Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Granting Approval to Proposed Rule Change and Amendment Nos. 1 and 2 Thereto To Amend NASD Rules To Modify and Expand NASD's Authority To Initiate Trading and Quotation Halts in OTC Equity Securities, 78242-78245 [E6-22197]
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Federal Register / Vol. 71, No. 249 / Thursday, December 28, 2006 / Notices
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act 11 and Rule 19b–4(f)(2) 12
thereunder. At any time within 60 days
of the filing of such proposed rule
change, the Commission may summarily
abrogate such rule change if it appears
to the Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of the Act.
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 File
Number SR–ISE–2006–65 and should be
submitted on or before January 18, 2007.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
BILLING CODE 8011–01–P
sroberts on PROD1PC70 with NOTICES
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–ISE–2006–65 on the subject
line.
Paper comments
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–ISE–2006–65. 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 proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change 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 the ISE. All
11 15
12 17
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(2).
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For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.13
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E6–22193 Filed 12–27–06; 8:45 am]
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–54952; File No. SR–NASD–
2006–039]
Self-Regulatory Organizations;
National Association of Securities
Dealers, Inc.; Order Granting Approval
to Proposed Rule Change and
Amendment Nos. 1 and 2 Thereto To
Amend NASD Rules To Modify and
Expand NASD’s Authority To Initiate
Trading and Quotation Halts in OTC
Equity Securities
December 18, 2006.
I. Introduction
On March 22, 2006, the National
Association of Securities Dealers, Inc.
(‘‘NASD’’) filed with the Securities and
Exchange Commission (‘‘Commission’’),
pursuant to section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a
proposed rule change to: (1) Amend
NASD rules to modify and expand
NASD’s authority to direct its members
to halt trading and quotation in certain
over-the-counter (‘‘OTC’’) equity
securities (‘‘OTC Equity Securities’’); 3
and (2) adopt factors that NASD may
consider in determining, in its
discretion, whether to impose a trading
and quotation halt in OTC Equity
Securities. On May 23, 2006, NASD
filed with the Commission Amendment
No. 1 to the proposed rule change.4 The
proposed rule change, as amended, was
published for comment in the Federal
Register on June 7, 2006.5 The
Commission received one comment
13 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See NASD Rule 6610(d).
4 Amendment No. 1 replaced and superseded the
original rule filing in its entirety.
5 See Securities Exchange Act Release No. 53920
(June 1, 2006), 71 FR 33026 (‘‘Notice’’).
1 15
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letter in response to the proposal.6 On
November 8, 2006, NASD filed
Amendment No. 2 to the proposed rule
change.7 The text of Amendment No. 2
to the proposed rule change is available
on NASD’s Web site at https://
www.nasd.com, at NASD’s Office of the
Secretary, and at the Commission’s
Public Reference Room. This order
approves the proposed rule change, as
amended.
II. Description of the Proposal
NASD proposes to expand the scope
of its authority with respect to trading
and quotation halts in OTC Equity
Securities. Currently, NASD Rule 6545
provides NASD with limited trading
and quotation halt authority solely for
securities quoted on the OTC Bulletin
Board (‘‘OTCBB’’). Specifically, under
NASD Rule 6545, NASD can direct
NASD members to halt trading and
quotations in OTCBB securities only
where: (1) The OTCBB security (or
security underlying an OTCBB
American Depository Receipt (‘‘ADR’’))
is listed on or registered with a foreign
securities exchange or market and the
foreign securities exchange or market or
regulatory authority halts trading in the
security; (2) the OTCBB security (or the
security underlying the OTCBB ADR) is
a derivative or component of a security
listed on or registered with The
NASDAQ Stock Market LLC or a
national securities exchange or foreign
securities exchange or market and that
exchange or market halts trading in the
underlying security; or (3) the issuer of
the OTCBB security (or security
underlying the OTCBB ADR) fails to
comply with the requirements of Rule
10b–17 under the Act.8 NASD Rule
6545 provides NASD with authority to
halt trading and quotations of OTCBB
securities in the foregoing
6 See Letter from R. Cromwell Coulson, Chief
Executive Office, Pink Sheets LLC (‘‘Pink Sheets’’),
to Nancy M. Morris, Secretary, Commission, dated
July 10, 2006.
7 In Amendment No. 2, which supplemented the
proposed rule change as filed, NASD made
typographical, non-substantive changes to the rule
text contained in the proposed rule change. Two of
the technical changes that are the subject of
Amendment No. 2 were incorporated into the rule
text that was published in the Notice. See Notice,
supra note 5, at note 5 and accompanying text
(citing to a conversation between Kosha Dalal,
Associate General Counsel, NASD, and Tim Fox,
Special Counsel, Division of Market Regulation,
Commission, on June 1, 2006). In addition, in
Amendment No. 2, NASD responded to the
comments raised in the Pink Sheets Letter. In light
of the purely technical nature of Amendment No.
2, the Commission is not publishing Amendment
No. 2 for public comment.
8 17 CFR 240.10b–17. Rule 10b–17 generally
requires the issuer of a class of publicly-traded
securities to provide NASD with notice no later
than 10 days prior to the record date of a dividend
or distribution.
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Federal Register / Vol. 71, No. 249 / Thursday, December 28, 2006 / Notices
circumstances for up to five business
days.
NASD proposes to expand the scope
of its authority to direct NASD members
to halt trading and quotations to cover
all OTC Equity Securities,9 which
includes ADRs that trade in the OTC
market as well as securities quoted in
quotation mediums other than the
OTCBB (e.g., the Pink Sheets).10
Further, NASD proposes to modify and
expand the scope of its trading and
quotation halt authority beyond halts
related to non-compliance with Rule
10b–17 under the Act,11 while limiting
such authority only to those
extraordinary events that have a
material effect on the market for the
OTC Equity Security or that have the
potential to cause major disruption to
the marketplace and/or cause significant
uncertainty in the settlement and
clearance process. In addition, NASD
proposes to increase from five business
days to ten business days the maximum
length a trading and quotation halt can
be imposed under NASD Rule 6660.
Finally, NASD proposes to adopt IM–
6660–1 that sets forth certain factors
that it will consider in determining, in
its discretion, whether to direct NASD
members to halt quoting and trading in
an OTC Equity Security.12 According to
NASD, NASD staff would weigh the
relevant information and make a
determination whether halting trading
in the security is appropriate and may
consult with NASD’s Uniform Practice
Code (‘‘UPC’’) Committee (or any
successor thereto) as it deems necessary
or appropriate.13 In its proposal to
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9 See
NASD Rule 6610(d) (defining OTC Equity
Security). The term ‘‘OTC Equity Security’’ also
includes certain exchange-listed securities that do
not otherwise qualify for real-time trade reporting
because they are not ‘‘eligible securities’’ as defined
in NASD Rule 6410(d). The term ‘‘OTC Equity
Security’’ does not include ‘‘restricted securities,’’
as defined by Rule 144(a)(3) under the Securities
Act of 1933, nor any securities designated in the
PORTAL Market under the NASD Rule 5300 Series.
10 Because the current NASD Rule 6500 Series
relates solely to OTCBB securities, NASD is
proposing to renumber NASD Rule 6545 as NASD
Rule 6660, which would become part of the NASD
rules relating to OTC Equity Securities.
11 17 CFR 240.10b–17.
12 The proposed factors in IM–6660–1 that NASD
may consider in determining whether to impose a
trading and quotation halt under NASD Rule
6660(a)(3) include, but are not limited to: (1) the
material nature of the event; (2) the material facts
surrounding the event are undisputed and not in
conflict; (3) the event has caused widespread
confusion in the trading of the security; (4) there
has been a material negative effect on the market
for the subject security; (5) the potential exists for
a major disruption to the marketplace; (6) there is
significant uncertainty in the settlement and
clearance process for the security; and/or (7) such
other factors as NASD deems relevant in making its
determination.
13 The UPC Committee is a standing committee of
NASD, currently consisting of six professionals in
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expand its existing trading and
quotation halt authority to all OTC
Equity Securities, NASD stated its belief
that its trading and quotation halt
authority should apply uniformly to all
OTC Equity Securities, and affirmed its
belief that eliminating this disparity will
further investor protections in this area
of the securities market and enhance the
quality of the OTC market.
NASD noted that, under the proposal,
it would exercise significant discretion
in determining whether a particular
event affecting a security warranted a
trading and quotation halt, and it would
impose a halt only when it determines
that halting trading and quotations in
the security is the appropriate
mechanism to protect investors and
ensure a fair and orderly marketplace.
According to NASD, its expanded
trading and quotation halt authority
would not be used to correct
informational imbalances resulting from
corporate news about an issuer because
NASD does not have a listing or other
agreement with the issuer and thus
cannot compel the issuer to disclose
material information.
NASD intends to announce the
effective date of the proposed rule
change in a Notice to Members to be
published no later than 60 days
following Commission approval of the
proposal. The effective date will be 30
days following publication of the Notice
to Members announcing Commission
approval of the proposal.
III. Summary of Comments and NASD’s
Response
The Pink Sheets generally supported
NASD’s proposed rule change, but
recommended several modifications.
First, the Pink Sheets objected (except
in the case of foreign regulatory halts) to
NASD’s proposal to impose a trading
and quotation halt for more than four
business days 14 because of the loss of
‘‘piggyback’’ eligibility under Rule
15c2–11 under the Act.15 According to
the securities industry. The UPC Committee has the
authority to advise NASD on issues of interest and
concern to the securities industry, including
interpretations with respect to the UPC. According
to NASD, NASD staff may present matters relating
to possible trading and quotation halts to the UPC
Committee from time to time. However, the role of
the UPC Committee in this regard is advisory only.
NASD stated that NASD staff would retain full
power and authority to make all determinations
under proposed NASD Rule 6660 and IM–6660–1.
14 The Commission notes that under existing
NASD Rule 6545, NASD can direct NASD members
to halt trading and quotations in OTCBB securities
for up to five business days.
15 17 CFR 240.15c2–11. Under the ‘‘piggyback’’
provision of Rule 15c2–11, broker-dealers can
publish quotations for securities subject to the Rule
as long as the security has been quoted on each of
at least twelve days within the previous thirty
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78243
the Pink Sheets, if a NASD member
cannot rely on the piggyback provision,
the member would have to comply with
the provisions of Rule 15c2–11,
including submitting a new NASD Form
211 to NASD, before initiating or
resuming quotations in the security. The
Pink Sheets also suggested that, because
NASD’s proposed rule change does not
provide a forum to facilitate the exercise
of due process, NASD trading and
quotation halts should be limited to four
business days. In addition, the Pink
Sheets noted that trading and quotation
halts are an effective anti-fraud weapon
and should be used accordingly.
Finally, the Pink Sheets indicated that
its proposed four business day limit on
NASD trading and quotation halts
should not apply in the case of foreign
regulatory halts.
NASD, in Amendment No. 2,
responded to the Pink Sheets’
comments.16 NASD reaffirmed its view
that its proposed rule change is
appropriate and furthers investor
protection. In response to the Pink
Sheets’ concern about the potential loss
of piggyback eligibility under Rule
15c2–11, NASD noted that it is critical
to require market makers to review
current information regarding the issuer,
as set forth in Rule 15c2–11 under the
Act. NASD indicated that such a
‘‘restart’’ of the Rule 15c2–11 process is
appropriate and consistent with the
operation of Rule 15c2–11 following a
Commission-imposed trading
suspension under Section 12(k) of the
Act.17 NASD also responded to the Pink
Sheets’ assertion that its proposed
trading and quotation halt authority
should be used more than just sparingly
by explaining that its proposal clearly
delineates the situations under which it
would exercise its authority under the
proposed rule. NASD noted that it
intends to exercise the proposed trading
and quotation halt authority in very
limited circumstances to protect the
market and investors, and does not
believe this authority should be used
liberally whenever there is a ‘‘problem’’
with a security.
In addressing the Pink Sheets’’
concern that NASD trading and
quotation halts in OTC Equity Securities
would not be subject to due process,
NASD stated that the proposed
authority is consistent with its statutory
obligations as a self-regulatory
organization, including, among others,
its responsibility under Section
calendar days with no more than four successive
business days without a quotation.
16 See Amendment No. 2, supra note 7.
17 15 U.S.C. 78l(k).
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Federal Register / Vol. 71, No. 249 / Thursday, December 28, 2006 / Notices
15A(b)(11) of the Act 18 to ‘‘ensure fair
and informative quotations, to prevent
fictitious or misleading quotations, and
to promote orderly procedures for
collecting, distributing, and publishing
quotations.’’ Further, NASD noted that
not all determinations made by NASD
staff are explicitly subject to a hearing
process, and that decisions like trading
and quotation halts require certainty
and finality so that the marketplace can
operate fairly and efficiently. NASD
noted that a hearing process, even if
adopted as part of its proposed rule,
would not stay the trading and
quotation halt or the Rule 15c2–11
process.
Finally, NASD explained that the
term ‘‘foreign regulatory halt’’ in
proposed NASD Rule 6660(a)(1) would
include the Canadian provincial
exchanges or markets. NASD noted,
however, that, as proposed, it would not
impose its own trading and quotation
halt if a foreign regulatory halt covering
a given security was imposed for
material news, a regulatory filing
deficiency, or operational reasons.
IV. Discussion and Commission
Findings
The Commission has reviewed
carefully the proposed rule change, the
comment letter, and NASD’s response to
the comment letter, and finds that the
proposed rule change, as amended, is
consistent with the Act and the rules
and regulations thereunder applicable to
a national securities association,
including the provisions of Section
15A(b)(6) of the Act,19 which requires,
among other things, that NASD rules be
designed to promote just and equitable
principles of trade, to foster cooperation
and coordination with persons engaged
in regulating, clearing, settling,
processing transactions in securities,
and, in general, to protect investors and
the public interest, and Section
15A(b)(11) of the Act,20 which requires,
among other things, that NASD rules
relating to quotations be designed to
produce fair and informative quotations,
to prevent fictitious or misleading
quotations, and to promote orderly
procedures for collecting, distributing,
and publishing quotations.21
The Commission believes that
NASD’s proposal to permit trading and
quotation halts in OTC Equity Securities
can benefit the marketplace and
sroberts on PROD1PC70 with NOTICES
18 15
U.S.C. 78o–3(b)(11).
U.S.C. 78o–3(b)(6).
20 15 U.S.C. 78o–3(b)(11).
21 In approving this proposed rule change, as
amended, the Commission notes that it has
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
19 15
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20:03 Dec 27, 2006
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investors when an extraordinary event
occurs that has had a material effect on
the market for the OTC Equity Security
or has caused or has the potential to
cause major disruption to the
marketplace or significant uncertainty
in the settlement and clearance process.
NASD Rule 6660 is designed to provide
the marketplace with the opportunity to
widely digest and disseminate the
information that precipitated the market
condition and provide NASD with the
opportunity to consider whether further
regulatory action is warranted in a
particular circumstance.22 The
Commission believes that NASD’s
proposed trading and quotation halt rule
for OTC Equity Securities, when
appropriately applied under the
circumstances specified in the proposed
rule, is designed to foster the integrity
of quotations for these securities and to
promote the protection of investors and
the public interest.
In particular, the Commission
believes that NASD’s proposal to
expand its trading and quotation halt
authority to situations involving
extraordinary events with respect to
OTC Equity Securities should enable
NASD to impose trading and quotation
halts in OTC Equity Securities under a
broader set of circumstances than it may
impose today for OTCBB securities. The
Commission believes that the proposal
is intended to strike a reasonable
balance between NASD’s interest in
imposing trading and quotation halts for
OTC Equity Securities under
circumstances warranting a halt, while
establishing a clear standard that limits
the imposition of trading and quotation
halts for these securities to exigent
circumstances.
In the Commission’s view, the
proposed factors set forth in proposed
IM–6660–1, to be considered by NASD
when determining whether a trading
and quotation halt would be the
appropriate mechanism to protect
investors and ensure a fair and orderly
marketplace, would help provide
transparency to NASD’s trading and
quotation halt process. The Commission
believes that NASD’s proposed factors
are tailored to assist NASD’s
determination of whether an
extraordinary event has occurred that
warrants the imposition of a trading and
22 The Commission notes that quotations in an
OTC Equity Security may not automatically resume
when a trading and quotation halt expires. In
particular, if a trading and quotation halt was in
effect for more than four consecutive business days,
the ‘‘piggyback’’ exception in Rule 15c2–11(f)(3)
under the Act would not be available and, in that
case, broker-dealers would be required to comply
with the requirements of Rule 15c2–11 and NASD
Rule 6740 before initiating or resuming quotations
for the subject security.
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quotation halt. The Commission further
believes that NASD’s ability to consult
with the UPC Committee (or any
successor thereto), in an advisory
capacity only, as it deems necessary, is
an appropriate mechanism for NASD
staff to benefit from the insight of
market professionals, while NASD
retains ultimate authority to determine
whether to impose a trading and
quotation halt.
The Commission believes that it is
appropriate for NASD to expand its
authority to halt trading and quotation
to all OTC Equity Securities. This
proposal would enable NASD to impose
trading and quotation halts in OTC
Equity Securities that are quoted in
trading venues other than, or in addition
to, the OTCBB, and would thereby assist
NASD in carrying out its self-regulatory
responsibilities for the over-the-counter
marketplace.
The Commission further believes that
extending from five to ten the maximum
number of business days for which
NASD may impose a trading and
quotation halt is reasonably designed to
protect investors and the public interest
and to foster the integrity of quotations
for OTC Equity Securities. This change
would provide NASD with the ability to
impose a trading and quotation halt of
up to ten business days in the event that
NASD believes that, under the
circumstances, a halt of this length is
necessary to protect investors and
ensure a fair and orderly marketplace.
Finally, the Commission notes that
the proposal permits NASD to halt
trading and quoting of an OTC Equity
Security when NASD determines that an
extraordinary event has occurred that,
under NASD Rule 6660, justifies the
imposition of such a halt. In such case,
imposition of a trading and quotation
halt would provide a measure of
certainty and finality to the marketplace
and investors. The Commission notes
that NASD’s administration of its
proposed rule is subject to continuing
Commission oversight, and that NASD,
as a registered national securities
association, remains bound by its
obligations as a self-regulatory
organization under the Act and all
relevant rules and regulations
thereunder.
For the reasons described above, the
Commission believes that NASD’s
proposed rule change promotes the
protection of investors and the public
interest by expanding NASD’s authority
to direct NASD members to halt
quotation and trading in an OTC Equity
Security under appropriate
circumstances.
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V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,23 that the
proposed rule change (SR-NASD–2006–
039), as amended, be, and it hereby is,
approved.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.24
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E6–22197 Filed 12–27–06; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–54984; File No. SR–NASD–
2006–135]
Self-Regulatory Organizations;
National Association of Securities
Dealers, Inc.; Notice of Filing and
Immediate Effectiveness of Proposal
Relating to Implementation of Certain
Approved Rule Changes Reflecting the
Complete Separation of Nasdaq from
NASD
December 20, 2006.
Pursuant to section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),11 and Rule 19b–4 thereunder,2
notice is hereby given that on December
20, 2006, the National Association of
Securities Dealers, Inc. (‘‘NASD’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been substantially prepared by NASD.
NASD has filed this proposal pursuant
to Section 19(b)(3)(A) of the Act 3 and
Rule 19b–4(f)(6) thereunder 4 which
renders the proposal effective upon
filing with the Commission. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
NASD has filed a proposed rule
change relating to a phased
implementation of SR–NASD–2006–
104, which was approved by the
Commission on November 21, 2006.5
Specifically, NASD is proposing to
23 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 15 U.S.C. 78s(b)(3)(A).
4 17 CFR 240.19b–4(f)(6).
5 ≤See Securities Exchange Act Release No.
54798, 71 FR 69156 (November 29, 2006) (order
approving SR–NASD–2006–104).
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24 17
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implement on December 20, 2006,
amendments to the Plan of Allocation
and Delegation of Functions by NASD to
Subsidiaries (‘‘Delegation Plan’’) and the
By-Laws of NASD, NASD Regulation
and NASD Dispute Resolution, and the
deletion of The Nasdaq Stock Market
Inc. (‘‘Nasdaq’’) By-Laws, which were
previously approved in SR–NASD–
2006–104, to reflect Nasdaq’s complete
separation from NASD, and, on that
same date, dissolve NASD’s controlling
share in Nasdaq.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
NASD included statements concerning
the purpose of, and basis for, the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. NASD has prepared
summaries, set forth in Sections A, B,
and C below, of the most significant
aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Background
On June 30, 2006, the Commission
approved proposed rule change SR–
NASD–2005–087, which, among other
things, amended NASD’s Delegation
Plan, By-Laws and NASD rules to reflect
the operation of The NASDAQ Stock
Market LLC (the ‘‘Nasdaq Exchange’’) as
a national securities exchange for
Nasdaq-listed securities.6 For a
transitional period that commenced on
August 1, 2006, the Nasdaq Exchange
has been operating as an exchange for
Nasdaq-listed securities only. Nasdaq,
as a subsidiary of NASD, continues to
perform its obligations under the
Delegation Plan with respect to overthe-counter (‘‘OTC’’) quoting, trading
and execution of non-Nasdaq exchangelisted securities, including the operation
of, among other things, its
SuperIntermarket (‘‘SiM’’) trading
platform. Nasdaq no longer performs
any functions under the Delegation Plan
relating to Nasdaq-listed securities.
On November 21, 2006, the
Commission approved SR–NASD–2006–
104.7 Pursuant to SR–NASD–2006–104,
NASD proposed to delete the Nasdaq
6 See Securities Exchange Act Release No. 54084
(June 30, 2006), 71 FR 38935 (July 10, 2006) (order
approving SR–NASD–2005–087).
7 See note 5 supra.
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78245
By-Laws and amend the Delegation
Plan, the By-Laws of NASD, NASD
Regulation and NASD Dispute
Resolution, and NASD rules to reflect
the separation of Nasdaq from NASD
upon the operation of the Nasdaq
Exchange as a national securities
exchange for non-Nasdaq exchangelisted securities. In addition, NASD
proposed to amend NASD rules for OTC
quoting and trading in non-Nasdaq
exchange-listed securities to reflect the
manner in which NASD will be
satisfying its regulatory obligations
under the Exchange Act and the rules
thereunder on a temporary basis until
NASD’s Alternative Display Facility
(‘‘ADF’’) is able to satisfy those
obligations (‘‘Modified SiM Rules’’).8
Finally, NASD proposed to expand the
scope of the NASD/Nasdaq Trade
Reporting Facility rules to include trade
reporting in non-Nasdaq exchange-listed
securities and make other clarifying and
conforming changes. As approved, SR–
NASD–2006–104 will be effective on the
date on which the Nasdaq Exchange
operates as a national securities
exchange with respect to non-Nasdaq
exchange-listed securities. When SR–
NASD–2006–104 was originally filed,
that date was anticipated to be October
2006; however, it is now anticipated to
be in the first quarter of 2007.
Separation of Nasdaq from NASD and
Proposed Phased Implementation of
SR–NASD–2006–104
As noted above, Nasdaq continues to
exercise regulatory authority under the
Delegation Plan. Therefore, NASD
retains control of Nasdaq through a
single share of Series D Preferred Stock
(the ‘‘Series D Share’’) that allows NASD
to cast a majority of the votes in any
matter submitted to Nasdaq’s
stockholders, including the election of
Nasdaq directors. Once the delegation to
Nasdaq is no longer necessary, the
Series D Share will automatically lose
its voting rights and will be redeemed
by Nasdaq for $1.00.
In light of the delay in
implementation of portions of SR–
NASD–2006–104, NASD is proposing to
eliminate its delegation and effectuate
8 This is one of the conditions required by the
Commission before the Nasdaq Exchange can
operate as an exchange for non-Nasdaq exchangelisted securities. The Commission approved the
Nasdaq Exchange application on January 13, 2006.
See Securities Exchange Act Release No. 53128, 71
FR 3550 (January 23, 2006) (File No. 10–131). See
also Securities Exchange Act Release No. 54085
(June 30, 2006), 71 FR 38910 (July 10, 2006), which
modified the conditions set forth in the Nasdaq
Exchange approval order to allow the Nasdaq
Exchange to operate as a national securities
exchange solely with respect to Nasdaq-listed
securities.
E:\FR\FM\28DEN1.SGM
28DEN1
]]>Agencies
[Federal Register Volume 71, Number 249 (Thursday, December 28, 2006)]
[Notices]
[Pages 78242-78245]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-22197]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-54952; File No. SR-NASD-2006-039]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Order Granting Approval to Proposed Rule Change and
Amendment Nos. 1 and 2 Thereto To Amend NASD Rules To Modify and Expand
NASD's Authority To Initiate Trading and Quotation Halts in OTC Equity
Securities
December 18, 2006.
I. Introduction
On March 22, 2006, the National Association of Securities Dealers,
Inc. (``NASD'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to: (1) Amend NASD rules to modify and expand
NASD's authority to direct its members to halt trading and quotation in
certain over-the-counter (``OTC'') equity securities (``OTC Equity
Securities''); \3\ and (2) adopt factors that NASD may consider in
determining, in its discretion, whether to impose a trading and
quotation halt in OTC Equity Securities. On May 23, 2006, NASD filed
with the Commission Amendment No. 1 to the proposed rule change.\4\ The
proposed rule change, as amended, was published for comment in the
Federal Register on June 7, 2006.\5\ The Commission received one
comment letter in response to the proposal.\6\ On November 8, 2006,
NASD filed Amendment No. 2 to the proposed rule change.\7\ The text of
Amendment No. 2 to the proposed rule change is available on NASD's Web
site at https://www.nasd.com, at NASD's Office of the Secretary, and at
the Commission's Public Reference Room. This order approves the
proposed rule change, as amended.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See NASD Rule 6610(d).
\4\ Amendment No. 1 replaced and superseded the original rule
filing in its entirety.
\5\ See Securities Exchange Act Release No. 53920 (June 1,
2006), 71 FR 33026 (``Notice'').
\6\ See Letter from R. Cromwell Coulson, Chief Executive Office,
Pink Sheets LLC (``Pink Sheets''), to Nancy M. Morris, Secretary,
Commission, dated July 10, 2006.
\7\ In Amendment No. 2, which supplemented the proposed rule
change as filed, NASD made typographical, non-substantive changes to
the rule text contained in the proposed rule change. Two of the
technical changes that are the subject of Amendment No. 2 were
incorporated into the rule text that was published in the Notice.
See Notice, supra note 5, at note 5 and accompanying text (citing to
a conversation between Kosha Dalal, Associate General Counsel, NASD,
and Tim Fox, Special Counsel, Division of Market Regulation,
Commission, on June 1, 2006). In addition, in Amendment No. 2, NASD
responded to the comments raised in the Pink Sheets Letter. In light
of the purely technical nature of Amendment No. 2, the Commission is
not publishing Amendment No. 2 for public comment.
---------------------------------------------------------------------------
II. Description of the Proposal
NASD proposes to expand the scope of its authority with respect to
trading and quotation halts in OTC Equity Securities. Currently, NASD
Rule 6545 provides NASD with limited trading and quotation halt
authority solely for securities quoted on the OTC Bulletin Board
(``OTCBB''). Specifically, under NASD Rule 6545, NASD can direct NASD
members to halt trading and quotations in OTCBB securities only where:
(1) The OTCBB security (or security underlying an OTCBB American
Depository Receipt (``ADR'')) is listed on or registered with a foreign
securities exchange or market and the foreign securities exchange or
market or regulatory authority halts trading in the security; (2) the
OTCBB security (or the security underlying the OTCBB ADR) is a
derivative or component of a security listed on or registered with The
NASDAQ Stock Market LLC or a national securities exchange or foreign
securities exchange or market and that exchange or market halts trading
in the underlying security; or (3) the issuer of the OTCBB security (or
security underlying the OTCBB ADR) fails to comply with the
requirements of Rule 10b-17 under the Act.\8\ NASD Rule 6545 provides
NASD with authority to halt trading and quotations of OTCBB securities
in the foregoing
[[Page 78243]]
circumstances for up to five business days.
---------------------------------------------------------------------------
\8\ 17 CFR 240.10b-17. Rule 10b-17 generally requires the issuer
of a class of publicly-traded securities to provide NASD with notice
no later than 10 days prior to the record date of a dividend or
distribution.
---------------------------------------------------------------------------
NASD proposes to expand the scope of its authority to direct NASD
members to halt trading and quotations to cover all OTC Equity
Securities,\9\ which includes ADRs that trade in the OTC market as well
as securities quoted in quotation mediums other than the OTCBB (e.g.,
the Pink Sheets).\10\ Further, NASD proposes to modify and expand the
scope of its trading and quotation halt authority beyond halts related
to non-compliance with Rule 10b-17 under the Act,\11\ while limiting
such authority only to those extraordinary events that have a material
effect on the market for the OTC Equity Security or that have the
potential to cause major disruption to the marketplace and/or cause
significant uncertainty in the settlement and clearance process. In
addition, NASD proposes to increase from five business days to ten
business days the maximum length a trading and quotation halt can be
imposed under NASD Rule 6660. Finally, NASD proposes to adopt IM-6660-1
that sets forth certain factors that it will consider in determining,
in its discretion, whether to direct NASD members to halt quoting and
trading in an OTC Equity Security.\12\ According to NASD, NASD staff
would weigh the relevant information and make a determination whether
halting trading in the security is appropriate and may consult with
NASD's Uniform Practice Code (``UPC'') Committee (or any successor
thereto) as it deems necessary or appropriate.\13\ In its proposal to
expand its existing trading and quotation halt authority to all OTC
Equity Securities, NASD stated its belief that its trading and
quotation halt authority should apply uniformly to all OTC Equity
Securities, and affirmed its belief that eliminating this disparity
will further investor protections in this area of the securities market
and enhance the quality of the OTC market.
---------------------------------------------------------------------------
\9\ See NASD Rule 6610(d) (defining OTC Equity Security). The
term ``OTC Equity Security'' also includes certain exchange-listed
securities that do not otherwise qualify for real-time trade
reporting because they are not ``eligible securities'' as defined in
NASD Rule 6410(d). The term ``OTC Equity Security'' does not include
``restricted securities,'' as defined by Rule 144(a)(3) under the
Securities Act of 1933, nor any securities designated in the PORTAL
Market under the NASD Rule 5300 Series.
\10\ Because the current NASD Rule 6500 Series relates solely to
OTCBB securities, NASD is proposing to renumber NASD Rule 6545 as
NASD Rule 6660, which would become part of the NASD rules relating
to OTC Equity Securities.
\11\ 17 CFR 240.10b-17.
\12\ The proposed factors in IM-6660-1 that NASD may consider in
determining whether to impose a trading and quotation halt under
NASD Rule 6660(a)(3) include, but are not limited to: (1) the
material nature of the event; (2) the material facts surrounding the
event are undisputed and not in conflict; (3) the event has caused
widespread confusion in the trading of the security; (4) there has
been a material negative effect on the market for the subject
security; (5) the potential exists for a major disruption to the
marketplace; (6) there is significant uncertainty in the settlement
and clearance process for the security; and/or (7) such other
factors as NASD deems relevant in making its determination.
\13\ The UPC Committee is a standing committee of NASD,
currently consisting of six professionals in the securities
industry. The UPC Committee has the authority to advise NASD on
issues of interest and concern to the securities industry, including
interpretations with respect to the UPC. According to NASD, NASD
staff may present matters relating to possible trading and quotation
halts to the UPC Committee from time to time. However, the role of
the UPC Committee in this regard is advisory only. NASD stated that
NASD staff would retain full power and authority to make all
determinations under proposed NASD Rule 6660 and IM-6660-1.
---------------------------------------------------------------------------
NASD noted that, under the proposal, it would exercise significant
discretion in determining whether a particular event affecting a
security warranted a trading and quotation halt, and it would impose a
halt only when it determines that halting trading and quotations in the
security is the appropriate mechanism to protect investors and ensure a
fair and orderly marketplace. According to NASD, its expanded trading
and quotation halt authority would not be used to correct informational
imbalances resulting from corporate news about an issuer because NASD
does not have a listing or other agreement with the issuer and thus
cannot compel the issuer to disclose material information.
NASD intends to announce the effective date of the proposed rule
change in a Notice to Members to be published no later than 60 days
following Commission approval of the proposal. The effective date will
be 30 days following publication of the Notice to Members announcing
Commission approval of the proposal.
III. Summary of Comments and NASD's Response
The Pink Sheets generally supported NASD's proposed rule change,
but recommended several modifications. First, the Pink Sheets objected
(except in the case of foreign regulatory halts) to NASD's proposal to
impose a trading and quotation halt for more than four business days
\14\ because of the loss of ``piggyback'' eligibility under Rule 15c2-
11 under the Act.\15\ According to the Pink Sheets, if a NASD member
cannot rely on the piggyback provision, the member would have to comply
with the provisions of Rule 15c2-11, including submitting a new NASD
Form 211 to NASD, before initiating or resuming quotations in the
security. The Pink Sheets also suggested that, because NASD's proposed
rule change does not provide a forum to facilitate the exercise of due
process, NASD trading and quotation halts should be limited to four
business days. In addition, the Pink Sheets noted that trading and
quotation halts are an effective anti-fraud weapon and should be used
accordingly. Finally, the Pink Sheets indicated that its proposed four
business day limit on NASD trading and quotation halts should not apply
in the case of foreign regulatory halts.
---------------------------------------------------------------------------
\14\ The Commission notes that under existing NASD Rule 6545,
NASD can direct NASD members to halt trading and quotations in OTCBB
securities for up to five business days.
\15\ 17 CFR 240.15c2-11. Under the ``piggyback'' provision of
Rule 15c2-11, broker-dealers can publish quotations for securities
subject to the Rule as long as the security has been quoted on each
of at least twelve days within the previous thirty calendar days
with no more than four successive business days without a quotation.
---------------------------------------------------------------------------
NASD, in Amendment No. 2, responded to the Pink Sheets'
comments.\16\ NASD reaffirmed its view that its proposed rule change is
appropriate and furthers investor protection. In response to the Pink
Sheets' concern about the potential loss of piggyback eligibility under
Rule 15c2-11, NASD noted that it is critical to require market makers
to review current information regarding the issuer, as set forth in
Rule 15c2-11 under the Act. NASD indicated that such a ``restart'' of
the Rule 15c2-11 process is appropriate and consistent with the
operation of Rule 15c2-11 following a Commission-imposed trading
suspension under Section 12(k) of the Act.\17\ NASD also responded to
the Pink Sheets' assertion that its proposed trading and quotation halt
authority should be used more than just sparingly by explaining that
its proposal clearly delineates the situations under which it would
exercise its authority under the proposed rule. NASD noted that it
intends to exercise the proposed trading and quotation halt authority
in very limited circumstances to protect the market and investors, and
does not believe this authority should be used liberally whenever there
is a ``problem'' with a security.
---------------------------------------------------------------------------
\16\ See Amendment No. 2, supra note 7.
\17\ 15 U.S.C. 78l(k).
---------------------------------------------------------------------------
In addressing the Pink Sheets'' concern that NASD trading and
quotation halts in OTC Equity Securities would not be subject to due
process, NASD stated that the proposed authority is consistent with its
statutory obligations as a self-regulatory organization, including,
among others, its responsibility under Section
[[Page 78244]]
15A(b)(11) of the Act \18\ to ``ensure fair and informative quotations,
to prevent fictitious or misleading quotations, and to promote orderly
procedures for collecting, distributing, and publishing quotations.''
Further, NASD noted that not all determinations made by NASD staff are
explicitly subject to a hearing process, and that decisions like
trading and quotation halts require certainty and finality so that the
marketplace can operate fairly and efficiently. NASD noted that a
hearing process, even if adopted as part of its proposed rule, would
not stay the trading and quotation halt or the Rule 15c2-11 process.
---------------------------------------------------------------------------
\18\ 15 U.S.C. 78o-3(b)(11).
---------------------------------------------------------------------------
Finally, NASD explained that the term ``foreign regulatory halt''
in proposed NASD Rule 6660(a)(1) would include the Canadian provincial
exchanges or markets. NASD noted, however, that, as proposed, it would
not impose its own trading and quotation halt if a foreign regulatory
halt covering a given security was imposed for material news, a
regulatory filing deficiency, or operational reasons.
IV. Discussion and Commission Findings
The Commission has reviewed carefully the proposed rule change, the
comment letter, and NASD's response to the comment letter, and finds
that the proposed rule change, as amended, is consistent with the Act
and the rules and regulations thereunder applicable to a national
securities association, including the provisions of Section 15A(b)(6)
of the Act,\19\ which requires, among other things, that NASD rules be
designed to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing transactions in securities, and, in
general, to protect investors and the public interest, and Section
15A(b)(11) of the Act,\20\ which requires, among other things, that
NASD rules relating to quotations be designed to produce fair and
informative quotations, to prevent fictitious or misleading quotations,
and to promote orderly procedures for collecting, distributing, and
publishing quotations.\21\
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\19\ 15 U.S.C. 78o-3(b)(6).
\20\ 15 U.S.C. 78o-3(b)(11).
\21\ In approving this proposed rule change, as amended, the
Commission notes that it has considered the proposed rule's impact
on efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
---------------------------------------------------------------------------
The Commission believes that NASD's proposal to permit trading and
quotation halts in OTC Equity Securities can benefit the marketplace
and investors when an extraordinary event occurs that has had a
material effect on the market for the OTC Equity Security or has caused
or has the potential to cause major disruption to the marketplace or
significant uncertainty in the settlement and clearance process. NASD
Rule 6660 is designed to provide the marketplace with the opportunity
to widely digest and disseminate the information that precipitated the
market condition and provide NASD with the opportunity to consider
whether further regulatory action is warranted in a particular
circumstance.\22\ The Commission believes that NASD's proposed trading
and quotation halt rule for OTC Equity Securities, when appropriately
applied under the circumstances specified in the proposed rule, is
designed to foster the integrity of quotations for these securities and
to promote the protection of investors and the public interest.
---------------------------------------------------------------------------
\22\ The Commission notes that quotations in an OTC Equity
Security may not automatically resume when a trading and quotation
halt expires. In particular, if a trading and quotation halt was in
effect for more than four consecutive business days, the
``piggyback'' exception in Rule 15c2-11(f)(3) under the Act would
not be available and, in that case, broker-dealers would be required
to comply with the requirements of Rule 15c2-11 and NASD Rule 6740
before initiating or resuming quotations for the subject security.
---------------------------------------------------------------------------
In particular, the Commission believes that NASD's proposal to
expand its trading and quotation halt authority to situations involving
extraordinary events with respect to OTC Equity Securities should
enable NASD to impose trading and quotation halts in OTC Equity
Securities under a broader set of circumstances than it may impose
today for OTCBB securities. The Commission believes that the proposal
is intended to strike a reasonable balance between NASD's interest in
imposing trading and quotation halts for OTC Equity Securities under
circumstances warranting a halt, while establishing a clear standard
that limits the imposition of trading and quotation halts for these
securities to exigent circumstances.
In the Commission's view, the proposed factors set forth in
proposed IM-6660-1, to be considered by NASD when determining whether a
trading and quotation halt would be the appropriate mechanism to
protect investors and ensure a fair and orderly marketplace, would help
provide transparency to NASD's trading and quotation halt process. The
Commission believes that NASD's proposed factors are tailored to assist
NASD's determination of whether an extraordinary event has occurred
that warrants the imposition of a trading and quotation halt. The
Commission further believes that NASD's ability to consult with the UPC
Committee (or any successor thereto), in an advisory capacity only, as
it deems necessary, is an appropriate mechanism for NASD staff to
benefit from the insight of market professionals, while NASD retains
ultimate authority to determine whether to impose a trading and
quotation halt.
The Commission believes that it is appropriate for NASD to expand
its authority to halt trading and quotation to all OTC Equity
Securities. This proposal would enable NASD to impose trading and
quotation halts in OTC Equity Securities that are quoted in trading
venues other than, or in addition to, the OTCBB, and would thereby
assist NASD in carrying out its self-regulatory responsibilities for
the over-the-counter marketplace.
The Commission further believes that extending from five to ten the
maximum number of business days for which NASD may impose a trading and
quotation halt is reasonably designed to protect investors and the
public interest and to foster the integrity of quotations for OTC
Equity Securities. This change would provide NASD with the ability to
impose a trading and quotation halt of up to ten business days in the
event that NASD believes that, under the circumstances, a halt of this
length is necessary to protect investors and ensure a fair and orderly
marketplace.
Finally, the Commission notes that the proposal permits NASD to
halt trading and quoting of an OTC Equity Security when NASD determines
that an extraordinary event has occurred that, under NASD Rule 6660,
justifies the imposition of such a halt. In such case, imposition of a
trading and quotation halt would provide a measure of certainty and
finality to the marketplace and investors. The Commission notes that
NASD's administration of its proposed rule is subject to continuing
Commission oversight, and that NASD, as a registered national
securities association, remains bound by its obligations as a self-
regulatory organization under the Act and all relevant rules and
regulations thereunder.
For the reasons described above, the Commission believes that
NASD's proposed rule change promotes the protection of investors and
the public interest by expanding NASD's authority to direct NASD
members to halt quotation and trading in an OTC Equity Security under
appropriate circumstances.
[[Page 78245]]
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\23\ that the proposed rule change (SR-NASD-2006-039), as amended,
be, and it hereby is, approved.
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\23\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\24\
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\24\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E6-22197 Filed 12-27-06; 8:45 am]
BILLING CODE 8011-01-P
