain call report information from the National Information Center of
Banking Information website (http://www.ffiec.gov/nic) or the Federal
Deposit Insurance Corporation's website (http://www.fdic.gov). Call
reports are filed 30 days after the end of each calendar quarter and
are available to the public within 15 days of filing. Insurance
companies file annual statements with the National Association of
Insurance Commissioners (``NAIC'') by March 1 of each year. This
information is released to the public by NAIC by April 1. Because of
the delay in the availability of call reports and insurance company
annual statements, the proposed rule permits a 60 calendar day grace
period for the quotation of securities of these companies after the
[[Page 1257]]
deadline for the issuer to submit a report to the appropriate
regulator.
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\12\ EDGAR is the SEC's system for the receipt, acceptance, and
review of documents submitted in electronic format.
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Amendment to Rule 6540
This proposed amendment to Rule 6540 would prohibit member firms
from quoting an issuer's security if the issuer has not made current
reports with the SEC or the appropriate regulatory authority. Members
must also provide such reports to the NASD, although the reports may be
provided by any market maker in the security. The NASD is exploring
ways to reduce the burden of this requirement for members, particularly
with respect to issuers who are EDGAR filers. As discussed above, the
NASD will affix a modifier to the security's symbol if the NASD has not
received information that the report was timely filed. This indication
will provide members with notice that the NASD has not received
information that the issuer's report was timely filed. Once the NASD
provides this notice, the member will have the opportunity to acquire
the necessary report and provide it to the NASD before the end of the
grace period.
Phase-In
The new requirements will be immediately effective upon approval of
the rule for securities not previously quoted on the OTCBB. Securities
quoted on the OTCBB on the date the rule becomes effective will be
afforded at least six months to comply with the new requirements.
Specifically, and in order to accommodate the resource demands that may
be placed upon the SEC when certain issuers elect to file current
public reports, the new requirements will be applied in a month-by-
month staggered manner for a period from six to eighteen months from
the date the rule is approved. The NASD will apply the new rule to
approximately the same number of issuers for each month during that
period in order to evenly distribute the SEC's anticipated work load.
The delayed effectiveness of the rule should also enable market makers,
investors, and issuers to take appropriate action. It should be noted
that for issuers who file a Form 10 or Form 10SB with the SEC to
register under Section 12(g) of the Act,\13\ all SEC comments, if any,
must be cleared with the SEC before securities can be quoted on the
OTCBB.
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\13\ 15 U.S.C. 78l(g).
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III. Summary of Comments
The Commission received three comments on the proposed
amendments.\14\ All three commenters supported the proposal; noting
that the proposed amendments should help to reduce fraud in OTCBB
traded securities.
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\14\ See supra note 4.
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IV. Discussion
The Commission believes that the proposal is consistent with
Section 15A of the Act \15\ as it will protect investors and the public
interest by requiring issuers listed on the OTCBB to file reports
containing current financial information with the Commission or
appropriate regulatory agency. Specifically, the Commission believes
the proposal is consistent with the requirements of Section 15A(b)(6)
and (11) of the Act.\16\ Section 15A(b)(6) requires, among other
things, that the association's rules be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, to remove impediments to and perfect the mechanism
of a free and open market and a national market system, and, in
general, to protect investors and the public interest.\17\ Section
15A(b)(11) requires that the rules of the association 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.\18\
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\15\ 15 U.S.C. 78o-3.
\16\ 15 U.S.C. 78o-3(b)(6) and (11).
\17\ 15 U.S.C. 78o-3(b)(6).
\18\ 15 U.S.C. 78o-3(b)(11).
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Under proposed Rule 6530, market makers will not be permitted to
quote OTCBB traded securities unless the issuer has made current
filings with the appropriate regulatory agency. The filing requirement
ensures that companies trading on the OTCBB market will have current,
public information that investors can access, from the appropriate
regulatory agency, when considering whether to invest in an OTCBB
traded security. Proposed Rule 6530 should provide investors in OTCBB
securities with more information on which to base investment decisions.
The Commission also believes that limiting quotations on the OTCBB to
the securities of issuers that report to the SEC or applicable
regulatory authority may help to reduce fraud and manipulation. As a
result of the reporting requirement, financial data on issuers will be
available and issuers that provide false or misleading information in
their required filings may be subject to liability for making those
statements.\19\ The Commission finds that proposed Rule 6530 is
consistent with the Act because it will protect investors and the
public interest.\20\
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\19\ See, e.g., SEC v. Savoy Industries, Inc., 587 F.2d 1149
(D.C. Cir. 1978), cert denied, 440 U.S. 913 (1979); Exchange Act
Rule 10b-5, 17 CFR 240.10b-5.
\20\ 15 U.S.C. 78o-3(b)(6).
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Proposed Rule 6530 provides that domestic securities that were
previously trading on the OTCBB will not be subject to the proposal
until six months after the approval date. Neither foreign issuers nor
issuers of securities not currently trading on the OTCBB will be able
to take advantage of the phase-in provision; these issuers will be
obligated to immediately comply with Rule 6530, as amended. The
Commission believes that the phase-in period is reasonable and
consistent with the Act. The Commission believes that the phase-in
period for issuers of domestic securities that were previously trading
on the OTCBB will provide these issuers with ample notice of the rule
change and adequate time to comply with the new rules' requirements.
Regarding issuers of domestic securities not currently quoted on the
OTCBB and foreign securities, the Commission believes it is consistent
with the Act and in the public interest that they be required to comply
with the amendments to Rule 6530 effective immediately. The Commission
finds that the phase-in period for issuers previously quoted on the
OTCBB and immediate effectiveness of the amendments to Rule 6530 with
respect to other issuers is reasonable, and consistent with Section
15A(b)(6) of the Act.\21\
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\21\ 15 U.S.C. 78o-3(b)(6).
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Proposed amendments to Rule 6540 will permit NASD members to quote
only the securities of issuers that satisfy the requirements of
proposed Rule 6530. As proposed, Rule 6540 will also necessitate that
NASD members provide the NASD copies of reports filed with the
Commission or other applicable regulatory authority. These reports can
be provided by any market maker in the security to the NASD. Once a
market maker has properly filed all necessary reports with the NASD,
all market makers in the security may quote the security, as long as
the reports remain current. The Commission believes that the rule
should ensure that market makers have current financial information
available to them regarding issuers quoted on the OTCBB and enable NASD
market makers to reflect this information in their quote. The
Commission finds that proposed Rule 6540 is consistent with Section
[[Page 1258]]
15A(b)(11) of the Act \22\ in that it is designed to produce fair and
informative quotations, to prevent fictitious or misleading quotations
and to promote orderly procedures for collecting, distributing, and
publishing quotations.
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\22\ 15 U.S.C. 78o-3(b)(11).
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\23\ that the proposed rule change (SR-NASD-98-51) is approved, as
amended.
\23\ 15 U.S.C. 78s(b)(2).
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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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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-414 Filed 1-7-99; 8:45 am]
BILLING CODE 8010-01-M