Self-Regulatory Organizations; Notice of Filing of proposed rule Change by The National Association of Securities Dealers, Inc. Adding Listing Requirements To Prohibit Immediate Delistings of Units on Nasdaq

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34515; File No. SR-NASD-94-38]

Self-Regulatory Organizations; Notice of Filing of proposed rule

Change by The National Association of Securities Dealers, Inc. Adding

Listing Requirements To Prohibit Immediate Delistings of Units on

Nasdaq

August 10, 1994.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on July 28,

1994, the National Association of Securities Dealers, Inc. (``NASD'' or

``Association'') filed with the Securities and Exchange Commission

(``SEC'' or ``Commission'') the proposed rule change as described in

Items I, II, and III below, which Items have been prepared by the

NASD.\1\ The Commission is publishing this notice to solicit comments

on the proposed rule change from interested persons.

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\1\The proposed rule change was originally filed on June 21,

1994, and was amended twice; once on July 22, 1994, and again on

July 28, 1994. Both amendments are available for inspection in the

Commission's Public Reference Room.

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I. Self-Regulatory Organization's Statement of the Terms of Substance

of the Proposed Rule Change

Pursuant to the provisions of Section 19(b)(1) of the Act, the NASD

is filing a proposed rule change related to the listing requirements in

Parts II and III of Schedule D to the NASD By-Laws that would require

that: (1) An issuer of units included for quotation on Nasdaq maintain

the listing for a minimum period of 30 days; (2) an issuer provide the

NASD with notice of delisting of the units at least 15 days prior to

such action; and (3) an issuer disclose in the prospectus any intention

to immediately delist the units. Below is the text of the proposed rule

change. Proposed new language is italicized.

Schedule D

Part II

Sec. 1(c)(10(a) * * *

(b) in the case of units, the minimum period for inclusion of

the unites shall be 30 days from the first day of inclusion, except

the period may be shortened if the units are suspended or withdrawn

for regulatory purposes. Issuers and underwriters seeking to

withdraw units from inclusion must provide the Association with

notice of such intent at least 15 days prior to withdrawal.

* * * * *

Sec. 1(c) (21) The issuer of units shall include in its

prospectus or other offering document used in connection with any

offering of securities that is required to be filed with the

Commission under the Federal securities laws and the rules and

regulations thereunder a statement regarding any intention to delist

the units immediately after the minimum inclusion period.

* * * * *

Part III

Sec. 5.

(1) Units

(1) Minimum Inclusion Period and Notice of Withdrawal

In the case of units, the minimum period for inclusion of the

units shall be 30 days from the first day of inclusion, except the

period may be shortened if the units are suspended or withdrawn for

regulatory purposes. Issuers and underwrites seeking to withdraw

units from inclusion must provide the Association with notice of

such intent at least 15 days prior to withdrawal.

(2) Disclosure Requirements for Units

Each Nasdaq/NM issuer of units shall include in its prospectus

or other offering document used in connection with any offering of

securities that is required to be filed with the Commission under

the federal securities laws and the rules and regulations

promulgated thereunder a statement regarding any intention to delist

the units immediately after the minimum inclusion period.

II. Self-Regulatory Organizations's Statement of the Purpose of and

Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, the 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

test of these statements may be examined at the places specified in

item IV below. The 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

The purpose of the new listing requirements for units is to address

concerns that Nasdaq has experienced related to issuers listing and

then almost immediately thereafter withdrawing units from inclusion

after trading has commenced. In several instances, certain issuers of

units have included such units for quotation on Nasdaq combining as a

unit common stock previously quoted on Nasdaq with previously quoted or

newly-issued warrants for the same common stock. Shortly after the

units are listed and trading has commenced, these issuers, without any

prior disclosure of their intention or advance notice to investors,

market makers, or Nasdaq, delist the units. Because active trading in

these securities has commenced with the expectation that the units will

continue to be listed on Nasdaq, the sudden withdrawal from quotation

significantly and adversely affect both market markers and investors

who have traded in these securities.

The practice of immediate delisting without adequate disclosure

clearly poses harm to traders and investors in those securities and

adversely affects the integrity of the Nasdaq Stock Market. The

practice causes investor confusion because investors who have purchased

the units no longer have a liquid market in which to trade these

securities. Additionally, the sudden withdrawal may cause difficulties

for investors and market makers alike who have established short

positions in the units. These traders may be unable to cover their

short positions after the delisting has occurred, and are likely to be

required to cover these short positions by purchasing the components of

the unit separately, frequently at a premium to the price originally

being quoted prior to the delisting. Indeed, in those situations where

warrants have been issued separately from the unit, it may be

impossible to cover the short position.

The NASD is also concerned because the practice of immediate

delisting of units appears to raise serious regulatory issues regarding

proper disclosure of the issuers' intentions regarding the units and it

poses questions about manipulative practices in the market for the

units. For example, if the prospectus contains no information regarding

the issuer's intention or contemplation of delisting immediately or

shortly after trading commences, it is reasonable to question whether

adequate disclosure of the issuer's plans was made. Moreover, if they

lead underwriter involved in the offering also dominates or controls

the market in the units, concerns regarding manipulation of the

security arise if the intention is to force short selling investors to

cover their short positions at a premium to the unit prices.

To address these concerns and to promote and enhance the integrity

of the Nasdaq Stock Market, the NASD is proposing three changes to its

inclusion criteria for units. As noted, for both Nasdaq SmallCAPSM

units and National Market units, the NASD proposes to impose a minimum

30-day period within which the units may not be delisted, absent a

legitimate regulatory interest in so doing. In addition, the NASD

believes that the issuer and its advisors should provide the NASD with

adequate notice of their intention to delist, so that the NASD may

provide adequate notice to investors and market makers before the

delisting occurs. Because it is important that investors be provided

with sufficient time to obtain the information and assess its effect on

their positions, the NASD is proposing that the issuer provide such

notice to the NASD at least 15 days before the delisting is to occur.

In addition, the NASD is concerned that issuers of units may need

to take additional steps to ensure that adequate disclosure of their

intentions regarding delisting is made to investors prior to the

offering of the units. It would appear to be a reasonable implication

that an issuer that delists within a short period, i.e., a matter of

days, after the initial inclusion on Nasdaq should reasonably have

anticipated that such an event was intended or likely to occur.

Therefore, the NASD proposes to require that issuers make adequate

disclosure of their delisting intentions in their prospectuses.

As noted in a recent Commission release regarding Nasdaq Stock

Market listing requirements,\2\ the NASD has the authority to preserve

and strengthen the quality of and public confidence in its market.

Nasdaq inclusion criteria are intended to promote investor confidence

and support the country's capital formation process. Accordingly,

inclusion of a security in the Nasdaq Stock Market should carry with it

the confidence that the security will continue to be available for

trading once listed, unless regulatory issues with the security arise.

These proposed changes address concerns regarding the trading and

listing process for Nasdaq securities and enhance the integrity of

Nasdaq listings. With the minimum listing requirement of 30 days for

units, the NASD enhances the likelihood that an orderly trading market

in these securities will exist. Similarly, the 15 day advance notice of

delisting and adequate disclosure of an issuer's intent to delist

promotes proper disclosure of material information of use to investors

and to market makers. Consequently, the NASD believes that the proposed

rule change is consistent with Section 15A(b)(6) in that these proposed

changes are designed to prevent fraudulent and manipulative acts and

practices, to promote just and equitable principles of trade, to

facilitate transactions in these securities, to remove impediments to

and perfect the mechanism of a free and open market and national market

system, and, in general, to protect investors and the public interest.

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\2\Securities Exchange Act Release No. 34151 (June 3, 1994), 59

FR 29843 (June 9, 1994).

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(B) Self-Regulatory Organization's Statement on Burden on Competition

The NASD does not believe that the proposed rule change will result

in any burden on competition that is not necessary or appropriate in

furtherance of the purposes of the Act, as amended.

(C) Self-Regulatory Organization's Statement on Comments on the

Proposed Rule Change Received From Members, Participants, or Others

Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for

Commission Action

Within 35 days of the date of publication of this notice in the

Federal Register or within such longer period (i) as the Commission may

designate up to 90 days of such date if it finds such longer period to

be appropriate and publishes its reasons for so finding or (ii) as to

which the NASD consents, the Commission will:

(A) By order approve such proposed rule change, or

(B) Institute proceedings to determine whether the proposed rule

change should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and

arguments concerning the foregoing. In particular, the Commission

invites the written views of interested persons concerning any hardship

encountered by members or other persons due to the unforeseen delisting

of units and whether the proposed rule change will provide effective

protection against such hardship. Persons making written submissions

should file six copies thereof with the Secretary, Securities and

Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.

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 will also be

available for inspection and copying at the principal office of the

NASD. All submissions should refer to file number SR-NASD-94-38 and

should be submitted by September 8, 1994.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\3\

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\3\17 CFR 200.30-3(a)(12).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-20315 Filed 8-17-94; 8:45am]

BILLING CODE 8010-01-M