[Federal Register Volume 64, Number 92 (Thursday, May 13, 1999)]
[Notices]
[Pages 25942-25945]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-12064]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41367; File No. SR-NASD-98-88]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the National Association of Securities Dealers, Inc.,
Relating to Listing and Continued Listing Determinations
May 4, 1999.
On November 27, 1998, the National Association of Securities
Dealers, Inc. (``NASD'' or ``Association'') filed with the Securities
and Exchange Commission (``SEC'' or ``Commission'') a proposed rule
change pursuant to
[[Page 25943]]
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\
and Rule 19b-4 thereunder concerning the procedures followed by the
Association in listing and delisting an issuer.\2\ The NASD amended the
proposal on December 15, 1998.\3\ Notice of the proposal, as amended,
was published in the Federal Register on January 8, 1999
(``Notice'').\4\ The Commission did not receive any comment letters on
the fling.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Robert E. Aber, Senior Vice President and
General Counsel, Nasdaq, to Katherine A. England, Assistant
Director, Division of Market Regulation, Commission, dated December
15, 1998.
\4\ See Securities Exchange Act Release No. 40874 (December 31,
1998), 64 FR 1258.
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I. Introduction and Background
The NASD is proposing to replace its existing rules setting forth
the procedures by which issuers may be denied listing on, or delisted
from, the Nasdaq Stock Market. The proposed revised code of listings
procedures (``Revised Listings Code'') codifies procedures that are
already used by the Association in practice. In addition, the Revised
Listing Code contains greater detail about the review process and adds
a number of provisions, including those for the maintenance of the
record on review, fees for reviews, and prohibitions on communications
outside of the official proceeding.\5\ This proposal is designed to
address shortfalls in the NASD's listings procedures identified in the
Commission's 21(a) Report and a previous report on the NASD's
governance structure.\6\
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\5\ The Association is also proposing to temporarily move the
existing Rule 4800 Series relating to other grievances concerning
the Association's automated systems to the Rule 9700 Series, and
reference to the delisting procedures in the current Rule 4800
Series will be removed prior to this relocation. The NASD and NASD
Regulation, Inc. plan to file changes to the Rule 9500 Series in the
near future and, upon approval of those changes, the Rule 9700
Series will be deleted and non-listing related grievances and
denials of access involving Nasdaq's automated systems will be
reviewed through Rule 9500 Series procedures.
\6\ See Commission's Report and Appendix to Report Pursuant to
Section 21(a) of the Securities Exchange Act of 1934 Regarding the
NASD and The Nasdaq Stock Market dated August 8, 1996; Securities
Exchange Act Release No. 37538 (August 8, 1996) (SEC Order
Instituting Public Proceedings Pursuant to Section 19(h)(1) of the
Securities Exchange Act of 1934, Making Findings and Imposing
Remedial Sanctions, In the Matter of National Association of
Securities Dealers, Inc., Administrative Proceeding File No. 3-
9056); and Report of the NASD Select Committee on Structure and
Governance to the NASD Board of Governors (1995).
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II. Description of the Proposal
The revised Rule 4800 Series applies only to decisions to deny,
limit, or prohibit the listing of an issuer's securities on the Nasdaq
Stock Market. The substantive criteria for listing on the Nasdaq Stock
Market are contained in other portions of the Rule 4000 Series. Rule
4810 of the Revised Listings Code describes the limited purpose of the
new Rule 4800 Series as well as certain general provisions.
Rule 4810 also provides that an issuer may request an extension of
time to comply with any of the standards contained in the Rule 4000
Series or an exception to those standards. It is solely within the
NASD's discretion whether to grant such an extension. In determining
whether to grant an extension or exception, the NASD reviewing body at
each level of review will consider the original issue cited, but may
also consider any additional issues, regardless of whether they were
considered earlier in the proceeding.\7\ The Revised Listings Code
provides that the NASD will notify the issuer if additional issues are
being considered in determining whether to grant a request for an
exception or exemption, and the issue will be given an opportunity to
respond to such issues.
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\7\ The levels of review are described in the following
paragraphs.
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Rule 4810 particularly notes that ``the issuer may be subject to
additional or more stringent criteria for the initial or continued
inclusion of particular securities based on any event, condition, or
circumstance that exists or occurs that makes initial or continued
inclusion of the securities inadvisable or unwarranted in the opinion
of the Association, even though the securities meet all enumerated
criteria for initial or continued inclusion in the Nasdaq Stock
Market.''\8\
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\8\ See revised Rule 4810, Purpose and General Provisions.
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Revised Rule 4815 through 4860 provide the general procedures that
the Association and an issuer must follow with respect to any
determination by the NASD to deny initial or continued listing to an
issuer, including retention of records for the various Association
adjudicators.\9\ Under revised Rule 4815, Nasdaq staff in the Listing
Qualifications Department or Listing Investigation Department will
notify an issuer in writing of any decision to limit or prohibit the
initial or continued listing of its securities. This notification will
describe the specific grounds for the determination.
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\9\ See revised Rule 4830(b) (the record for a proceeding before
a Listing Qualification Panel is kept by the Nasdaq Hearings
Department); revised Rule 4840(d) (the record for a proceeding
before the Review Council is kept by the Nasdaq Office of General
Counsel); and revised Rule 4850(b) (the record for a proceeding
before the NASD Board is kept by the Nasdaq Office of General
Counsel).
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Revised Rule 4820 provides that within 7 calendar days of receipt
of this notification, the issuer may request a hearing for review of
the determination.\10\ If an issuer requests a review, the staff
determination will generally be stayed pending the outcome of the
review.\11\ If no request for review is made, the determination will
take effect after the time to request review has expired.
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\10\ The fee for such a review remains at its existing level of
$1,400 for a review based on written submission and $2,300 for a
review based on an oral presentation. The NASD is proposing to
relocate the fee provisions from Rule 4530 to revised Rule 4820(c).
\11\ The Association is permitted, however, to suspend a
security's inclusion in Nasdaq if the securities are not in
compliance with the qualification requirements of Rule 4310 or Rule
4320, or those requirements imposed by the NASD under Rule 4330(a).
In that event, Nasdaq will notify the issuer prior to the suspension
or as soon as practicable thereafter. See Rule 4330(b). Furthermore,
Nasdaq may halt trading in a security pending the dissemination of
material news or when Nasdaq requests information from an issuer
relating to material news, qualification matters, or other
information necessary to protect the public interest. See Rule
4120(a)(5).
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Revised Rule 4830 provides that all requests for review will be
considered by an independent panel (``Listing Panel'') composed of at
least two persons who are not employees of the NASD or its
subsidiaries. The Nasdaq Board of Directors will designate potential
panelists. Panelists may include both securities and non-securities
professionals, such as NASD members, issuers, attorneys, or
accountants. The Listing Panel hearing will, to the extent practicable,
be scheduled within 45 days of the date that the request for hearing is
filed. After the hearing, the Listing Panel will issue a written
decision that is effective immediately (unless the decision itself
provides otherwise).
Under revised Rule 4840, an issuer may request review of the
Listing Panel's decision by the Nasdaq Listing and Hearing Review
Council (``Review Council'') within 15 days.\12\ In addition, any
member of the Review Council may decide to review a decision of the
Listing Panel within 45 days of the date of the issuance of that
decision. Review Council review of a matter generally
[[Page 25944]]
does not stay the Listing Panel decision (unless the call for review
specifies otherwise). The NASD is proposing to impose a $1,400 fee for
a Review Council review. This fee is in addition to the current $1,400
fee for the Listing Panel's review of the Nasdaq staff's initial
determination.\13\
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\12\ The Review Council is a compositionally balanced panel of
no fewer than eight and no more than 18 members. Of these members,
at least five must be Non-Industry, and not more than 50 percent may
be engaged in market-making activity or employed by a member whose
revenues from market-making activity exceed ten percent of its total
revenues. See Nasdaq By-Laws Article 5.2(a).
\13\ The new fee is designed to recoup the costs of processing
the request for review, including preparing and copying the record
on review for the Review Council, covering staff resources within
the Nasdaq Office of General Counsel for reviewing the record,
advising the Review Council, preparing the decision, and covering a
proportionate part of the expense of Review Council meetings. The
fee is designed to be revenue neutral, to directly offset the costs
associated with the Review Council's review.
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Under the Revised Listing Code, the Review Council will review
matters based on the written record and will issue a decision to
affirm, modify, or reverse the Listing Panel's decision. Alternatively,
the Review Council can choose to hold additional hearings, or remand
the matter to Nasdaq staff or to the Listing Panel.\14\ This decision,
although subject to a call for review by the NASD Board of Governors
(``NASD Board''), will be effective immediately, unless it specifies to
the contrary.
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\14\ The Review Council may, at its sole discretion, also hold
additional hearings.
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Any member of the NASD Board may choose to review a Review Council
decision for review at its next meeting that is at least 15 calendar
days or more following the date of the Review Council decision. An
issuer may not request that the NASD Board review the Review Council
decision. If the NASD Board does not determine to review a Review
Council decision, the issuer will be notified that the Review Council
decision represents the final action of the NASD. If the NASD Board
does call a Review Council decision for review, the NASD Board will
generally review the matter based on the record before the Review
Council. Ordinarily, the issuer will not be permitted to supplement the
record on review.\15\ The NASD Board may affirm, modify, or reverse the
Review Council decision and may remand the matter to the Review
Council, the Listing Panel, or Nasdaq staff.
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\15\ The NASD Board may, at its sole discretion, request
additional information from the issuer or from Nasdaq staff and may,
at its sole discretion, hold additional hearings.
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Revised Rule 4870 defines what is included in the record on review
at each level of a Rule 4800 proceeding. At each level of review, the
issuer will be provided a list of documents included in the record on
review. In addition, any subsequent public filings made by the issuer
and any subsequent information released to the public by the issuer may
be added to the record on review, as well as any subsequent
correspondence between the Association and the issuer. Furthermore, at
any level of review, the deciding body may take note of the issuer's
current Nasdaq Stock Market bid price and number of market makers at
the time of consideration. The written record, as well as any documents
excluded from the written record, will be maintained until the date
upon which the decision becomes final, including, if applicable, upon
conclusion of any review by the Commission or a federal court.\16\
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\16\ Time is computed within the Revised Listings Code based on
calendar days. In computing any period of time, the day of the act,
event, or default from which the period of time begins is not
included. The last day of the period is included, unless it is a
Saturday, Sunday, federal holiday, or NASD holiday. An NASD holiday
is any day on which the Nasdaq Stock Market or the executive offices
of the NASD are closed for the entire day.
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The Revised Listings Code prohibits any communication relevant to
the merits of a proceeding amongst anyone participating in or advising
in the consideration of a listing or delisting matter (including
members of the Listing Panel, Review Council, or NASD Board and NASD
employees), unless the issuer and the appropriate Nasdaq staff have
been provided notice and an opportunity to participate in the
communication.\17\ This proposed limitation is designed to prevent
information outside of the record from being considered in rendering a
decision in a matter. The NASD indicates that they currently expect
Nasdaq staff to waive participation in such communications. The Revised
Listings Code also specifies that if an issuer submits a proposal to
resolve matters at issue in a Rule 4800 Series proceeding,
communications about that submission will be excluded from the
prohibitions discussed above.\18\
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\17\ See revised Rule 4890, Prohibited Communications.
\18\ The NASD is also proposing to make conforming changes to
Rules 4330 and 4480, and Rule 4530 will be removed because the
substance of that Rule has been relocated to Rule 4820(c).
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III. Discussion
The Commission finds that the proposal is consistent with the Act
and in particular with those provisions applicable to a national
securities association. Specifically, the Commission believes that the
proposal is consistent with the requirements of Section 15A(b)(6) of
the Act \19\ because it is designed to promote just and equitable
principles of trade and, in general, to protect investors and the
public interest. The Commission believes that the amendments, by
codifying, expanding, and clarifying existing procedures, strike a
reasonable balance between the Association's obligation to protect
investors and their confidence in the market, with its parallel
obligation to perfect the mechanism of a free and open market. The
amendments provide fair procedures for issuers, while giving Nasdaq the
ability to deny, limit, or delist an issuer that has failed to meet the
substantive standards outlined in the Rule 4000 Series.
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\19\ 15 U.S.C. 78o-3(b)(6).
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For the most part, the Revised Listings Code codifies present
Association procedures. The general system of review remains basically
the same. In the past, many of these procedures were not codified, and
instead were explained through correspondence during the course of a
listing or delisting proceeding. As a result, it was often unclear how
certain of the practices or procedures were applied in particular
cases. The Revised Listings Code clearly sets forth the procedures
applicable to all issuers.
One of the most important clarifications addresses an issuer's
ability to request an extension of time to comply with any of the
standards set forth in the Rule 4000 Series or an exception to those
standards at any time during the pendency of a Rule 4800 Series
proceeding. While extensions and exceptions have always been granted,
their availability was not readily apparent. The Commission believes it
is essential for issuers to understand that they may request an
extension of, or exception to, the NASD's codified procedures. Although
the decision to grant such extensions and exceptions is within the
discretion of the Association, the Commission notes that the NASD must
exercise that discretion in a manner consistent with the Act generally
and, in particular, with Section 15A(b)(6).\20\
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\20\ Id. No Association rule may unreasonably discriminate
against one group of issuers versus another.
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The impact of decisions at each level of review is also clarified
in the Revised Listings Code. Review of a Listing Panel determination
by the Review Council, and review of a Review Council decision by the
NASD Board does not stay the previous determination. The ability to
issue immediately a decision will allow the Association to act swiftly
to delist a non-compliant issuer that is still trading on the Nasdaq
Stock Market, or to permit an issuer that was wrongly delisted by the
Nasdaq staff to return to the Nasdaq Stock Market more quickly.
Another important clarification is that each adjudicator, from the
Nasdaq staff
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through the NASD Board, has the discretion to supplement the record.
Thus, at each level of a proceeding under the Rule 4800 Series, the
Listing Panel, Review Council, or the NASD Board, as part of its
respective review, may:
1. Request additional information from the issuer;
2. Consider the issuer's bid price, market makers or any
information that the issuer releases to the public, including any
additional quantitative deficiencies reflected in the released
information; and
3. Consider any failure to meet any quantitative standard or
qualitative consideration set forth in the Rule 4000 Series,
including failures previously not considered in the proceeding.
The issuer will be afforded notice of such consideration and given
an opportunity to respond to actions taken by the adjudicator. The
Commission believes that the ability to supplement the record with the
most up-to-date information regarding the issuer will help to ensure
that the reviewing body's decision is informed and appropriate under
the circumstances.
There are also several new features in the Revised Listings Code.
One of the most important restricts communication between Association
adjudicators and parties to a listing determination.\21\ For example,
the revised rules restrict communication between adjudicators and
either the Nasdaq staff or the issuer, unless both are given the
opportunity to participate. In addition, any prohibited communication
must be entered in the record of the proceeding. The Commission
believes that these safeguards will help to ensure greater fairness and
openness in Association listings proceedings.
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\21\ See revised Rule 4890, Prohibited Communications.
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The Revised Listings Code also adds a comprehensive explanation of
the content of the official record of a listing proceeding,\22\ as well
as how the record is maintained through various levels of review.\23\
This provision is another important improvement that should help to
ensure that issuers are made aware of those factors that are considered
in a listing or delisting decision, which in turn should assist them in
challenging a decision that is adverse to them.
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\22\ See revised Rule 4870, Record on Review.
\23\ See revised Rule 4830(b).
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Finally, the Revised Listings Code imposes fees for Association
review.\24\ The Commission believes that these fees are consistent with
Section 15A(b)(5) of the Act, which permits the allocation of fees on
issuers using any facility or system that the Association operates or
controls. Specifically, the Commission believes that the proposal
provides for the equitable allocation of reasonable fees among issuers
using the resources of the Association. The Commission also believes
that these fees are reasonable under the circumstances in that they are
designed to recoup the costs of processing requests for review and
holding the subsequent hearings.
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\24\ See revised Rules 4820(c) and 4840(b).
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The renumbering of the existing Rule 4800 Series to the Rule 9700
Series, as revised, will be effective immediately upon approval of this
revised rule change.\25\ The revised Rule 4800 Series will be made
effective immediately upon approval for matters where the issuer has
not yet received a Staff Determination, as defined in Rule 4815 of the
Revised Listings Code. For issuers that have received notification from
the staff that they will be delisted or denied initial inclusion prior
to the date of approval, or that otherwise have matters pending before
the Listing Panel or the Review Council prior to the date of approval
of these rule changes, the existing Rule 4800 Series will continue to
apply for 180 days. The Commission believes that this staggered
schedule is appropriate because it will allow the Association to make
an orderly transition from the existing rules to the Revised Listings
Code.
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\25\ See supra note 5, discussing relocation of the current Rule
4800 Series, Grievances Concerning The Automated Systems, to the
Rule 9700 Series.
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IV. Conclusion
The Commission believes that the proposed rule change is consistent
with Act, and, particularly, with Section 15A.\26\ in approving the
proposal, the Commission has considered its impact on efficiency,
competition, and capital formation.\27\
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\26\ 15 U.S.C. Sec. 78o-3.
\27\ 15 U.S.C. Sec. 78c(f).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\28\ that the proposed rule change (SR-NASD-98-88) is approved.
\28\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\29\
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\29\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-12064 Filed 5-12-99; 8:45 am]
BILLING CODE 8010-01-M