Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Approving Proposed Rule Change to Expand the Universe of Equity Securities Eligible for Quotation in the OTC Bulletin Board Service

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-33507; File No. SR-NASD-93-24]

Self-Regulatory Organizations; National Association of Securities

Dealers, Inc.; Order Approving Proposed Rule Change to Expand the

Universe of Equity Securities Eligible for Quotation in the OTC

Bulletin Board Service

January 24, 1994.

I. Introduction

On April 5, 1993, the National Association of Securities Dealers,

Inc. (``NASD'' or ``Association'') 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 expand the universe of equity

securities eligible for quotation in the OTC Bulletin Board Service

(``OTCBB''). Specifically, the NASD proposes that any equity security

meeting the following criteria will be deemed eligible for quotation in

the OTCBB: (1) The security is listed on one or more regional stock

exchanges in the U.S. and (2) the security does not meet the

requirements for dissemination of transaction reports through the

facilities of the Consolidated Tape (``non-Tape B securities'').

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\1\15 U.S.C. 78s(b)(1) (1988).

\2\17 CFR 240.19b-4 (1991).

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The proposed rule change was published for comment in Securities

Exchange Act Release No. 32169 (April 19, 1993), 58 FR 22010. The

Commission received five comment letters on the proposal,\3\ and an

NASD response to those letters,\4\ all of which are discussed below.

This order approves the proposed rule change.

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\3\See letter from George W. Mann, Senior Vice President and

General Counsel, Boston Stock Exchange, Inc. (``BSE''), to Jonathan

G. Katz, Secretary, Commission, dated May 18, 1993; letter from

David P. Semak, Vice President, Pacific Stock Exchange, Inc.

(``PSE''), to Jonathan G. Katz, Secretary, Commission, dated May 18,

1993; letter from William W. Uchimoto, Vice President and General

Counsel, Philadelphia Stock Exchange, Inc. (``Phlx''), to Jonathan

G. Katz, Secretary, Commission; letter from Edward G. Culverwell,

Culverwell & Co. Inc. (``Culverwell''), to Jonathan Katz, Secretary,

Commission, dated October 18, 1993; and letter from Cheryl Hess,

Chief Financial Officer, Thoratec Laboratories Corporation

(``Thoratec'') to Secretary, Commission, dated November 8, 1993.

\4\See letter from Robert E. Aber, Vice President and General

Counsel, NASD, to Jonathan G. Katz, Secretary, Commission, dated

November 9, 1993.

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II. Description of the Proposal

The NASD proposes to expand the universe of equity securities

eligible for quotation in the OTCBB. In the NASD's original proposal to

implement the OTCBB,\5\ the universe of securities classified as

potentially eligible for inclusion was limited to equity securities

that were neither qualified for inclusion on Nasdaq nor listed on a

U.S. securities exchange. The instant filing would expand that

classification by permitting certain exchange-listed equities to be

quoted in the OTCBB. The subset of equity securities affected by this

proposal is limited to those listed on any regional stock exchange

(i.e., current and prospective listings) and not included in the

definition of ``Eligible Securities'' under the Consolidated Tape

Plan.\6\

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\5\Securities Exchange Act Release No. 27975-A (May 30, 1990),

55 FR 23161 (File No. SR-NASD-88-19).

\6\Part VI(a) of the Consolidated Tape Plan defines ``Eligible

Securities'' to include any common stock, long-term warrant, or

preferred stock registered or admitted to unlisted trading

privileges on any national securities exchange other than the New

York Stock Exchange (``NYSE'') or the American Stock Exchange

(``Amex''), which, at the time of such registration or the

commencement of such trading, substantially meets the original

listing requirements of the NYSE or of the Amex.

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The NASD currently engages in surveillance of the relevant

securities. In 1991, the NASD Schedule H end-of-day reporting

requirements were expanded to cover over-the-counter (``OTC'')

transactions in exchange-listed equities that were not eligible for

transaction reporting on the Consolidated Tape.\7\ Under the current

proposal, this same group of equity securities would become eligible

for quotation in the OTCBB by NASD member firms that function as market

makers in this electronic medium. The NASD states that its surveillance

capabilities will be enhanced by the electronic capture of quotation

data to the extent that member firms elect to quote these securities in

the OTCBB.

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\7\NASD members that effect OTC transactions in exchange-listed

securities that are eligible for Consolidated Tape reporting must

observe the transaction reporting requirements contained in Schedule

G to the NASD By-Laws.

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In the present proposal, the NASD states that it recognizes that

some securities covered by this rule change might eventually qualify

for dissemination of transaction reports over the Consolidated Tape by

listing on one of the primary stock exchanges. If this occurs, the

security would no longer be qualified for quotation in the OTCBB. NASD

member firms desiring to continue as market makers for those securities

would have to then register as Consolidated Quotation Service (``CQS'')

market makers in accord with Part VII of Schedule D to the NASD By-

Laws.

III. Summary of Comments

The Commission received five comment letters on the proposal, of

which two favor,\8\ and three oppose Commission approval of the

proposal.\9\

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\8\See letters from Culverwell and Thoratec, supra note 3.

\9\See letters from BSE, Phlx, and PSE, supra note 3.

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The two letters favoring Commission approval of the proposal, one

from a regionally listed corporation and the other from an OTC market

maker, argue that the proposed expansion of securities eligible for

quotation in the OTCBB would add beneficial exposure to the relevant

securities. One letter also discusses difficulties in ascertaining

symbols in regioinally-listed securities, and argues that dual trading

with the OTCBB would increase access to market information.

The Phlx, in opposition to the proposal, states that the proposed

expansion goes well beyond the original scope and purpose contemplated

by the Commission's approval of the OTCBB which, the letter states, was

to provide more timely trading information in non-listed and non-Nasdaq

securities. The Phlx believes that for the NASD's listing expansion to

be consistent with National Market System objectives, the OTCBB must

reflect Phlx quotations as well as NASD member quotations, identify the

Phlx's three-character stock symbols for the relevant securities to

avoid confusion,\10\ and assure Phlx access to OTCBB member quotations.

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\10\The Phlx states that, in telephone conversations with the

NASD, the Phlx learned that the NASD intends to disseminate

quotations in the relevant securities using a four or five character

securities symbol rather than the exchanges' current three character

symbol.

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The BSE and PSE request that the Commission delay approval of the

present proposal, which they believe relates to other similar

initiatives by the NASD to trade listed stocks. The BSE and PSE argue

that approval of the present proposal, therefore, may have a

prejudicial effect on the treatment of these initiatives in the

Commission's Market 2000 Study.\11\ The BSE and PSE also state that if

the proposal is approved, the dissemination of quotations for each

listed stock should be limited to the symbol currently used by the

listing exchange to avoid shareholder and market participant confusion.

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\11\See Securities Exchange Act Release No. 30920 (July 14,

1992), 57 FR 32587 (July 22, 1992) (Market 2000 Study Concept

Release).

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The NASD responded to the letters opposing the Commission approval

of the proposal. With respect to uniform symbols, the NASD states that

each market center or quotation medium has been allowed to develop its

own conventions for collecting and disseminating dealers' quotations in

non-Tape B securities.\12\ According to the NASD, the OTCBB cannot

accommodate security symbols with fewer than four characters, and it is

not economically feasible to make the changes requested by the

exchanges, particularly in light of the small number of non-Tape B

securities potentially affected by the proposal. The NASD also notes

that approximately 90 equities currently listed on The Nasdaq Stock

Market are simultaneously listed on a regional exchange, and to the

NASD's knowledge, the different symbol format has not produced

confusion among investors.

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\12\The Commission notes that non-Tape B securities are not

subject to a transaction reporting plan, and therefore, do not fall

within the Rule 11Aa3-1(a)(4) definition of a ``reported security''

(i.e., a listed equity security or NASDAQ security for which

transaction reports are required to be made on a real-time basis

pursuant to an effective transaction reporting plan). Thus, non-Tape

B securities are not subject to the statutory requirements for

consolidated reporting. Accordingly, the Commission generally has

allowed the self-regulatory organizations to develop individual

procedures for trade and quotation reporting in those securities.

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The NASD states that it believes that, with respect to the present

proposal, greater potential for confusion probably lies with member

firm personnel than public investors. To minimize this potential, the

NASD is willing to modify the OTCBB Symbol Directory to provide a

separate alphabetical listing of all non-Tape B securities that NASD

members elect to quote in the OTCBB. The listing would include the four

character OTCBB symbol, the three character exchange symbol, and an

indication of the regional exchange on which the security is listed.

The NASD also would periodically publish a separate listing with this

information in the ``OTC Update,'' another publication dealing with the

OTCBB that specifically targets the trading community.\13\

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\13\The NASD will ensure that, within two months of this order,

the ``OTC Update'' will include this separate listing. Also, the

NASD will ensure that the Fall 1994 OTCBB Symbol Directory and all

future OTCBB Symbol Directories will include this modified listing.

Telephone conversation between Michael Kulczak, NASD and Betsy

Prout, Commission, January 19, 1994.

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In response to the request for consolidated reporting, the NASD

states that it has reviewed the possibility of creating a central

facility for consolidating and disseminating market information, and

concludes that it is not economically feasible to construct a central

facility dedicated to processing quotation and transaction information

for the relevant securities (approximately 200 securities, which the

NASD does not expect to increase significantly). The NASD addresses

potential specialist participation in the OTCBB, observing that

participation in the OTCBB is open to any NASD member firm, including

those also acting as regional specialists, as long as the firm meets

the financial and operational requirements for market making and enters

into a contract to receive the necessary Nasdaq terminal service. On

the other hand, there is no statutory requirement that the NASD

accommodate non-member market makers in the OTCBB. The NASD also notes

that a broker-dealer's membership in a self-regulatory organization is

essential to ensure adequate regulation of market participants and

discharge of the self-regulatory organization's statutory

responsibilities to enforce member's compliance with all applicable

rules governing use of its market facilities.

IV. Discussion

The Commission believes that the NASD's proposal to amend its rules

to allow OTCBB quotations in non-Tape B securities listed on one or

more regional exchange is consistent with sections 15A(b)(6) and

15A(b)(11) of the Act. Section 15A(b)(6) requires, among other things,

that the NASD's rules be designed to prevent fraudulent and

manipulative acts and practices, to promote just and equitable

principles of trade, to remove impediments to and perfect the

mechanisms of a free and open market and a national market system, and,

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

15A(b)(11) requires the NASD to include in its rules provisions

governing the form and content of quotations relating to securities

sold otherwise than on a national securities exchange, and requires

those rules to 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.

The Commission believes that inclusion of the relevant securities

in the OTCBB may lead to more effective NASD surveillance over NASD

members who trade those issues, thereby furthering the objectives of

section 15A(b)(6). Currently, the NASD monitors its members' trading

activity in the securities by analyzing aggregate volume and price

range data submitted by member firms pursuant to Schedule H of the

NASD's By-Laws. Under the present proposal, those surveillance efforts

should be enhanced by merging transaction data currently submitted by

NASD members with real-time OTCBB quotation data which would not

otherwise be readily accessible in OTC trading of non-Tape B

securities. Thus, the Commission supports the proposal in that it will

enhance the NASD's surveillance over its members' trading in the

relevant securities once they become quoted on OTCBB, and, therefore,

the Commission believes that the proposal is consistent with the

purposes of section 15A(b)(11). The Commission also believes that the

proposal is consistent with section 15A(b)(6), in that OTCBB

eligibility for non-Tape B securities should enhance the opportunity

for OTC market makers to provide dynamically updated electronic

quotations in those securities, thereby furthering the production of

fair and informative OTC market maker quotations, the prevention of

misleading quotations, and the promotion of orderly procedures for

collecting and dissemination quotations.

With respect to the comment letters received and the NASD's

response, the Commission believes that the potential benefits of the

proposal outweigh the potential risk of confusion asserted by those

opposing the proposal, and that the NASD has adequately responded to

the concerns raised in the comment letters. The Commission believes

that the NASD's suggested modification of the OTCBB Symbol Directory to

provide a separate alphabetical listing of all non-Tape B securities

that NASD members elect to quote in the OTCBB, combined with periodic

publication of a separate listing of the information, should serve to

avoid potential confusion caused by the different symbols in this

relatively small number of stocks. Thus, the Commission expects the

NASD to begin the supplemental publication efforts upon commencement of

OTCBB inclusion of the relevant securities.

While the Commission generally supports efforts for consolidated

reporting, the Commission realizes that the number of stocks affected

by this proposal is small and recognizes that the costs associated with

the creation of consolidated reporting in those securities might be

prohibitively high at this time. The Commission also recognizes that,

with respect to non-Tape B securities, the Act and the Rules thereunder

do not require consolidated quotations.\14\ Finally, the Commission

believes that, while consolidated quotations are preferable, adequate

avenues for access to OTCBB quotation information currently are

available to regional specialists, and therefore, it would be

inappropriate for the Commission to mandate consolidated quotations at

this time.

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\14\See supra, note 12.

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Finally, while the Commission is approving the present proposal,

the Commission notes that the proposal does not provide for a specific

amendment to the NASD's OTCBB Rules. Recently, the Commission approved

a proposed rule change submitted by the NASD which codified the

existing OTCBB requirements.\15\ The Commission requests that, within

30 days of publication of this order, the NASD submit a proposed rule

change to the Commission to codify the present proposal.\16\

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\15\Securities Exchange Act Release No. 33433 (January 5, 1994).

\16\The proposal states that the NASD will implement the revised

inclusion standards within 90 days of the date of the SEC's approval

order. The NASD also has supplied the Commission with language that

it intends to use in the codification. See letters from Robert E.

Aber, NASD, to Elizabeth H. MacGregor, Commission, dated July 1,

1993 and January 21, 1994. The Commission requests that the

codification of the present proposal be in place in the NASD Rules

before the NASD implements these revised inclusion standards.

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V. Conclusion

For the foregoing reasons the Commission finds that the present

proposal is consistent with the Act and the Rules and Regulations

thereunder.

It is therefore ordered, Pursuant to section 19(b)(2) of the

Act,\17\ that the proposed rule change (SR-NASD-93-24) is approved.

\17\15 U.S.C. 78s(b)(2) (1988).

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For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\18\

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\18\17 CFR 200.30-3(a)(12) (1991).

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[FR Doc. 94-2059 Filed 1-28-94; 8:45 am]

BILLING CODE 8010-01-M