Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Approving Proposed Rule Change Relating to the Addition of Listing Requirements to Prohibit Immediate Withdrawal of Units From Inclusion on Nasdaq

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34690; File No. SR-NASD-94-38]

Self-Regulatory Organizations; National Association of Securities

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

Addition of Listing Requirements to Prohibit Immediate Withdrawal of

Units From Inclusion on Nasdaq

September 20, 1994.

On July 28, 1994, the National Association of Securities Dealers,

Inc. (``NASD'' or ``Association'') filed with the Securities and

Exchange Commission (``SEC'' or ``Commission'') a proposed rule

change\1\ pursuant to Section 19(b)(1) of the Securities Exchange Act

of 1934 (``Act'')\2\ and Rule 19b-4 Thereunder.\3\ The rule change

amends the listing requirements found in Parts II and III of Schedule D

to the NASD By-Laws to include additional requirements for units.

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\1\The proposed rule change was initially submitted on June 21,

1994, and was amended twice prior to the publication of the Notice;

once on July 22, 1994, and again on July 28, 1994.

\2\15 U.S.C. 78s(b)(1).

\3\17 CFR 240.19b-4.

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Under the rule as amended, in order to be included on the National

Association of Securities Dealers Automated Quotation Service

(``Nasdaq''), units included for quotation on Nasdaq must continue to

be included for a minimum period of 30 days from the first day of

inclusion, barring suspension or withdrawal for regulatory purposes.

The rule also requires those issuers or underwriters seeking to

withdraw units from inclusion to provide the NASD with notice of their

intent at least 15 days prior to withdrawal. In addition, an issuer of

units will be required to include in its prospectus or other offering

document a statement disclosing any intention to withdraw the units

immediately after the minimum inclusion period.

Notice of the proposed rule change, together with its terms of

substance was provided by issuance of a Commission release\4\ and by

publication in the Federal Register.\5\

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\4\Securities Exchange Act Rel. No. 34515 (August 10, 1994).

\5\59 FR 42626 (August 18, 1994).

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No comments were received in response to the notice. This order

approves the proposed rule change.

The new listing requirements have been proposed in response to the

concerns of the NASD related to issuers that list and then almost

immediately thereafter withdraw units from inclusion after trading has

commenced.\6\ As the NASD indicated in its rule filing, problems have

arisen in instances where, shortly after certain units had been

included for quotation and trading had commenced, the issuers or their

underwriters suddenly withdrew their units from inclusion without any

prior disclosure of their intention or advance notice to investors,

market makers, or Nasdaq. Because active trading in these securities

had commenced with the expectation that the units would continue to be

included on Nasdaq, the sudden withdrawal from quotation significantly

and adversely affected the market makers and investors who traded in

these securities.

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\6\Generally, units are created by combining common stock of a

corporation already quoted on Nasdaq with warrants for the same

common stock.

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The practice of immediate withdrawal of units from inclusion

without adequate disclosure clearly poses harm to traders and investors

in these securities and adversely affects the integrity of the Nasdaq

Stock Market. The practice leads to confusion because market

participants who have purchased the units are left without a liquid

market in which to trade these securities.

Moreover, if the lead underwriter involved in an offering also

dominates or controls the market in the units, concerns regarding

manipulation of the security may arise. A sudden withdrawal may cause

difficulties for investors and market makers alike who may have

established short positions in the units. These traders may be unable

to cover their short positions after the withdrawal 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 withdrawal. In fact, in

situations where warrants have not been issued separately from the

unit, it may be impossible to ``recreate'' the unit so as to cover the

short position.

To address these concerns, the NASD's proposal makes three changes

to its inclusion criteria for units. As noted, for both Nasdaq Small

CapSM units and National Market units, the proposal will impose a

minimum 30-day period within which the units may not be withdrawn,

absent a legitimate regulatory interest in so doing. In addition, the

amendment will require issuers and underwriters seeking to withdraw

units from inclusion to provide the NASD with at least 15 days notice

of their intention to withdraw, so that the NASD may provide adequate

notice to investors and market makers before the withdrawal occurs.

Issuers having any intention to withdraw the units immediately after

the minimum inclusion period also will have to disclose their intention

in the prospectus or other offering document.

The Commission has determined to approve the NASD's proposal. The

Commission finds that the rule change is consistent with the

requirements of the Act and the rules and regulations thereunder

applicable to the NASD, including the requirements of Section 15A(b)(6)

of the Act.\7\ Section 15A(b)(6) requires, in part, that the rules of a

national securities association 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 mechanism

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

general, to protect investors and the public interest. The proposed

rule change addresses concerns regarding the trading and inclusion

process for units and enhances the integrity of Nasdaq listings. With

the minimum inclusion requirement of 30 days for units, the amendment

enhances the likelihood that an orderly trading market in these

securities will exist. Similarly, requiring both a 15-day advance

notice of withdrawal and an adequate disclosure of an issuer's

intention to withdraw its units from inclusion promotes proper

disclosure of information of use to all market participants.

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\7\15 U.S.C. 78o-3(b)(6).

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It is therefore ordered, pursuant to Section 19(b)(2) of the Act,

that the proposed rule change SR-NASD-94-38 be, and hereby is,

approved.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\8\

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\8\17 CFR 200.30-3(a)(12).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-23843 Filed 9-26-94; 8:45 am]

BILLING CODE 8010-01-M