Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Approving Proposed Rule Change and Amendment No. 1 and Notice of Filing and Order Granting Accelerated Approval of Amendment No. 2 Regarding Procedures for Denying Listing on Nasdaq, 52456-52460 [E5-4803]

Download as PDF 52456 Federal Register / Vol. 70, No. 170 / Friday, September 2, 2005 / Notices SECURITIES AND EXCHANGE COMMISSION [Release No. 34–52342; File No. SR-NASD– 2004–125] Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Approving Proposed Rule Change and Amendment No. 1 and Notice of Filing and Order Granting Accelerated Approval of Amendment No. 2 Regarding Procedures for Denying Listing on Nasdaq August 26, 2005. I. Introduction On August 18, 2004, the National Association of Securities Dealers, Inc. (‘‘NASD’’), through its subsidiary, The Nasdaq Stock Market, Inc. (‘‘Nasdaq’’), 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 regarding its procedures for denying listing on Nasdaq. On February 9, 2005, Nasdaq filed Amendment No. 1 to the proposed rule change. The proposed rule change, as amended, was published for comment in the Federal Register on March 4, 2005.3 The Commission received 2 comments on the proposal as amended by Amendment No. 1.4 On July 1, 2005, Nasdaq filed Amendment No. 2 to the proposed rule change in response to the comment letters.5 This order approves the proposed rule change, as amended. Simultaneously, the Commission provides notice of, and grants accelerated approval to, Amendment No. 2. II. Description of Proposed Rule Change Nasdaq proposes to enhance, clarify, and increase the transparency of its procedures for denying or limiting initial or continued listing on Nasdaq. Among others, Nasdaq proposes to clarify the various decisionmakers responsible for denying or limiting listing on Nasdaq, proper documentation of decisions, conducts 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 51268 (February 28, 2005), 70 FR 10716. 4 See letters to Jonathan G. Katz, Secretary, Commission, from David A. Donohoe, Jr., President, Donohoe Advisory Associates LLC, dated March 25, 2005 (‘‘Donohoe Letter’’) and Lyle Roberts and H. Hubert Yang, Wilson Sonsini Goodrich & Rosati, dated April 1, 2005 (‘‘Wilson Letter’’). The letters are described in Section III, infra. 5 Amendment No. 2 made modifications to the rule text and the purpose section in response to comment letters. 2 17 VerDate Aug<18>2005 18:00 Sep 01, 2005 Jkt 205001 deemed appropriate for such decisionmakers, and procedural deadlines involved. Also, more specifically, Nasdaq proposes to define more clearly the decision-makers authorized to exercise discretion to grant exceptions, how exceptions are documented, and when exceptions must expire. Further, Nasdaq proposes minor miscellaneous changes to the rules. III. Summary of Comments and Nasdaq’s Response The Commission received two comment letters on the proposed rule change.6 Generally, the commenters supported the proposed rule change. However, the commenters also expressed concern regarding proposed NASD Rule 4802, which provides 90 and 60-day time limits on exceptions to the listing standards granted by Nasdaq Listing Qualifications Panel (‘‘Panel’’) and the Nasdaq Listing and Hearing Review Council (‘‘Listing Council’’), respectively. Furthermore, one commenter sought clarifications regarding proposed NASD IM–4803,7 proposed NASD Rule 4806(d), and proposed NASD Rule 4802(f).8 The commenters expressed concern that the time limits in proposed NASD Rule 4802 would result in an inflexible application of exceptions. One commenter argued that that the proposed 90 and 60-day time limits on exceptions to the listing standards are inconsistent with the Commission’s observation in In the Matter of Tassaway, Inc. that Nasdaq’s rules with respect to delisting ‘‘do not lend themselves to mechanical and inflexible administration.’’ 9 Likewise, to illustrate, another commenter provided that an issuer with a viable plan to regain compliance in 91 days from a Panel Decision, rather than 90 days required in the proposal, would be automatically delisted.10 Nasdaq responded in Amendment No. 2 that it believes that strict time limits are appropriate. Nasdaq explained that the Commission also held in In the Matter of Tassaway, Inc. that prospective investors in Nasdaq securities are ‘‘entitled to assume that the securities in [Nasdaq] meet [Nasdaq’s] standards. Thus, the presence in [Nasdaq] of non-complying securities could have a serious deceptive effect.’’ 11 Nasdaq also replied 6 See supra note 4. Donohoe Letter at 3–4. 8 See Dohonoe Letter at 4. 9 See Donohoe Letter at 1 and 4. See Securities Exchange Act Release No. 11291 (March 13, 1975), 45 SEC 706, 6 SEC Docket 427. 10 See Wilson Letter at 2. 11 See supra note 9. 7 See PO 00000 Frm 00096 Fmt 4703 Sfmt 4703 that where, for example, an issuer gains compliance shortly after the expiration of a 90-day Panel exception, such issuer would have been out of compliance for an extended period of time. In Amendment No. 2, Nasdaq continued to explain that in its experience an issuer that must rely on an extended exception period in order to regain compliance with the listing standards frequently falls again out of compliance within a short period and is eventually delisted. Moreover, Nasdaq argued that investors in Nasdaq listed companies are entitled to an expectation that such companies meet the listing standards and would be permitted to remain listed under an exception for only a limited period of time. Accordingly, Nasdaq affirmed its belief that continued inclusion of noncomplying companies would be inappropriate and that the proposed 90 and 60-day time limits strike a balance between flexible application of the rules and the rights and expectations of prospective investors. Nasdaq also noted that delisted issuers that believe they would regain compliance in the near term are able to appeal the Panel Decision to the Listing Council. The commenters also expressed concern that the proposed NASD Rule 4802 would not permit a Panel or Listing Council discretion to grant additional time to regain compliance where an issuer fails to meet the filing requirement contained in NASD Rule 4310(c)(14).12 Nasdaq recognized that as a result of increased demands placed upon public companies by the SarbanesOxley Act, certain issuers may face transitional difficulties complying with NASD Rule 4310(c)(14). Nevertheless, Nasdaq affirmed its belief that the imposition of the proposed time limits would not result in inequitable results. Nasdaq, however, stated that it intends to closely monitor, and propose adjustments to, the time limits applicable to exceptions to the filing requirement if such adjustments appear advisable in future. One commenter noted that the 90-day and 60-day exception periods are based on the date of the applicable decision, which is not a fixed date.13 As such, the commenter expressed concern that the proposed NASD Rule 4802 ‘‘provides insufficient practical guidance to companies subject to delisting.’’ 14 Nasdaq agreed that the exception periods are not sufficiently precise and that different non-complying issuers could remain listed for varying amounts 12 See Donohoe Letter at 2 and Wilson Letter at 13 See Wilson Letter at 2. 2. 14 Id. E:\FR\FM\02SEN1.SGM 02SEN1 Federal Register / Vol. 70, No. 170 / Friday, September 2, 2005 / Notices of time, depending on the time required to schedule a hearing and to issue a decision. Consequently, in response to the commenter’s concern, Nasdaq proposed to amend the time limits for exceptions to provide that a Panel exception may not exceed the earlier of 90 days from the date of the Panel Decision or 180 days from the date of the Staff Determination with respect to the deficiency for which the exception is granted, and a Listing Council exception may not exceed the earlier of 60 days from the date of the Listing Council Decision or 180 days from the date of the Panel Decision. Another commenter sought clarification regarding proposed NASD IM–4803.15 The commenter asked that Nasdaq clarify its position on the Panel’s authority to grant exceptions to issuers seeking to demonstrate compliance with income requirement on The Nasdaq SmallCap Market or the total assets and total revenue requirement on the Nasdaq National Market.16 Nasdaq responded by affirming that Nasdaq staff would not accept a plan to regain compliance with these requirements. Nasdaq explained that each of these rules requires compliance based on a completed fiscal year and, as such, non-compliance would be determined based on an issuer’s annual periodic filing. Because an issuer could regain compliance only with another annual periodic filing, such plan would always be unacceptable, because the curative filing would not be made for approximately 12 months. One commenter requested clarification on whether an issuer that retained its Nasdaq listing, but is subject to Panel monitoring under proposed NASD Rule 4806(d) because it fell out of compliance with equity or filing continued listing requirements, would be entitled to an oral hearing in the event that the issuer fell out of compliance with the equity or filing requirement during the monitoring period.17 In response, Nasdaq proposed to amend the proposed rule change to clarify that in such situation the issuer would be provided with the opportunity for an oral hearing pursuant to the terms of NASD Rule 4805, since the issuer would have been in full compliance with applicable listing standards for a period of time. However, because the purpose of proposed NASD Rule 4806(d) is to expedite review of issuers that repeatedly fail to satisfy the listing standards, Nasdaq also proposed to 15 See Donohoe Letter at 3 and 4. Donohoe Letter at 3. 17 See Donohoe Letter at 4. 16 See VerDate Aug<18>2005 18:00 Sep 01, 2005 Jkt 205001 clarify that in the situation where the Panel grants an issuer an exception from continued listing standards pertaining to the shareholder equity and periodic report filing, but the Panel opts not to monitor the issuer pursuant to NASD Rule 4806(d)(2), and issuer regains compliance but falls out of compliance again within a one-year period, (i) the issuer would not be permitted to provide the Listing Department with a plan to regain compliance, if it would otherwise be permitted to do so under proposed NASD Rule 4803, (ii) the Listing Department would not be permitted to grant additional time for the issuer to regain compliance, and (iii) the Panel conducting the subsequent hearing would consider the issuer’s prior non-compliance. Further, Nasdaq proposed to give the Panel the option to monitor an issuer directly in all cases where the Panel concludes that there is a likelihood that the issuer would fail to maintain compliance with any continued listing standard in the one-year period following its decision.18 If a Panel monitors an issuer and any subsequent deficiency occurs during the monitoring period, as in the scenario above, the issuer would not be permitted to provide the Listing Department with a plan to regain compliance and the Listing Qualifications Department would be unable to grant additional time for the issuer to regain compliance. Additionally, the Panel would promptly consider this deficiency.19 Again, the issuer would be entitled to an oral hearing pursuant to the terms of NASD Rule 4805. IV. Discussion After careful review of the proposal, the comment letters, and Nasdaq’s response to comments, the Commission finds that the proposed rule change, as amended, is consistent with the requirements of the Act and the rules and regulations thereunder.20 In particular, the Commission finds that the proposed rule change, as amended, 18 Nasdaq represented that whether or not the Panel opts to monitor an issuer, the Nasdaq Listing Qualifications Department would monitor the issuer’s compliance with all Nasdaq listing standards, as it does for all Nasdaq-listed issuers. 19 A commenter also requested clarification regarding the ability of Panel and Listing Council to relist an issuer under the maintenance requirements, notwithstanding proposed NASD Rule 4802(f). See Donohoe Letter at 4. Nasdaq responded that it believes that such discretion should exist under its listing rules and intends to file a separate rule proposal in the near term that would codify the limits of discretion in this regard. 20 In approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). PO 00000 Frm 00097 Fmt 4703 Sfmt 4703 52457 is consistent with Section 15A(b)(6) of the Act 21 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 proposed rule change strikes a reasonable balance between Nasdaq’s obligation to protect investors and their confidence in the market, with its obligation to perfect the mechanism of free and open market. A. Review of Deficiency and Discretion To Grant Exceptions Nasdaq’s proposes certain rule changes to enhance, clarify, and increase the transparency of its procedures for denying or limiting initial or continued listing. First, Nasdaq’s provides in proposed NASD Rule 4803 that in the event of an issuer’s deficiency, the Listing Department would either initiate proceedings to deny or limit listing or notify the issuer of the deficiency and provide 15 days to submit a plan to regain compliance with the listing standards. Nasdaq staff would then be required to initiate proceedings to deny or limit listing or grant the issuer up to 105 days to regain compliance.22 The staff’s authority to grant an exception, however, would not apply to quantitative listing standards that, by their terms, specify a period during which an issuer may seek to regain compliance before being subject to delisting 23 or to qualitative listing standards that are considered fundamental to an investor’s participation in, or to Nasdaq’s relationship with, the issuer.24 The Commission believes that proposed NASD Rule 4803 is consistent with the Act. Specifically, the Commission believes that proposed NASD Rule 4803 clarifies and increases the transparency of the Listing 21 15 U.S.C. 78o–3(b)(6). an issuer is already the subject of a Staff Determination by the Listing Department pursuant to NASD Rule 4804, the Listing Department would not provide the issuer with the opportunity to submit a plan, nor could the staff grant an exception, with respect to a new deficiency. Rather, the new deficiency would be considered by the relevant Adjudicatory Body as provided by NASD Rule 4810(e) (redesignated as NASD Rule 4802(d)). 23 These standards include the requirements for number of market makers (NASD Rules 4310(c)(1), 4320(e)(1), and 4450(a)(6), (b)(6), and (h)(5)); market value of publicly held shares (NASD Rules 4310(c)(7) and 4450(a)(2), (b)(3), and (h)(2)); market value of listed securities (NASD Rules 4310(c)(2), 4320(e)(2), and 4450(b)(1)); and bid price (NASD Rules 4310(c)(4) and 4450(a)(5), (b)(4), and (h)(3)). 24 These standards include the requirements to provide Nasdaq with responsive and accurate information (NASD Rule 4330); file periodic reports (NASD Rules 4350(b) and 4360(b)); hold annual meetings and solicit proxies (NASD Rules 4350(e) and (g) and 4360(e) and (g)); and execute a listing agreement (NASD Rules 4350(j) and 4360(h)). 22 If E:\FR\FM\02SEN1.SGM 02SEN1 52458 Federal Register / Vol. 70, No. 170 / Friday, September 2, 2005 / Notices Department’s procedures for reviewing deficiencies. Also, the Commission believes that proposed NASD Rule 4803 provides fair procedures for issuers. The Commission notes that Nasdaq’s proposal to grant issuers with up to 105 days to regain compliance is appropriate because it provides issuers additional time while not causing undue delay between the identification of deficiencies and the determination to limit or prohibit initial or continued listing. Further, by making clear which listing standards are subject to exceptions, the Commission believes that the proposal provides issuers with greater guidance regarding factors relevant to listing and delisting procedures. The Commission believes that the proposed amendments to NASD Rule 4810 (redesignated as NASD Rule 4802) are consistent with the Act. The Commission notes that Nasdaq proposes to clarify the decision-makers authorized to exercise discretion to grant an exception to its listing standards, how the exception is documented, and when the exception must expire. Pursuant to proposed NASD Rule 4810(b) (redesignated as NASD Rule 4802(b)), a Panel may grant an exception from any of the listing standards set forth in NASD Rule 4000 Series for a period not to exceed the earlier of 90 days from the date of the Panel Decision or 180 days from the date of the Staff Determination, and the Listing Council may grant an exception for a period not to exceed the earlier of 60 days from the date of the Listing Council Decision or 180 days from the date of the Panel Decision. The Commission believes that by clarifying how exceptions are granted and for how long, the proposed rule change helps issuers better understand the factors relevant to listing and delisting procedures. The Commission agrees that the proposed rule strikes a balance between flexible application of the rules and the rights and expectations of prospective investors in Nasdaq securities. The Commission believes that Nasdaq proposed timeframes for exceptions help prevent non-complying issuers from remaining listed for an undue amount of time. Moreover, the Commission notes that Nasdaq intends to monitor the time limits applicable to exceptions as they relate to filing requirements in NASD Rule 4310(c)(14) and to propose adjustments, if advisable. Lastly, the Commission notes that Amendment No. 2 addresses the commenter’s concern that the exception periods are imprecise and provide insufficient guidance to issuers (because the time periods may vary among VerDate Aug<18>2005 18:00 Sep 01, 2005 Jkt 205001 issuers based on the scheduling of hearing dates and dates of decisions) by providing that a Panel exception would not exceed the earlier of 90 days from the date of the Panel Decision or 180 days from the date of the Staff Determination, and a Listing Council exception would not exceed the earlier of 60 days from the date of the Listing Council Decision or 180 days from the date of the Panel Decision. The Commission believes that Nasdaq’s amendment to NASD Rule 4830 is consistent with the Act. In the proposed rule change, Nasdaq proposes to amend NASD Rule 4830 (redesignated as NASD Rule 4806) to give the Panel the option to monitor an issuer for up to one year if the Panel concludes that there is a likelihood that the issuer would fail to maintain compliance with any listing standard during that period following the date it regains compliance. The Commission expects Nasdaq to quickly institute delisting proceedings for issuers that fall below Nasdaq listing standards during the one-year period following the date such issuers regain compliance. Nasdaq, in turn, proposes that where the Panel opts to monitor an issuer, it would promptly schedule an oral hearing pursuant to the terms of NASD Rule 4805 if the issuer fails to maintain compliance with any of the listing standards. Where the Panel opts to monitor an issuer, and where an issuer is granted an exception from continued listing standards, regains compliance, and falls out of compliance again within a one-year period (i) the issuer would not be permitted to provide the Listing Department with a plan to regain compliance, if it would otherwise be permitted to do so under proposed NASD Rule 4803, (ii) the Listing Department would not be permitted to grant additional time for the issuer to regain compliance, and (iii) the Panel conducting the subsequent hearing would consider the issuer’s prior non-compliance. Nasdaq represents that the Panel would opt to monitor an issuer directly in all cases where the Panel concludes that there is a likelihood that the issuer would fail to maintain compliance with any listing standard in the one-year period following its decision. Likewise, Nasdaq proposes that if the Panel opts not to monitor an issuer and within one year the issuer again fails to maintain compliance, the Listing Department would promptly provide the issuer with a Staff Determination. Even if the Panel opts not to monitor an issuer, if the Panel grants an issuer an exception from continued listing standards pertaining to the shareholder PO 00000 Frm 00098 Fmt 4703 Sfmt 4703 equity or periodic report filing, and the issuer regains compliance but fails to maintain such compliance for a oneyear period, the expedited delisting procedures described above would apply. Again, such issuer would be entitled to an oral hearing pursuant to the terms of NASD Rule 4805. The Commission believes that to uphold the quality of its market, it is reasonable for Nasdaq to implement procedures that allow an expedited resolution to a repeatedly deficient issuer. B. Exception to Shareholder Approval Requirement The Commission believes that Nasdaq’s proposal to amend NASD Rule 4350(i)(2) is consistent with the Act. The Commission believes that Nasdaq’s proposal to require an independent committee approve an issuer’s reliance on an exception to shareholder approval requirements, the issuance of a press release when such exception is used, and the stipulation that communications between the issuer and the Listing Qualifications Department regarding the exception must be in writing should help provide transparency to investors and reduce the potential for abuse of this exception. C. Public Interest Authority The Commission also finds that Nasdaq’s proposal to amend NASD Rule 4300 is consistent with the Act. Nasdaq proposes in NASD Rule 4300 to clarify that the Listing Department must issue a Staff Determination under NASD Rule 4815 (redesignated as NASD Rule 4804) when Nasdaq staff exercises its authority under NASD Rule 4300 to limit or prohibit the initial or continued listing of an issuer’s securities. Nasdaq also proposes to supplement the rule with interpretive material that explains, among others things, the factors used in evaluating whether the regulatory misconduct of an individual associated with an issuer should be used as a basis to deny listing. The Commission believes that these proposals may enhance the transparency of Nasdaq’s procedures for denying or limiting initial or continued listing on Nasdaq. D. Supplementing the Record Nasdaq proposes to amend NASD Rule 4810(c) and (d) (redesignated as NASD Rule 4802(c)) to provide an Adjudicatory Body at each level of review with broad authority to supplement the record on its own motion. Nasdaq also proposes to amend NASD Rule 4875 (redesignated as NASD Rule 4812) to provide that all documents submitted to Nasdaq or NASD in connection with a NASD Rule E:\FR\FM\02SEN1.SGM 02SEN1 Federal Register / Vol. 70, No. 170 / Friday, September 2, 2005 / Notices 4800 Series proceeding shall be retained in accordance with applicable record retention policies. The ability to supplement the record with necessary information would help ensure that the Adjudicatory Body’s decision is informed and appropriate. Therefore, the Commission believes that it is important that each Adjudicatory Body has the authority to supplement it record on its own motion. The Commission also believes the new NASD Rule 4812 is consistent with the Act because Nasdaq proposes to comply with the rules thereunder.25 E. Procedural Deadlines Nasdaq proposes to amend NASD Rule 4885 (redesignated NASD Rule 4814) to provide that, if notice has not been properly given or if other extenuating circumstances exist, the Nasdaq Office of General Counsel may equitably adjust the time period provided by the rules for the filing of written submissions, the scheduling of hearings, or the performance of other procedural actions by the issuer or the Adjudicatory Body. Nasdaq also proposes to amend NASD Rule 4885 to provide that an issuer may waive any notice period specified by NASD Rule 4800 Series. The Commission believes that Nasdaq’s proposed amendments to NASD Rule 4885 would facilitate fairness in the listing and delisting procedures. F. Listing Council Subcommittees The Commission believes that Nasdaq’s proposal to amend NASD Rule 4840 (redesignated NASD Rule 4807) is consistent with the Act. Nasdaq proposes to make transparent the current practice of using subcommittees for the review of the complete written record of an appeal. The Commission believes that Nasdaq’s proposal may enhance the transparency of Nasdaq’s procedures for appeals. Also, in the Commission’s view, the practice of a subcommittee reviewing complete written record of an appeal and recommending a disposition of the matter to the Listing Council should provide an efficient and fair framework for handling the review process. G. Content and Approval of Decisions Nasdaq proposes to amend NASD Rule 4870 (redesignated NASD Rule 4811) to establish explicit standards for the content of decisions by the Adjudicatory Bodies. Nasdaq also proposes to amend the rules relating to the issuance of decisions to require explicitly the documentation of 25 See 17 CFR 240.17a–6. VerDate Aug<18>2005 18:00 Sep 01, 2005 Jkt 205001 affirmative approval of decisions by each Adjudicator. The Commission believes that these proposed amendments may enhance the transparency of Nasdaq’s procedures for denying or limiting initial or continued listing on Nasdaq. H. Ex Parte Communications and Recusals and Disqualifications The Commission finds that Nasdaq’s proposals regarding ex parte communications are consistent with the Act. Nasdaq proposes certain changes to NASD Rule 4890 (redesignated as NASD Rule 4815), such as requiring recusal, disqualification, or removal for Adjudicators who engaged in ex parte communications or recusal, disqualification, or personnel action for Nasdaq staff engaged in the same. Nasdaq also proposes to make its procedures for recusals more transparent by adopting proposed NASD Rule 4816. Further, Nasdaq proposes to delete NASD Rule 4890(d), which provides that an issuer’s proposal to resolve matters at issue in a Rule 4800 listing determination proceeding constitutes a waiver of any claims regarding ex parte communications. The Commission believes the proposed safeguards enhance fairness and openness in Nasdaq’s delisting proceedings. The Commission also believes that deleting NASD Rule 4890(d) is reasonable because an ex parte communication does not provide a basis for denying listing to an otherwise qualified issuer. Therefore, there is no need to construe an issuer’s submission of a proposal to resolve matters at issue in the Rule 4800 proceeding as a waiver of any claims that Adjudicators engaged in ex parte communications. I. Other Changes The Commission also believes that Nasdaq’s proposal to amend NASD Rule 4803 and NASD Rule 4804 regarding disclosures to news media about the receipt of a Staff Determination appropriate because it conforms to the new Form 8–K requirements. Likewise, the Commission believes that Nasdaq’s proposal to amend NASD Rule 4830(d) (redesignated NASD Rule 4806(c)) consistent with the Act. The Commission believes that Nasdaq’s clarification that a second Panel convened after the first fails to reach a unanimous decision may act through a majority of the Panel increases the transparency of procedures for denying or limiting initial or continued listing on Nasdaq. PO 00000 Frm 00099 Fmt 4703 Sfmt 4703 52459 V. Accelerated Approval of Amendment No. 2 The Commission finds good cause for approving the proposed Amendment No. 2 before the thirtieth day of publication of notice of filing thereof in the Federal Register. Nasdaq filed Amendment No. 2 in response to comments received after the publication of notice of filing of the proposed rule change, as amended, to address the commenters’ concerns and to make several technical corrections to the proposed rule language. Specifically, Amendment No. 2 proposed to amend the time limits for exceptions to provide that a Panel exception may not exceed the earlier of 90 days from the date of the Panel Decision or 180 days from the date of the Staff Determination, and a Listing Council exception may not exceed the earlier of 60 days from the date of the Listing Council Decision or 180 days from the date of the Panel Decision. Further, Amendment No. 2 proposed to give the Panel the option to monitor an issuer directly in all cases where the Panel concludes there is a likelihood that the issuer would fail to maintain compliance with any listing standard in the one-year period following its decision. In the case of such monitoring, Amendment No. 2 provides that where an issuer is granted an exception from continued listing standards, regains compliance, and falls out of compliance again within a oneyear period (i) the issuer would not be permitted to provide the Listing Department with a plan to regain compliance, if it would otherwise be permitted to do so under proposed NASD Rule 4803, (ii) the Listing Department would not be permitted to grant additional time for the issuer to regain compliance, and (iii) the Panel conducting the subsequent hearing would consider the issuer’s prior noncompliance. Similar expedited procedures would apply to an issuer that repeatedly falls below compliance with stockholder equity and periodic filing requirements, even if the Panel opts not to monitor the issuer. As mentioned above, Amendment No. 2 also proposed to make certain technical corrections to the proposed rule language. The Commission believes that Nasdaq’s proposed changes in Amendment No. 2 strengthen and clarify the proposed rule change in direct response to issues raised by commenters and raise no new regulatory issues. Based on the above, the Commission finds good cause for E:\FR\FM\02SEN1.SGM 02SEN1 52460 Federal Register / Vol. 70, No. 170 / Friday, September 2, 2005 / Notices VII. Conclusion accelerating approval of Amendment No. 2.26 VI. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning Amendment No. 2, including whether the amendment is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–NASD–2004–125 on the subject line. Paper Comments • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, Station Place, 100 F Street, NE., Washington, DC 20549–9303. All submissions should refer to File No. SR–NASD–2004–125. This file number should be included on the subject line if e-mail is used. To help the Commission 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 (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the amendment that are filed with the Commission, and all written communications relating to the amendment between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission’s Public Reference Room. Copies of such filing also will be available for inspection and copying at the principal office of NASD. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to the File Number SR–NASD–2004–125 and should be submitted on or before September 23, 2005. 26 The Commission further notes that both the rule filing and the amendments thereto have been available since their respective filing dates on NASD’s Web site https://www.nasd.com). VerDate Aug<18>2005 18:00 Sep 01, 2005 Jkt 205001 It is therefore ordered, pursuant to Section 19(b)(2) of the Act,27 that the proposed rule change, as amended, (SR– NASD–2004–125) is approved, and that Amendment No. 2 to the proposed rule change be, and hereby is, approved on an accelerated basis. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.28 Margaret H. McFarland, Deputy Secretary. [FR Doc. E5–4803 Filed 9–1–05; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–52352; File No. SR–NASD– 2005–58] Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Approving Proposed Rule Change and Amendment No. 1 Relating to the Reporting of Data to Clearing Firms by Correspondent Firms August 26, 2005. I. Introduction On May 2, 2005, 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 amend NASD Rule 3150 and Rule 3230 governing the reporting of data to clearing firms by correspondent firms. On July 14, 2005, NASD filed Amendment No. 1 to the proposed rule change.3 The proposed rule change, as amended, was published for comment in the Federal Register on July 26, 2005.4 The Commission received one comment letter on the proposed rule change.5 This order approves the proposed rule change, as amended. 27 15 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 Amendment No. 1, which replaced and superseded the original filing in its entirety, clarifies which piggybacking arrangements will be subject to the rule and modifies certain rule language to conform with other terms used in NASD rules. 4 Securities Exchange Act Release No. 52059 (July 19, 2005), 70 FR 43204 (July 26, 2005). 5 See letter from James Rogan, Chairman, SIA Clearing Firms Committee, Securities Industry Association (‘‘SIA’’), to Jonathan G. Katz, Secretary, Commission, dated August 12, 2005 (‘‘SIA letter’’). 28 17 PO 00000 Frm 00100 Fmt 4703 Sfmt 4703 II. Description NASD proposes to amend NASD Rule 3150 (governing reporting requirements for clearing firms) and NASD Rule 3230 (governing clearing agreements) to permit regulators and clearing firms to distinguish between data belonging to an introducing firm and data belonging to its ‘‘piggybacking’’ firm(s). Brokerdealers that contract for clearing services with an introducing firm are often referred to as ‘‘piggybacking’’ firms, or ‘‘piggybackers.’’ Under this arrangement, only the introducing firm has a contractual arrangement with the clearing firm, which clears for both the introducing firm and the introducing firm’s piggybacking firms. The proposed rule change would require clearing firms to report data to NASD about each piggybacking firm separately from the introducing firm’s own customer and proprietary data. The proposed rule change would apply only if the piggybacking relationship with the introducing firm is established on or after the effective date of the proposed rule change. III. Comment Received The commenter discussed a concern that the SIA Clearing Firms Committee had with a prior version of the proposed rule change relating to which intermediary account relationships would be subject to the proposed rule change.6 Specifically, the SIA letter stated that ‘‘we are pleased to see that subsection (b) has now been modified so that Rule 3150 will only apply to intermediary clearing arrangements which are actually established after the effective date of the rule.’’ 7 IV. Discussion After careful review, the Commission finds that the proposed rule change, as amended, is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities association 8 and, in particular, the requirements of Section 15A of the Act and the rules and regulations thereunder.9 The Commission finds specifically that the proposed rule change is consistent with the provisions of Section 15A(b)(6) 10 of the Act, which requires, among other things, that NASD rules must be designed to prevent fraudulent and manipulative acts and practices, to 6 See SIA letter supra note 5. 7 Id. 8 In approving this proposed rule change, the Commission has considered the proposal’s impact on efficiency, competition and capital formation. See 15 U.S.C. 78c(f). 9 15 U.S.C. 78o–3. 10 15 U.S.C. 78o–3(b)(6). E:\FR\FM\02SEN1.SGM 02SEN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 70, Number 170 (Friday, September 2, 2005)]
[Notices]
[Pages 52456-52460]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-4803]



[[Page 52456]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52342; File No. SR-NASD-2004-125]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Approving Proposed Rule Change and Amendment No. 1 
and Notice of Filing and Order Granting Accelerated Approval of 
Amendment No. 2 Regarding Procedures for Denying Listing on Nasdaq

August 26, 2005.

I. Introduction

    On August 18, 2004, the National Association of Securities Dealers, 
Inc. (``NASD''), through its subsidiary, The Nasdaq Stock Market, Inc. 
(``Nasdaq''), 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 regarding its procedures for denying listing on 
Nasdaq. On February 9, 2005, Nasdaq filed Amendment No. 1 to the 
proposed rule change. The proposed rule change, as amended, was 
published for comment in the Federal Register on March 4, 2005.\3\ The 
Commission received 2 comments on the proposal as amended by Amendment 
No. 1.\4\ On July 1, 2005, Nasdaq filed Amendment No. 2 to the proposed 
rule change in response to the comment letters.\5\ This order approves 
the proposed rule change, as amended. Simultaneously, the Commission 
provides notice of, and grants accelerated approval to, Amendment No. 
2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 51268 (February 28, 
2005), 70 FR 10716.
    \4\ See letters to Jonathan G. Katz, Secretary, Commission, from 
David A. Donohoe, Jr., President, Donohoe Advisory Associates LLC, 
dated March 25, 2005 (``Donohoe Letter'') and Lyle Roberts and H. 
Hubert Yang, Wilson Sonsini Goodrich & Rosati, dated April 1, 2005 
(``Wilson Letter''). The letters are described in Section III, 
infra.
    \5\ Amendment No. 2 made modifications to the rule text and the 
purpose section in response to comment letters.
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II. Description of Proposed Rule Change

    Nasdaq proposes to enhance, clarify, and increase the transparency 
of its procedures for denying or limiting initial or continued listing 
on Nasdaq. Among others, Nasdaq proposes to clarify the various 
decisionmakers responsible for denying or limiting listing on Nasdaq, 
proper documentation of decisions, conducts deemed appropriate for such 
decisionmakers, and procedural deadlines involved. Also, more 
specifically, Nasdaq proposes to define more clearly the decision-
makers authorized to exercise discretion to grant exceptions, how 
exceptions are documented, and when exceptions must expire. Further, 
Nasdaq proposes minor miscellaneous changes to the rules.

III. Summary of Comments and Nasdaq's Response

    The Commission received two comment letters on the proposed rule 
change.\6\ Generally, the commenters supported the proposed rule 
change. However, the commenters also expressed concern regarding 
proposed NASD Rule 4802, which provides 90 and 60-day time limits on 
exceptions to the listing standards granted by Nasdaq Listing 
Qualifications Panel (``Panel'') and the Nasdaq Listing and Hearing 
Review Council (``Listing Council''), respectively. Furthermore, one 
commenter sought clarifications regarding proposed NASD IM-4803,\7\ 
proposed NASD Rule 4806(d), and proposed NASD Rule 4802(f).\8\
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    \6\ See supra note 4.
    \7\ See Donohoe Letter at 3-4.
    \8\ See Dohonoe Letter at 4.
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    The commenters expressed concern that the time limits in proposed 
NASD Rule 4802 would result in an inflexible application of exceptions. 
One commenter argued that that the proposed 90 and 60-day time limits 
on exceptions to the listing standards are inconsistent with the 
Commission's observation in In the Matter of Tassaway, Inc. that 
Nasdaq's rules with respect to delisting ``do not lend themselves to 
mechanical and inflexible administration.'' \9\ Likewise, to 
illustrate, another commenter provided that an issuer with a viable 
plan to regain compliance in 91 days from a Panel Decision, rather than 
90 days required in the proposal, would be automatically delisted.\10\
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    \9\ See Donohoe Letter at 1 and 4. See Securities Exchange Act 
Release No. 11291 (March 13, 1975), 45 SEC 706, 6 SEC Docket 427.
    \10\ See Wilson Letter at 2.
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    Nasdaq responded in Amendment No. 2 that it believes that strict 
time limits are appropriate. Nasdaq explained that the Commission also 
held in In the Matter of Tassaway, Inc. that prospective investors in 
Nasdaq securities are ``entitled to assume that the securities in 
[Nasdaq] meet [Nasdaq's] standards. Thus, the presence in [Nasdaq] of 
non-complying securities could have a serious deceptive effect.'' \11\ 
Nasdaq also replied that where, for example, an issuer gains compliance 
shortly after the expiration of a 90-day Panel exception, such issuer 
would have been out of compliance for an extended period of time. In 
Amendment No. 2, Nasdaq continued to explain that in its experience an 
issuer that must rely on an extended exception period in order to 
regain compliance with the listing standards frequently falls again out 
of compliance within a short period and is eventually delisted. 
Moreover, Nasdaq argued that investors in Nasdaq listed companies are 
entitled to an expectation that such companies meet the listing 
standards and would be permitted to remain listed under an exception 
for only a limited period of time. Accordingly, Nasdaq affirmed its 
belief that continued inclusion of non-complying companies would be 
inappropriate and that the proposed 90 and 60-day time limits strike a 
balance between flexible application of the rules and the rights and 
expectations of prospective investors. Nasdaq also noted that delisted 
issuers that believe they would regain compliance in the near term are 
able to appeal the Panel Decision to the Listing Council.
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    \11\ See supra note 9.
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    The commenters also expressed concern that the proposed NASD Rule 
4802 would not permit a Panel or Listing Council discretion to grant 
additional time to regain compliance where an issuer fails to meet the 
filing requirement contained in NASD Rule 4310(c)(14).\12\ Nasdaq 
recognized that as a result of increased demands placed upon public 
companies by the Sarbanes-Oxley Act, certain issuers may face 
transitional difficulties complying with NASD Rule 4310(c)(14). 
Nevertheless, Nasdaq affirmed its belief that the imposition of the 
proposed time limits would not result in inequitable results. Nasdaq, 
however, stated that it intends to closely monitor, and propose 
adjustments to, the time limits applicable to exceptions to the filing 
requirement if such adjustments appear advisable in future.
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    \12\ See Donohoe Letter at 2 and Wilson Letter at 2.
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    One commenter noted that the 90-day and 60-day exception periods 
are based on the date of the applicable decision, which is not a fixed 
date.\13\ As such, the commenter expressed concern that the proposed 
NASD Rule 4802 ``provides insufficient practical guidance to companies 
subject to delisting.'' \14\ Nasdaq agreed that the exception periods 
are not sufficiently precise and that different non-complying issuers 
could remain listed for varying amounts

[[Page 52457]]

of time, depending on the time required to schedule a hearing and to 
issue a decision. Consequently, in response to the commenter's concern, 
Nasdaq proposed to amend the time limits for exceptions to provide that 
a Panel exception may not exceed the earlier of 90 days from the date 
of the Panel Decision or 180 days from the date of the Staff 
Determination with respect to the deficiency for which the exception is 
granted, and a Listing Council exception may not exceed the earlier of 
60 days from the date of the Listing Council Decision or 180 days from 
the date of the Panel Decision.
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    \13\ See Wilson Letter at 2.
    \14\ Id.
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    Another commenter sought clarification regarding proposed NASD IM-
4803.\15\ The commenter asked that Nasdaq clarify its position on the 
Panel's authority to grant exceptions to issuers seeking to demonstrate 
compliance with income requirement on The Nasdaq SmallCap Market or the 
total assets and total revenue requirement on the Nasdaq National 
Market.\16\ Nasdaq responded by affirming that Nasdaq staff would not 
accept a plan to regain compliance with these requirements. Nasdaq 
explained that each of these rules requires compliance based on a 
completed fiscal year and, as such, non-compliance would be determined 
based on an issuer's annual periodic filing. Because an issuer could 
regain compliance only with another annual periodic filing, such plan 
would always be unacceptable, because the curative filing would not be 
made for approximately 12 months.
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    \15\ See Donohoe Letter at 3 and 4.
    \16\ See Donohoe Letter at 3.
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    One commenter requested clarification on whether an issuer that 
retained its Nasdaq listing, but is subject to Panel monitoring under 
proposed NASD Rule 4806(d) because it fell out of compliance with 
equity or filing continued listing requirements, would be entitled to 
an oral hearing in the event that the issuer fell out of compliance 
with the equity or filing requirement during the monitoring period.\17\ 
In response, Nasdaq proposed to amend the proposed rule change to 
clarify that in such situation the issuer would be provided with the 
opportunity for an oral hearing pursuant to the terms of NASD Rule 
4805, since the issuer would have been in full compliance with 
applicable listing standards for a period of time. However, because the 
purpose of proposed NASD Rule 4806(d) is to expedite review of issuers 
that repeatedly fail to satisfy the listing standards, Nasdaq also 
proposed to clarify that in the situation where the Panel grants an 
issuer an exception from continued listing standards pertaining to the 
shareholder equity and periodic report filing, but the Panel opts not 
to monitor the issuer pursuant to NASD Rule 4806(d)(2), and issuer 
regains compliance but falls out of compliance again within a one-year 
period, (i) the issuer would not be permitted to provide the Listing 
Department with a plan to regain compliance, if it would otherwise be 
permitted to do so under proposed NASD Rule 4803, (ii) the Listing 
Department would not be permitted to grant additional time for the 
issuer to regain compliance, and (iii) the Panel conducting the 
subsequent hearing would consider the issuer's prior non-compliance.
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    \17\ See Donohoe Letter at 4.
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    Further, Nasdaq proposed to give the Panel the option to monitor an 
issuer directly in all cases where the Panel concludes that there is a 
likelihood that the issuer would fail to maintain compliance with any 
continued listing standard in the one-year period following its 
decision.\18\ If a Panel monitors an issuer and any subsequent 
deficiency occurs during the monitoring period, as in the scenario 
above, the issuer would not be permitted to provide the Listing 
Department with a plan to regain compliance and the Listing 
Qualifications Department would be unable to grant additional time for 
the issuer to regain compliance. Additionally, the Panel would promptly 
consider this deficiency.\19\ Again, the issuer would be entitled to an 
oral hearing pursuant to the terms of NASD Rule 4805.
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    \18\ Nasdaq represented that whether or not the Panel opts to 
monitor an issuer, the Nasdaq Listing Qualifications Department 
would monitor the issuer's compliance with all Nasdaq listing 
standards, as it does for all Nasdaq-listed issuers.
    \19\ A commenter also requested clarification regarding the 
ability of Panel and Listing Council to relist an issuer under the 
maintenance requirements, notwithstanding proposed NASD Rule 
4802(f). See Donohoe Letter at 4. Nasdaq responded that it believes 
that such discretion should exist under its listing rules and 
intends to file a separate rule proposal in the near term that would 
codify the limits of discretion in this regard.
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IV. Discussion

    After careful review of the proposal, the comment letters, and 
Nasdaq's response to comments, the Commission finds that the proposed 
rule change, as amended, is consistent with the requirements of the Act 
and the rules and regulations thereunder.\20\ In particular, the 
Commission finds that the proposed rule change, as amended, is 
consistent with Section 15A(b)(6) of the Act \21\ 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 proposed rule change strikes a reasonable balance 
between Nasdaq's obligation to protect investors and their confidence 
in the market, with its obligation to perfect the mechanism of free and 
open market.
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    \20\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \21\ 15 U.S.C. 78o-3(b)(6).
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A. Review of Deficiency and Discretion To Grant Exceptions

    Nasdaq's proposes certain rule changes to enhance, clarify, and 
increase the transparency of its procedures for denying or limiting 
initial or continued listing. First, Nasdaq's provides in proposed NASD 
Rule 4803 that in the event of an issuer's deficiency, the Listing 
Department would either initiate proceedings to deny or limit listing 
or notify the issuer of the deficiency and provide 15 days to submit a 
plan to regain compliance with the listing standards. Nasdaq staff 
would then be required to initiate proceedings to deny or limit listing 
or grant the issuer up to 105 days to regain compliance.\22\ The 
staff's authority to grant an exception, however, would not apply to 
quantitative listing standards that, by their terms, specify a period 
during which an issuer may seek to regain compliance before being 
subject to delisting \23\ or to qualitative listing standards that are 
considered fundamental to an investor's participation in, or to 
Nasdaq's relationship with, the issuer.\24\
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    \22\ If an issuer is already the subject of a Staff 
Determination by the Listing Department pursuant to NASD Rule 4804, 
the Listing Department would not provide the issuer with the 
opportunity to submit a plan, nor could the staff grant an 
exception, with respect to a new deficiency. Rather, the new 
deficiency would be considered by the relevant Adjudicatory Body as 
provided by NASD Rule 4810(e) (redesignated as NASD Rule 4802(d)).
    \23\ These standards include the requirements for number of 
market makers (NASD Rules 4310(c)(1), 4320(e)(1), and 4450(a)(6), 
(b)(6), and (h)(5)); market value of publicly held shares (NASD 
Rules 4310(c)(7) and 4450(a)(2), (b)(3), and (h)(2)); market value 
of listed securities (NASD Rules 4310(c)(2), 4320(e)(2), and 
4450(b)(1)); and bid price (NASD Rules 4310(c)(4) and 4450(a)(5), 
(b)(4), and (h)(3)).
    \24\ These standards include the requirements to provide Nasdaq 
with responsive and accurate information (NASD Rule 4330); file 
periodic reports (NASD Rules 4350(b) and 4360(b)); hold annual 
meetings and solicit proxies (NASD Rules 4350(e) and (g) and 4360(e) 
and (g)); and execute a listing agreement (NASD Rules 4350(j) and 
4360(h)).
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    The Commission believes that proposed NASD Rule 4803 is consistent 
with the Act. Specifically, the Commission believes that proposed NASD 
Rule 4803 clarifies and increases the transparency of the Listing

[[Page 52458]]

Department's procedures for reviewing deficiencies. Also, the 
Commission believes that proposed NASD Rule 4803 provides fair 
procedures for issuers. The Commission notes that Nasdaq's proposal to 
grant issuers with up to 105 days to regain compliance is appropriate 
because it provides issuers additional time while not causing undue 
delay between the identification of deficiencies and the determination 
to limit or prohibit initial or continued listing. Further, by making 
clear which listing standards are subject to exceptions, the Commission 
believes that the proposal provides issuers with greater guidance 
regarding factors relevant to listing and delisting procedures.
    The Commission believes that the proposed amendments to NASD Rule 
4810 (redesignated as NASD Rule 4802) are consistent with the Act. The 
Commission notes that Nasdaq proposes to clarify the decision-makers 
authorized to exercise discretion to grant an exception to its listing 
standards, how the exception is documented, and when the exception must 
expire. Pursuant to proposed NASD Rule 4810(b) (redesignated as NASD 
Rule 4802(b)), a Panel may grant an exception from any of the listing 
standards set forth in NASD Rule 4000 Series for a period not to exceed 
the earlier of 90 days from the date of the Panel Decision or 180 days 
from the date of the Staff Determination, and the Listing Council may 
grant an exception for a period not to exceed the earlier of 60 days 
from the date of the Listing Council Decision or 180 days from the date 
of the Panel Decision.
    The Commission believes that by clarifying how exceptions are 
granted and for how long, the proposed rule change helps issuers better 
understand the factors relevant to listing and delisting procedures. 
The Commission agrees that the proposed rule strikes a balance between 
flexible application of the rules and the rights and expectations of 
prospective investors in Nasdaq securities. The Commission believes 
that Nasdaq proposed timeframes for exceptions help prevent non-
complying issuers from remaining listed for an undue amount of time. 
Moreover, the Commission notes that Nasdaq intends to monitor the time 
limits applicable to exceptions as they relate to filing requirements 
in NASD Rule 4310(c)(14) and to propose adjustments, if advisable. 
Lastly, the Commission notes that Amendment No. 2 addresses the 
commenter's concern that the exception periods are imprecise and 
provide insufficient guidance to issuers (because the time periods may 
vary among issuers based on the scheduling of hearing dates and dates 
of decisions) by providing that a Panel exception would not exceed the 
earlier of 90 days from the date of the Panel Decision or 180 days from 
the date of the Staff Determination, and a Listing Council exception 
would not exceed the earlier of 60 days from the date of the Listing 
Council Decision or 180 days from the date of the Panel Decision.
    The Commission believes that Nasdaq's amendment to NASD Rule 4830 
is consistent with the Act. In the proposed rule change, Nasdaq 
proposes to amend NASD Rule 4830 (redesignated as NASD Rule 4806) to 
give the Panel the option to monitor an issuer for up to one year if 
the Panel concludes that there is a likelihood that the issuer would 
fail to maintain compliance with any listing standard during that 
period following the date it regains compliance.
    The Commission expects Nasdaq to quickly institute delisting 
proceedings for issuers that fall below Nasdaq listing standards during 
the one-year period following the date such issuers regain compliance. 
Nasdaq, in turn, proposes that where the Panel opts to monitor an 
issuer, it would promptly schedule an oral hearing pursuant to the 
terms of NASD Rule 4805 if the issuer fails to maintain compliance with 
any of the listing standards. Where the Panel opts to monitor an 
issuer, and where an issuer is granted an exception from continued 
listing standards, regains compliance, and falls out of compliance 
again within a one-year period (i) the issuer would not be permitted to 
provide the Listing Department with a plan to regain compliance, if it 
would otherwise be permitted to do so under proposed NASD Rule 4803, 
(ii) the Listing Department would not be permitted to grant additional 
time for the issuer to regain compliance, and (iii) the Panel 
conducting the subsequent hearing would consider the issuer's prior 
non-compliance. Nasdaq represents that the Panel would opt to monitor 
an issuer directly in all cases where the Panel concludes that there is 
a likelihood that the issuer would fail to maintain compliance with any 
listing standard in the one-year period following its decision.
    Likewise, Nasdaq proposes that if the Panel opts not to monitor an 
issuer and within one year the issuer again fails to maintain 
compliance, the Listing Department would promptly provide the issuer 
with a Staff Determination. Even if the Panel opts not to monitor an 
issuer, if the Panel grants an issuer an exception from continued 
listing standards pertaining to the shareholder equity or periodic 
report filing, and the issuer regains compliance but fails to maintain 
such compliance for a one-year period, the expedited delisting 
procedures described above would apply. Again, such issuer would be 
entitled to an oral hearing pursuant to the terms of NASD Rule 4805. 
The Commission believes that to uphold the quality of its market, it is 
reasonable for Nasdaq to implement procedures that allow an expedited 
resolution to a repeatedly deficient issuer.

B. Exception to Shareholder Approval Requirement

    The Commission believes that Nasdaq's proposal to amend NASD Rule 
4350(i)(2) is consistent with the Act. The Commission believes that 
Nasdaq's proposal to require an independent committee approve an 
issuer's reliance on an exception to shareholder approval requirements, 
the issuance of a press release when such exception is used, and the 
stipulation that communications between the issuer and the Listing 
Qualifications Department regarding the exception must be in writing 
should help provide transparency to investors and reduce the potential 
for abuse of this exception.

C. Public Interest Authority

    The Commission also finds that Nasdaq's proposal to amend NASD Rule 
4300 is consistent with the Act. Nasdaq proposes in NASD Rule 4300 to 
clarify that the Listing Department must issue a Staff Determination 
under NASD Rule 4815 (redesignated as NASD Rule 4804) when Nasdaq staff 
exercises its authority under NASD Rule 4300 to limit or prohibit the 
initial or continued listing of an issuer's securities. Nasdaq also 
proposes to supplement the rule with interpretive material that 
explains, among others things, the factors used in evaluating whether 
the regulatory misconduct of an individual associated with an issuer 
should be used as a basis to deny listing. The Commission believes that 
these proposals may enhance the transparency of Nasdaq's procedures for 
denying or limiting initial or continued listing on Nasdaq.

D. Supplementing the Record

    Nasdaq proposes to amend NASD Rule 4810(c) and (d) (redesignated as 
NASD Rule 4802(c)) to provide an Adjudicatory Body at each level of 
review with broad authority to supplement the record on its own motion. 
Nasdaq also proposes to amend NASD Rule 4875 (redesignated as NASD Rule 
4812) to provide that all documents submitted to Nasdaq or NASD in 
connection with a NASD Rule

[[Page 52459]]

4800 Series proceeding shall be retained in accordance with applicable 
record retention policies. The ability to supplement the record with 
necessary information would help ensure that the Adjudicatory Body's 
decision is informed and appropriate. Therefore, the Commission 
believes that it is important that each Adjudicatory Body has the 
authority to supplement it record on its own motion. The Commission 
also believes the new NASD Rule 4812 is consistent with the Act because 
Nasdaq proposes to comply with the rules thereunder.\25\
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    \25\ See 17 CFR 240.17a-6.
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E. Procedural Deadlines

    Nasdaq proposes to amend NASD Rule 4885 (redesignated NASD Rule 
4814) to provide that, if notice has not been properly given or if 
other extenuating circumstances exist, the Nasdaq Office of General 
Counsel may equitably adjust the time period provided by the rules for 
the filing of written submissions, the scheduling of hearings, or the 
performance of other procedural actions by the issuer or the 
Adjudicatory Body. Nasdaq also proposes to amend NASD Rule 4885 to 
provide that an issuer may waive any notice period specified by NASD 
Rule 4800 Series. The Commission believes that Nasdaq's proposed 
amendments to NASD Rule 4885 would facilitate fairness in the listing 
and delisting procedures.

F. Listing Council Subcommittees

    The Commission believes that Nasdaq's proposal to amend NASD Rule 
4840 (redesignated NASD Rule 4807) is consistent with the Act. Nasdaq 
proposes to make transparent the current practice of using 
subcommittees for the review of the complete written record of an 
appeal. The Commission believes that Nasdaq's proposal may enhance the 
transparency of Nasdaq's procedures for appeals. Also, in the 
Commission's view, the practice of a subcommittee reviewing complete 
written record of an appeal and recommending a disposition of the 
matter to the Listing Council should provide an efficient and fair 
framework for handling the review process.

G. Content and Approval of Decisions

    Nasdaq proposes to amend NASD Rule 4870 (redesignated NASD Rule 
4811) to establish explicit standards for the content of decisions by 
the Adjudicatory Bodies. Nasdaq also proposes to amend the rules 
relating to the issuance of decisions to require explicitly the 
documentation of affirmative approval of decisions by each Adjudicator. 
The Commission believes that these proposed amendments may enhance the 
transparency of Nasdaq's procedures for denying or limiting initial or 
continued listing on Nasdaq.

H. Ex Parte Communications and Recusals and Disqualifications

    The Commission finds that Nasdaq's proposals regarding ex parte 
communications are consistent with the Act. Nasdaq proposes certain 
changes to NASD Rule 4890 (redesignated as NASD Rule 4815), such as 
requiring recusal, disqualification, or removal for Adjudicators who 
engaged in ex parte communications or recusal, disqualification, or 
personnel action for Nasdaq staff engaged in the same. Nasdaq also 
proposes to make its procedures for recusals more transparent by 
adopting proposed NASD Rule 4816. Further, Nasdaq proposes to delete 
NASD Rule 4890(d), which provides that an issuer's proposal to resolve 
matters at issue in a Rule 4800 listing determination proceeding 
constitutes a waiver of any claims regarding ex parte communications. 
The Commission believes the proposed safeguards enhance fairness and 
openness in Nasdaq's delisting proceedings. The Commission also 
believes that deleting NASD Rule 4890(d) is reasonable because an ex 
parte communication does not provide a basis for denying listing to an 
otherwise qualified issuer. Therefore, there is no need to construe an 
issuer's submission of a proposal to resolve matters at issue in the 
Rule 4800 proceeding as a waiver of any claims that Adjudicators 
engaged in ex parte communications.

I. Other Changes

    The Commission also believes that Nasdaq's proposal to amend NASD 
Rule 4803 and NASD Rule 4804 regarding disclosures to news media about 
the receipt of a Staff Determination appropriate because it conforms to 
the new Form 8-K requirements. Likewise, the Commission believes that 
Nasdaq's proposal to amend NASD Rule 4830(d) (redesignated NASD Rule 
4806(c)) consistent with the Act. The Commission believes that Nasdaq's 
clarification that a second Panel convened after the first fails to 
reach a unanimous decision may act through a majority of the Panel 
increases the transparency of procedures for denying or limiting 
initial or continued listing on Nasdaq.

V. Accelerated Approval of Amendment No. 2

    The Commission finds good cause for approving the proposed 
Amendment No. 2 before the thirtieth day of publication of notice of 
filing thereof in the Federal Register. Nasdaq filed Amendment No. 2 in 
response to comments received after the publication of notice of filing 
of the proposed rule change, as amended, to address the commenters' 
concerns and to make several technical corrections to the proposed rule 
language. Specifically, Amendment No. 2 proposed to amend the time 
limits for exceptions to provide that a Panel exception may not exceed 
the earlier of 90 days from the date of the Panel Decision or 180 days 
from the date of the Staff Determination, and a Listing Council 
exception may not exceed the earlier of 60 days from the date of the 
Listing Council Decision or 180 days from the date of the Panel 
Decision. Further, Amendment No. 2 proposed to give the Panel the 
option to monitor an issuer directly in all cases where the Panel 
concludes there is a likelihood that the issuer would fail to maintain 
compliance with any listing standard in the one-year period following 
its decision. In the case of such monitoring, Amendment No. 2 provides 
that where an issuer is granted an exception from continued listing 
standards, regains compliance, and falls out of compliance again within 
a one-year period (i) the issuer would not be permitted to provide the 
Listing Department with a plan to regain compliance, if it would 
otherwise be permitted to do so under proposed NASD Rule 4803, (ii) the 
Listing Department would not be permitted to grant additional time for 
the issuer to regain compliance, and (iii) the Panel conducting the 
subsequent hearing would consider the issuer's prior non-compliance. 
Similar expedited procedures would apply to an issuer that repeatedly 
falls below compliance with stockholder equity and periodic filing 
requirements, even if the Panel opts not to monitor the issuer. As 
mentioned above, Amendment No. 2 also proposed to make certain 
technical corrections to the proposed rule language.
    The Commission believes that Nasdaq's proposed changes in Amendment 
No. 2 strengthen and clarify the proposed rule change in direct 
response to issues raised by commenters and raise no new regulatory 
issues. Based on the above, the Commission finds good cause for

[[Page 52460]]

accelerating approval of Amendment No. 2.\26\
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    \26\ The Commission further notes that both the rule filing and 
the amendments thereto have been available since their respective 
filing dates on NASD's Web site https://www.nasd.com).
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VI. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 2, including whether the amendment 
is consistent with the Act. Comments may be submitted by any of the 
following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NASD-2004-125 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.
    All submissions should refer to File No. SR-NASD-2004-125. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission 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 (https://www.sec.gov/
rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the amendment that are filed 
with the Commission, and all written communications relating to the 
amendment between the Commission and any person, other than those that 
may be withheld from the public in accordance with the provisions of 5 
U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Room. Copies of such filing also will be 
available for inspection and copying at the principal office of NASD.
    All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to the File Number SR-NASD-2004-
125 and should be submitted on or before September 23, 2005.

VII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\27\ that the proposed rule change, as amended, (SR-NASD-2004-125) 
is approved, and that Amendment No. 2 to the proposed rule change be, 
and hereby is, approved on an accelerated basis.
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    \27\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-4803 Filed 9-1-05; 8:45 am]
BILLING CODE 8010-01-P

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