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]

Download as PDF 78242 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 (http://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 (http://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). VerDate Aug<31>2005 20:03 Dec 27, 2006 Jkt 211001 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 PO 00000 Frm 00115 Fmt 4703 Sfmt 4703 letter in response to the proposal.6 On November 8, 2006, NASD filed Amendment No. 2 to the proposed rule change.7 The text of Amendment No. 2 to the proposed rule change is available on NASD’s Web site at http:// www.nasd.com, at NASD’s Office of the Secretary, and at the Commission’s Public Reference Room. This order approves the proposed rule change, as amended. 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. E:\FR\FM\28DEN1.SGM 28DEN1 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 sroberts on PROD1PC70 with NOTICES 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 VerDate Aug<31>2005 20:03 Dec 27, 2006 Jkt 211001 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 PO 00000 Frm 00116 Fmt 4703 Sfmt 4703 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). E:\FR\FM\28DEN1.SGM 28DEN1 78244 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 VerDate Aug<31>2005 20:03 Dec 27, 2006 Jkt 211001 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. PO 00000 Frm 00117 Fmt 4703 Sfmt 4703 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. E:\FR\FM\28DEN1.SGM 28DEN1 Federal Register / Vol. 71, No. 249 / Thursday, December 28, 2006 / Notices 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). sroberts on PROD1PC70 with NOTICES 24 17 VerDate Aug<31>2005 20:03 Dec 27, 2006 Jkt 211001 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. PO 00000 Frm 00118 Fmt 4703 Sfmt 4703 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 http://www.nasd.com, at NASD's Office of the Secretary, and at 
the Commission's Public Reference Room. This order approves the 
proposed rule change, as amended.
---------------------------------------------------------------------------

    \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.
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    \8\ 17 CFR 240.10b-17. Rule 10b-17 generally requires the issuer 
of a class of publicly-traded securities to provide NASD with notice 
no later than 10 days prior to the record date of a dividend or 
distribution.
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    NASD proposes to expand the scope of its authority to direct NASD 
members to halt trading and quotations to cover all OTC Equity 
Securities,\9\ which includes ADRs that trade in the OTC market as well 
as securities quoted in quotation mediums other than the OTCBB (e.g., 
the Pink Sheets).\10\ Further, NASD proposes to modify and expand the 
scope of its trading and quotation halt authority beyond halts related 
to non-compliance with Rule 10b-17 under the Act,\11\ while limiting 
such authority only to those extraordinary events that have a material 
effect on the market for the OTC Equity Security or that have the 
potential to cause major disruption to the marketplace and/or cause 
significant uncertainty in the settlement and clearance process. In 
addition, NASD proposes to increase from five business days to ten 
business days the maximum length a trading and quotation halt can be 
imposed under NASD Rule 6660. Finally, NASD proposes to adopt IM-6660-1 
that sets forth certain factors that it will consider in determining, 
in its discretion, whether to direct NASD members to halt quoting and 
trading in an OTC Equity Security.\12\ According to NASD, NASD staff 
would weigh the relevant information and make a determination whether 
halting trading in the security is appropriate and may consult with 
NASD's Uniform Practice Code (``UPC'') Committee (or any successor 
thereto) as it deems necessary or appropriate.\13\ In its proposal to 
expand its existing trading and quotation halt authority to all OTC 
Equity Securities, NASD stated its belief that its trading and 
quotation halt authority should apply uniformly to all OTC Equity 
Securities, and affirmed its belief that eliminating this disparity 
will further investor protections in this area of the securities market 
and enhance the quality of the OTC market.
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    \9\ See NASD Rule 6610(d) (defining OTC Equity Security). The 
term ``OTC Equity Security'' also includes certain exchange-listed 
securities that do not otherwise qualify for real-time trade 
reporting because they are not ``eligible securities'' as defined in 
NASD Rule 6410(d). The term ``OTC Equity Security'' does not include 
``restricted securities,'' as defined by Rule 144(a)(3) under the 
Securities Act of 1933, nor any securities designated in the PORTAL 
Market under the NASD Rule 5300 Series.
    \10\ Because the current NASD Rule 6500 Series relates solely to 
OTCBB securities, NASD is proposing to renumber NASD Rule 6545 as 
NASD Rule 6660, which would become part of the NASD rules relating 
to OTC Equity Securities.
    \11\ 17 CFR 240.10b-17.
    \12\ The proposed factors in IM-6660-1 that NASD may consider in 
determining whether to impose a trading and quotation halt under 
NASD Rule 6660(a)(3) include, but are not limited to: (1) the 
material nature of the event; (2) the material facts surrounding the 
event are undisputed and not in conflict; (3) the event has caused 
widespread confusion in the trading of the security; (4) there has 
been a material negative effect on the market for the subject 
security; (5) the potential exists for a major disruption to the 
marketplace; (6) there is significant uncertainty in the settlement 
and clearance process for the security; and/or (7) such other 
factors as NASD deems relevant in making its determination.
    \13\ The UPC Committee is a standing committee of NASD, 
currently consisting of six professionals in the securities 
industry. The UPC Committee has the authority to advise NASD on 
issues of interest and concern to the securities industry, including 
interpretations with respect to the UPC. According to NASD, NASD 
staff may present matters relating to possible trading and quotation 
halts to the UPC Committee from time to time. However, the role of 
the UPC Committee in this regard is advisory only. NASD stated that 
NASD staff would retain full power and authority to make all 
determinations under proposed NASD Rule 6660 and IM-6660-1.
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    NASD noted that, under the proposal, it would exercise significant 
discretion in determining whether a particular event affecting a 
security warranted a trading and quotation halt, and it would impose a 
halt only when it determines that halting trading and quotations in the 
security is the appropriate mechanism to protect investors and ensure a 
fair and orderly marketplace. According to NASD, its expanded trading 
and quotation halt authority would not be used to correct informational 
imbalances resulting from corporate news about an issuer because NASD 
does not have a listing or other agreement with the issuer and thus 
cannot compel the issuer to disclose material information.
    NASD intends to announce the effective date of the proposed rule 
change in a Notice to Members to be published no later than 60 days 
following Commission approval of the proposal. The effective date will 
be 30 days following publication of the Notice to Members announcing 
Commission approval of the proposal.

III. Summary of Comments and NASD's Response

    The Pink Sheets generally supported NASD's proposed rule change, 
but recommended several modifications. First, the Pink Sheets objected 
(except in the case of foreign regulatory halts) to NASD's proposal to 
impose a trading and quotation halt for more than four business days 
\14\ because of the loss of ``piggyback'' eligibility under Rule 15c2-
11 under the Act.\15\ According to the Pink Sheets, if a NASD member 
cannot rely on the piggyback provision, the member would have to comply 
with the provisions of Rule 15c2-11, including submitting a new NASD 
Form 211 to NASD, before initiating or resuming quotations in the 
security. The Pink Sheets also suggested that, because NASD's proposed 
rule change does not provide a forum to facilitate the exercise of due 
process, NASD trading and quotation halts should be limited to four 
business days. In addition, the Pink Sheets noted that trading and 
quotation halts are an effective anti-fraud weapon and should be used 
accordingly. Finally, the Pink Sheets indicated that its proposed four 
business day limit on NASD trading and quotation halts should not apply 
in the case of foreign regulatory halts.
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    \14\ The Commission notes that under existing NASD Rule 6545, 
NASD can direct NASD members to halt trading and quotations in OTCBB 
securities for up to five business days.
    \15\ 17 CFR 240.15c2-11. Under the ``piggyback'' provision of 
Rule 15c2-11, broker-dealers can publish quotations for securities 
subject to the Rule as long as the security has been quoted on each 
of at least twelve days within the previous thirty calendar days 
with no more than four successive business days without a quotation.
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    NASD, in Amendment No. 2, responded to the Pink Sheets' 
comments.\16\ NASD reaffirmed its view that its proposed rule change is 
appropriate and furthers investor protection. In response to the Pink 
Sheets' concern about the potential loss of piggyback eligibility under 
Rule 15c2-11, NASD noted that it is critical to require market makers 
to review current information regarding the issuer, as set forth in 
Rule 15c2-11 under the Act. NASD indicated that such a ``restart'' of 
the Rule 15c2-11 process is appropriate and consistent with the 
operation of Rule 15c2-11 following a Commission-imposed trading 
suspension under Section 12(k) of the Act.\17\ NASD also responded to 
the Pink Sheets' assertion that its proposed trading and quotation halt 
authority should be used more than just sparingly by explaining that 
its proposal clearly delineates the situations under which it would 
exercise its authority under the proposed rule. NASD noted that it 
intends to exercise the proposed trading and quotation halt authority 
in very limited circumstances to protect the market and investors, and 
does not believe this authority should be used liberally whenever there 
is a ``problem'' with a security.
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    \16\ See Amendment No. 2, supra note 7.
    \17\ 15 U.S.C. 78l(k).
---------------------------------------------------------------------------

    In addressing the Pink Sheets'' concern that NASD trading and 
quotation halts in OTC Equity Securities would not be subject to due 
process, NASD stated that the proposed authority is consistent with its 
statutory obligations as a self-regulatory organization, including, 
among others, its responsibility under Section

[[Page 78244]]

15A(b)(11) of the Act \18\ to ``ensure fair and informative quotations, 
to prevent fictitious or misleading quotations, and to promote orderly 
procedures for collecting, distributing, and publishing quotations.'' 
Further, NASD noted that not all determinations made by NASD staff are 
explicitly subject to a hearing process, and that decisions like 
trading and quotation halts require certainty and finality so that the 
marketplace can operate fairly and efficiently. NASD noted that a 
hearing process, even if adopted as part of its proposed rule, would 
not stay the trading and quotation halt or the Rule 15c2-11 process.
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    \18\ 15 U.S.C. 78o-3(b)(11).
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    Finally, NASD explained that the term ``foreign regulatory halt'' 
in proposed NASD Rule 6660(a)(1) would include the Canadian provincial 
exchanges or markets. NASD noted, however, that, as proposed, it would 
not impose its own trading and quotation halt if a foreign regulatory 
halt covering a given security was imposed for material news, a 
regulatory filing deficiency, or operational reasons.

IV. Discussion and Commission Findings

    The Commission has reviewed carefully the proposed rule change, the 
comment letter, and NASD's response to the comment letter, and finds 
that the proposed rule change, as amended, is consistent with the Act 
and the rules and regulations thereunder applicable to a national 
securities association, including the provisions of Section 15A(b)(6) 
of the Act,\19\ which requires, among other things, that NASD rules be 
designed to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing transactions in securities, and, in 
general, to protect investors and the public interest, and Section 
15A(b)(11) of the Act,\20\ which requires, among other things, that 
NASD rules relating to quotations be designed to produce fair and 
informative quotations, to prevent fictitious or misleading quotations, 
and to promote orderly procedures for collecting, distributing, and 
publishing quotations.\21\
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    \19\ 15 U.S.C. 78o-3(b)(6).
    \20\ 15 U.S.C. 78o-3(b)(11).
    \21\ In approving this proposed rule change, as amended, the 
Commission notes that it has considered the proposed rule's impact 
on efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    The Commission believes that NASD's proposal to permit trading and 
quotation halts in OTC Equity Securities can benefit the marketplace 
and investors when an extraordinary event occurs that has had a 
material effect on the market for the OTC Equity Security or has caused 
or has the potential to cause major disruption to the marketplace or 
significant uncertainty in the settlement and clearance process. NASD 
Rule 6660 is designed to provide the marketplace with the opportunity 
to widely digest and disseminate the information that precipitated the 
market condition and provide NASD with the opportunity to consider 
whether further regulatory action is warranted in a particular 
circumstance.\22\ The Commission believes that NASD's proposed trading 
and quotation halt rule for OTC Equity Securities, when appropriately 
applied under the circumstances specified in the proposed rule, is 
designed to foster the integrity of quotations for these securities and 
to promote the protection of investors and the public interest.
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    \22\ The Commission notes that quotations in an OTC Equity 
Security may not automatically resume when a trading and quotation 
halt expires. In particular, if a trading and quotation halt was in 
effect for more than four consecutive business days, the 
``piggyback'' exception in Rule 15c2-11(f)(3) under the Act would 
not be available and, in that case, broker-dealers would be required 
to comply with the requirements of Rule 15c2-11 and NASD Rule 6740 
before initiating or resuming quotations for the subject security.
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    In particular, the Commission believes that NASD's proposal to 
expand its trading and quotation halt authority to situations involving 
extraordinary events with respect to OTC Equity Securities should 
enable NASD to impose trading and quotation halts in OTC Equity 
Securities under a broader set of circumstances than it may impose 
today for OTCBB securities. The Commission believes that the proposal 
is intended to strike a reasonable balance between NASD's interest in 
imposing trading and quotation halts for OTC Equity Securities under 
circumstances warranting a halt, while establishing a clear standard 
that limits the imposition of trading and quotation halts for these 
securities to exigent circumstances.
    In the Commission's view, the proposed factors set forth in 
proposed IM-6660-1, to be considered by NASD when determining whether a 
trading and quotation halt would be the appropriate mechanism to 
protect investors and ensure a fair and orderly marketplace, would help 
provide transparency to NASD's trading and quotation halt process. The 
Commission believes that NASD's proposed factors are tailored to assist 
NASD's determination of whether an extraordinary event has occurred 
that warrants the imposition of a trading and quotation halt. The 
Commission further believes that NASD's ability to consult with the UPC 
Committee (or any successor thereto), in an advisory capacity only, as 
it deems necessary, is an appropriate mechanism for NASD staff to 
benefit from the insight of market professionals, while NASD retains 
ultimate authority to determine whether to impose a trading and 
quotation halt.
    The Commission believes that it is appropriate for NASD to expand 
its authority to halt trading and quotation to all OTC Equity 
Securities. This proposal would enable NASD to impose trading and 
quotation halts in OTC Equity Securities that are quoted in trading 
venues other than, or in addition to, the OTCBB, and would thereby 
assist NASD in carrying out its self-regulatory responsibilities for 
the over-the-counter marketplace.
    The Commission further believes that extending from five to ten the 
maximum number of business days for which NASD may impose a trading and 
quotation halt is reasonably designed to protect investors and the 
public interest and to foster the integrity of quotations for OTC 
Equity Securities. This change would provide NASD with the ability to 
impose a trading and quotation halt of up to ten business days in the 
event that NASD believes that, under the circumstances, a halt of this 
length is necessary to protect investors and ensure a fair and orderly 
marketplace.
    Finally, the Commission notes that the proposal permits NASD to 
halt trading and quoting of an OTC Equity Security when NASD determines 
that an extraordinary event has occurred that, under NASD Rule 6660, 
justifies the imposition of such a halt. In such case, imposition of a 
trading and quotation halt would provide a measure of certainty and 
finality to the marketplace and investors. The Commission notes that 
NASD's administration of its proposed rule is subject to continuing 
Commission oversight, and that NASD, as a registered national 
securities association, remains bound by its obligations as a self-
regulatory organization under the Act and all relevant rules and 
regulations thereunder.
    For the reasons described above, the Commission believes that 
NASD's proposed rule change promotes the protection of investors and 
the public interest by expanding NASD's authority to direct NASD 
members to halt quotation and trading in an OTC Equity Security under 
appropriate circumstances.

[[Page 78245]]

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\23\ that the proposed rule change (SR-NASD-2006-039), as amended, 
be, and it hereby is, approved.
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    \23\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E6-22197 Filed 12-27-06; 8:45 am]
BILLING CODE 8011-01-P