Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Approving Proposed Rule Change and Notice of Filing and Order Granting Accelerated Approval of Amendment No. 3 Relating to the Revision of the Criteria for Initial and Continued Listing on The Nasdaq Stock Market, Inc.

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38961; File No. SR-NASD-97-16]

Self-Regulatory Organizations; National Association of Securities

Dealers, Inc.; Order Approving Proposed Rule Change and Notice of

Filing and Order Granting Accelerated Approval of Amendment No. 3

Relating to the Revision of the Criteria for Initial and Continued

Listing on The Nasdaq Stock Market, Inc.

August 22, 1997.

I. Introduction

On March 3, 1997, the National Association of Securities Dealers,

Inc. (``NASD'' or ``Association''), through its wholly owned subsidiary

The Nasdaq Stock Market, Inc. (``Nasdaq''), filed with the Securities

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

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

1934 (``Act'')\1\ and Rule 19b-4 thereunder \2\ to revise its listing

and maintenance standards for Nasdaq National Market (``NNM'') and

SmallCap designated issuers. On March 27, 1997, the NASD filed

Amendment No. 1 to the proposal.\3\ On April 1, 1997, the NASD filed

Amendment No. 2 to the proposal.\4\ On June 17, 1997, the NASD filed

Amendment No. 3 to the proposal.\5\

---------------------------------------------------------------------------

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

\2\ 17 CFR 240.19b-4.

\3\ Letter from Robert E. Aber, Vice President and General

Counsel, Nasdaq, to Katherine England, Assistant Director,

Commission (March 27, 1997) (``Amendment No. 1''). Amendment No. 1

makes technical and conforming changes to the proposed rule filing.

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

Counsel, Nasdaq, to Katherine England, Assistant Director,

Commission (April 1, 1997) (``Amendment No. 2''). Amendment No. 2

makes technical and conforming changes to the proposed rule filing.

\5\ Letter from Robert E. Aber, Vice President and General

Counsel, Nasdaq, to Katherine England, Assistant Director,

Commission (June 17, 1997) (``Amendment No. 3''). Amendment No. 3

makes technical and conforming changes to the proposed rule filing,

correcting clerical errors and defining terms used in the rule

language. For example, Amendment No. 3 defines two abbreviations

used in the rules, as well as the terms ``Market Value'' and

``Country of Domicile.''

---------------------------------------------------------------------------

Notice of the substance of the proposed rule change and Amendment

Nos. 1 and 2 was provided by issuance of a release \6\ and by

publication in the Federal Register.\7\ Eight comment letters regarding

the proposed rule change

[[Page 45896]]

were received.\8\ This order approves the proposed rule change, as

amended, and approves Amendment No. 3 on an accelerated basis.

---------------------------------------------------------------------------

\6\ Exchange Act Release No. 38469 (April 2, 1997).

\7\ 62 FR 17262 (April 9, 1997).

\8\ Letters from Gerald L. Fishman, Fishman & Merrick, P.C.

(April 18, 1997) (``Fishman Letter''); Sam Rosen, Shannon, Gracey,

Ratliff & Miller, L.L.P. (April 28, 1997) (``Rosen Letter'');

Friedlob Sanderson Raskin Paulson & Tourtillot, LLC (April 30, 1997)

(``Friedlob Letter''); Van P. Carter, Walter & Haverfield P.L.L.

(April 30, 1997) (``Carter Letter''); James F. Duffy, American Stock

Exchange, Inc. (May 1, 1997) (``Amex Letter''); Bob Cardon,

Corporate Secretary, Dynatronics (May 6, 1997) (``Dynatronics Letter

No. 1''); Kelvyn H. Cullimore, Jr., President, Dynatronics (May 8,

1997) (``Dynatronics Letter No. 2''); and Sharon C. Kaiser, Chief

Financial Officer, HemaCare Corporation (May 30, 1997) (``HemaCare

Letter).

---------------------------------------------------------------------------

II. Description of the Proposal

The NASD has filed with the Commission a proposal to revise the

Rule 4300 and 4400 Series governing the listing and maintenance

standards for NNM and SmallCap designated issuers. Listing and

maintenance standards for NNM issuers were last modified on January 9,

1989.\9\ SmallCap listing and maintenance standards were last modified

on August 30, 1991.\10\

---------------------------------------------------------------------------

\9\ Exchange Act Release No. 26433 (January 9, 1989), 54 FR 1463

(January 13, 1989). Many states have exempted securities designated

as NNM from state registration requirements.

\10\ Exchange Act Release No. 29638 (August 30, 1991), 56 FR

44108 (September 6, 1991).

---------------------------------------------------------------------------

The NASD states that the purpose of the revision to the listing and

maintenance standards is to increase the quality of companies listed on

Nasdaq and raise the level of investor protection. The changes,

according to the NASD, will allow Nasdaq to balance its role in capital

formation with its responsibility to provide adequate investor

protection. The NASD believes the proposed standards will: (1) Increase

safeguards to protect public investors; (2) address growth and change

in the market; (3) conform with structural enhancements to the market

that are currently underway; and (4) address the changes in the market

since Nasdaq listing and maintenance standards were last revised.

More specifically, the proposal would: (1) Extend corporate

governance requirements already applicable to the NNM issuers to

SmallCap issuers; \11\ (2) require peer review of auditors for both NNM

and SmallCap issuers; \12\ and (3) increase the minimum requirements,

both for listing and maintenance, for NNM and SmallCap issuers.\13\ The

minimum requirements that will be increased include: (1) Net tangible

assets, market capitalization, or assets and revenue; \14\ (2) public

float and market value of public float; \15\ (3) number of market

makers; \16\ and (4) minimum bid price.\17\ These requirements are

explained in greater detail below.

---------------------------------------------------------------------------

\11\ Proposed Rule 4310(c)(25).

\12\ Proposed Rules 4310(c)(27) and 4450(m).

\13\ See generally Proposed Rule 4300 and 4400 Series.

\14\ Proposed Rules 4310(c)(2)(A), 4420(a)(5), 4420(b)(1) and

4420(c)(6) (for listing standards); Rules 4310(c)(2)(B), 4450(a)(3),

and 4450(b)(1) (for maintenance standards).

\15\ Proposed Rules 4310(c)(7), 4420(a), 4420(b) and 4420(c).

\16\ Proposed Rules 4310(c)(1), 4420(a)(7), 4420(b)(5),

4420(c)(4), 4450(b)(6) and 4450(e).

\17\ Proposed Rules 4310(c)(4) and 4450(a)(5).

---------------------------------------------------------------------------

Elimination of the Exception to the $1 Minimum Bid Price

Currently, maintenance standards for both SmallCap and NNM

designated issuers require that issuers maintain a minimum bid price of

$1. The existing standards provide an exception to the $1 bid price

requirement for issuers able to meet higher float as well as higher

capital and surplus or net tangible asset requirements.\18\

---------------------------------------------------------------------------

\18\ For SmallCap, the current exception requires $1 million in

market value of public float and $2 million in capital and surplus.

For NNM, the current exception requires $3 million in market value

of public float and $4 million in net tangible assets.

---------------------------------------------------------------------------

The NASD proposes to eliminate the exception to the $1 bid price

minimum for several reasons. First, the NASD believes the change would

remove the incentive to engage in large, below market private

placements that cause dilution and concomitant harm to Nasdaq

investors. The NASD also believes the change would provide a safeguard

against abusive market activity sometimes associated with low-priced

securities. Further, when the exception was adopted, it was intended to

address a ``temporary adverse market condition[]'' that may result in a

bid price below $1.\19\ Contrary to the NASD's stated intent in 1991,

issuers have used the exception as a permanent means of meeting the

listing standards. Finally, the NASD believes that a $1 minimum bid

price would serve to increase investor confidence and the credibility

of the Nasdaq market, commensurate with its increased prominence.

---------------------------------------------------------------------------

\19\ See Exchange Act Release No. 29638 (August 30, 1991), 56 FR

44108 (September 6, 1991).

---------------------------------------------------------------------------

Corporate Governance Standards for SmallCap Issuers

The NASD proposes to extend the corporate governance requirements

currently applicable to NNM issuers to SmallCap issuers. The

requirements include: (1) A minimum of two independent directors; (2)

an audit committee with a majority of independent directors; (3) an

annual shareholder meeting; and (4) shareholder approval for certain

corporate actions.\20\ The NASD believes the shareholder approval

requirement should help prevent further stock issuances that dilute

shareholder interest without the prior knowledge of investors. Further,

the NASD believes the audit committee, independent director, and annual

meeting requirements will provide enhanced safeguards to the investing

public.

---------------------------------------------------------------------------

\20\ It is contemplated that, as is currently the case with

respect to NNM issuers, the NASD would have the discretion to waive

or modify these corporate governance standards for foreign SmallCap

issuers where the standards are contrary to generally accepted

business practices in the issuer's country of origin.

---------------------------------------------------------------------------

Increase in the Quantitative Standards for Both the SmallCap and NNM

The NASD proposes to increase the quantitative standards for

issuers to list on SmallCap and NNM. The NASD proposes this change

because of the passage of time since the standards were last adjusted,

the opportunities to improve the quality of the market as identified by

the NASD from its experience over that period, and the concomitant

increases in the growth of the market and the rate of inflation. The

NASD believes the increases will further strengthen Nasdaq listing

criteria and enhance the quality of Nasdaq companies, while preserving

the ability of qualified Nasdaq companies to raise capital.

Market Capitalization Test for NNM

The NASD proposes to permit an issuer unable to meet either of two

alternative net tangible asset tests, as amended by the proposed rule

change.\21\ to be afforded designation as a NNM issuer provided it

initially had a market capitalization of $75 million, or total assets

and total revenue of $75 million each. For continued listing, such an

issuer would have to maintain a market capitalization of $50 million,

or total assets and total revenue of $50 million. The NASD states that

this provision would provide an alternative for issuers that may fail

to comply with the NNM net tangible asset test as a result of

accounting for goodwill associated with various merger and acquisition

activities or, as in the case of the telecommunications industry,

significant depreciation charges. The

[[Page 45897]]

NASD believes the proposed changes provide access to NNM listing for

NNM caliber companies that would otherwise not qualify due to

accounting conventions associated with certain business combinations

and specialized industries.

---------------------------------------------------------------------------

\21\ As amended under the proposed rule change for initial

listing on the National Market, an issuer must have net tangible

assets of $18 million, or $6 million if the issuer has had earnings

of $1 million in the most recent year or two of the last three

years. Net tangible assets equals total assets (including the value

of patents, copyrights and trade marks but excluding the value of

goodwill) less total liabilities. See Rule 4200(w).

---------------------------------------------------------------------------

Peer Review for Auditors of Nasdaq Listed Companies

The NASD proposes to require that auditors of Nasdaq listed

companies be subject to a practice monitoring program under which the

auditors' quality control systems would be reviewed by independent peer

auditors on a periodic basis. Currently, companies whose shares are

designated NNM or SmallCap are not required to have auditors who are

subject to such peer review.\22\ The proposal requires all independent

public accountants auditing Nasdaq listed companies to receive, or be

enrolled in, a peer review that meets acceptable guidelines. Acceptable

guidelines would include comparability to standards of the American

Institute of Certified Public Accountants (``AICPA'') included in the

Standards for Performing on Peer Reviews codified in the AICPA's SEC

Practice Section Reference Manual, and oversight by an independent body

comparable to the organizational structure of the Public Oversight

Board as codified in the AICPA's SEC Practice Section Reference Manual.

Further, the NASD proposes requiring that copies of peer review

reports, accompanied by any letters of comment and letters of response,

would be maintained by the administering entity of the peer review

program and be made available to Nasdaq upon request. Similarly, the

NASD proposes that working papers of the administering entity and the

independent oversight body would also be required to be retained for a

period after the report is filed, and be made available to Nasdaq upon

request.

---------------------------------------------------------------------------

\22\ Amex does require a program of peer review for auditors of

issuers that are applying for listing on Amex. See Amex Letter,

supra n.27.

---------------------------------------------------------------------------

Other Clarifying and Conforming Changes

The NASD also proposes to specify that the requirements relating to

the number of outstanding shareholders for SmallCap issuers be based on

the number of ``round lot'' holders of an issuer's shares. The NASD

believes this definition conforms with the standards of NNM and other

exchanges, and ensures that issuers maintain a broad and significant

shareholder base justifying a listing on a national securities market.

In addition, the NASD proposes to conform the stock price

compliance mechanism for initial listing under the NNM standards with

that of the SmallCap by specifying that the applicable price is the bid

price, and by removing the provisions under the NNM standards that

require satisfaction of the applicable stock price only ``on each of

the five business days prior to the date of application by the

issuer.'' The NASD states that the purpose of this change is to clarify

the requirement and ensure that issuers be in compliance with the bid

price requirement at the time of listing, and not just at the time

coinciding with the filing of the application.

Furthermore, the NASD proposes to amend certain provisions and

cross-references to the proposed rule changes and renumber them

appropriately. Finally, the NASD proposes to eliminate outdated

references and definitions, rename headings, and amend the Rule 4300

and 4400 Series where appropriate to replace ``Association'' with

``Nasdaq.''

III. Comments

The Commission received eight comment letters in response to the

filing, with one commenter submitting two letters.\23\ One comment

letter requested an extended comment period,\24\ six letters opposed

portions of the proposal,\25\ one letter supported portions of the

proposal,\26\ and one letter offered a clarification to the Notice

publishing the proposed rule change.\27\ The NASD submitted a letter in

response to those commenters in opposition to the proposal.\28\

---------------------------------------------------------------------------

\23\ See supra n.8.

\24\ See Fishman Letter.

\25\ See Rosen Letter, Friedlob Letter, Carter Letter,

Dynatronics Letter No. 1, Dynatronics Letter No. 2 and HemaCare

Letter.

\26\ See Friedlob Letter.

\27\ See Amex Letter. Amex clarified that, contrary to the

NASD's statement in its rule filing, Amex does require a program of

peer review for auditors of issuers that are applying for listing on

Amex.

\28\ See letter from Robert E. Aber, Vice President and General

Counsel, Nasdaq, to Katherine England, Assistant Director,

Commission (May 28, 1997) (``Nasdaq Letter'').

---------------------------------------------------------------------------

One commenter stated that issuers unable to meet the proposed NNM

maintenance requirements (which therefore would lose their NNM

designation) should not be required to apply anew for SmallCap

designation.\29\ The commenter suggested requiring issuers that lost

their NNM designation as a result of the increased maintenance

requirements to apply for SmallCap designation could have the effect of

punishing companies initially designated NNM instead of SmallCap. In

response to this comment, the NASD has stated it will provide for a

one-time waiver of the application for SmallCap designation for issuers

losing NNM designation through the implementation of the proposed

maintenance standards.\30\

---------------------------------------------------------------------------

\29\ See Rosen Letter.

\30\ See Nasdaq Letter, supra n.28.

---------------------------------------------------------------------------

Another commenter argued that the proposed implementation period

for the new listing and maintenance standards would only provide

temporary relief for affected issuers.\31\ Three commenters objected to

the proposed listing and maintenance standards because of reliance by

issuers or shareholders on existing standards.\32\ One commenter

proposed that companies currently listed on Nasdaq be governed by the

existing standards, and that companies listed after the new standards

became effective be governed by the proposed listing standards.\33\

Another commenter suggested a three year implementation period for the

new standards.\34\ A third commenter expressed a concern that issuers

were not aware of the proposal to revise the listing and maintenance

requirements because the NASD had not notified issuers that it was

going forward with the revision.\35\

---------------------------------------------------------------------------

\31\ See Friedlob Letter.

\32\ See Carter Letter, HemaCare Letter and Dynatronics Letter

No. 2.

\33\ See Carter Letter.

\34\ See HemaCare Letter.

\35\ See Dynatronics Letter No. 1.

---------------------------------------------------------------------------

The NASD, in its response to these comments, stated that issuers

may meet the new listing standards at any time between their initial

listing until 90 days after the proposal is approved by the

Commission.\36\ The NASD noted that issuers applying for Nasdaq

designation were provided with notice of the proposed changes to the

listing and maintenance standards. Further, the NASD pointed out that

when new standards were implemented in 1991, they were also applied

retroactively.

---------------------------------------------------------------------------

\36\ See Nasdaq Letter, supra n.28.

---------------------------------------------------------------------------

Another commenter believed that the proposed higher standards will

have a negative effect on small businesses and capital formation.\37\

The commenter also stated that neither the $1 minimum bid price nor the

quantitative entry and maintenance standards reflect the strength and

stability of an issuer. Another commenter objected to the maintenance

standard requiring a $1 minimum share price, stating that issuers do

not control their stock price.\38\ The commenter argued that a reverse

stock split, which could assist an issuer in meeting the $1 share price

[[Page 45898]]

minimum, is expensive and often has a negative impact on the market

capitalization of an issuer. The commenter also noted that the change

in minimum share price would not be a safeguard against improper market

activity, and might lead to manipulation as companies tried to maintain

the $1 minimum share price.

---------------------------------------------------------------------------

\37\ See Friedlob Letter.

\38\ See Dynatronics Letter No. 2.

---------------------------------------------------------------------------

The NASD responded to these comments by reiterating that the $1 bid

price requirement is an important component in the NASD's efforts to

provide safeguards against abusive market activity associated with low-

priced securities. The NASD also stated that the requirement would:

reduce large, below market issuances; curtail the interim exceptions'

use as a permanent solution for bid price deficiencies; and increase

investor confidence as well as the credibility of Nasdaq.\39\ The NASD

noted that, in response to comments it received, it expanded the time

period the bid price must be under $1 (from 10 to 30 consecutive days)

in order to fail this maintenance requirement.\40\

---------------------------------------------------------------------------

\39\ See Nasdaq Letter, supra n.28.

\40\ One commenter argued that the rule governing the 90-day

period for an issuer to return to minimum bid price maintenance

compliance applies to NNM issuers as well as SmallCap. See Rosen

Letter (discussing application of Rule 4310(c)(8)(B)). The NASD has

confirmed that this interpretation is correct. See Nasdaq Letter,

supra n.28. The NASD has clarified that the rules of the Rule 4300

Series, unless otherwise specifically noted, also apply to the NNM

issuers. Phone conversation between Andrew Margolin, Nasdaq and

Janice Mitnick, Commission, on June 13, 1997. Therefore, under the

proposed rules, both SmallCap and NNM issuers would have 90 days to

return to compliance with the $1 minimum bid.

---------------------------------------------------------------------------

Finally, one commenter endorsed the proposed corporate governance

standards, the auditor peer review proposal, and the retention of

discretion by the NASD in applying the listing criteria to issuers

applying for Nasdaq designation.\41\

---------------------------------------------------------------------------

\41\ See Friedlob Letter.

---------------------------------------------------------------------------

IV. Discussion

The Commission finds that the proposed rule change is consistent

with the requirements of the Act and the rules and regulations

thereunder applicable to a national securities exchange, and in

particular, Section 15A(b)(6).\42\ Section 15A(b)(6) requires, among

other things, that the rules of an association be designed to promote

just and equitable principles of trade, perfect the mechanism of a free

and open market, and in general, to further investor protection and the

public interest.\43\

---------------------------------------------------------------------------

\42\ 15 U.S.C. Sec. 78o-3(b)(6).

\43\ In approving this rule, the Commission notes that it has

considered the proposed rule's impact on efficiency, competition,

and capital formation. See 15 U.S.C. Sec. 78c(f).

---------------------------------------------------------------------------

The development and enforcement of adequate standards governing the

initial listing and maintenance of listing of securities is an activity

of critical importance to financial markets and the investing public.

Listing standards serve as a means for a marketplace to screen issuers

and to provide listed status only to bona fide companies with

sufficient float, investor base and trading interest to maintain fair

and orderly markets. Once an issuer has been approved for initial

listing, the maintenance criteria allow a marketplace to monitor the

status and trading characteristics of that issuers to ensure that it

continues to meet standards for market depth and liquidity. Many states

have recognized the importance of listing and maintenance standards by

exempting from state registration requirements securities traded on the

New York Stock Exchange, Inc., the American Stock Exchange, Inc., or

Nasdaq (for securities designated as NNM).

The Commission finds that the proposed rule change is an

appropriate action by the NASD in light of market growth and changes,

and the goals stated by the NASD in revising Nasdaq listing and

maintenance standards. There has been tremendous change in the Nasdaq

stock market, both in terms of volume and market developments, since

the most recent changes to the listing and maintenance requirements.

Since 1991, when the Nasdaq listing and maintenance standards were last

revised, volume on Nasdaq has more than tripled.\44\ Nasdaq is now the

second largest securities market in the world and includes hundreds of

stocks that would qualify for a New York Stock Exchange, Inc. listing.

This growth has resulted in investor expectations of a commensurate

level of quality for Nasdaq designated issuers. The Commission finds

that the NASD's attempts to meet such expectations by raising its

listing standards are appropriate and reasonably related to enhancing

the overall quality of issuers included on Nasdaq.

---------------------------------------------------------------------------

\44\ In 1991, Nasdaq's volume was 41.3 billion shares. For 1996,

Nasdaq's volume was 138.1 billion shares.

---------------------------------------------------------------------------

The new maintenance standards will become effective six months

after this rule change is approved by the Commission. The Commission

believes this time period will provide current issuers with adequate

time to complete any corporate actions necessary to comply with the new

maintenance rules.\45\ The Commission notes that when new listing and

maintenance standards were implemented in 1991, they were also applied

retroactively.\46\ At that time, the Commission stated that retroactive

implementation was necessary in order to avoid creating a two-tiered

Nasdaq market: one for issuers governed by the previous criteria, and

one for issuers required to meet the new requirements.\47\ The

Commission believes that this rationale applies to the revision of the

Nasdaq listing and maintenance standards approved here. The Commission

notes that, as discussed above, the NASD will provide for a one-time

waiver of the application for SmallCap designation for issuers losing

NNM designation through the implementation of the proposed NNM

maintenance standards.\48\

---------------------------------------------------------------------------

\45\ Such corporate actions could include the implementation of

the new corporate governance provisions required for SmallCap

issuers, or the authorization and issuance of additional shares to

meet the new market capitalization requirements.

\46\ Exchange Act Release No. 29638 (August 30, 1991), 56 FR

44108 (September 6, 1991).

\47\ The Commission also stated that retroactive application was

appropriate because the standards would assist the Commission in its

enforcement role pursuant to newly implemented rules under the Act

designated to prevent manipulation and fraud in the sale of low-

priced, non-Nasdaq designated securities. See Rule 15g-9 (previously

Rule 15c2-6).

\48\ See n.29 and accompanying discussion, supra.

---------------------------------------------------------------------------

Under the current maintenance standards for both SmallCap and NNM,

issuers must maintain a minimum bid price of $1. The current standards

provide an exception to the $1 bid price for those issuers that can

meet a higher float as well as higher capital and surplus or net

tangible asset requirements.\49\ The NASD has proposed to eliminate the

exception to the $1 bid price requirement, thereby requiring all

issuers to maintain a bid price of $1.\50\

---------------------------------------------------------------------------

\49\ For SmallCap issuers, the current exception requires $1

million in market value of public float and $2 million in capital

and surplus. For NNM issuers, the current exception requires $3

million in market value of public float and $4 million in net

tangible assets.

\50\ Under the proposal, an issuer would fail the maintenance

standard if the issuer's bid price fell below $1 for 30 consecutive

days. Once an issuer's stock falls below $1 for 30 consecutive

business days, it would have 90 days to meet the $1 standard for 10

consecutive business days, thus returning to compliance with the

maintenance standard.

---------------------------------------------------------------------------

The Commission believes that while the maintenance standard

requiring the $1 minimum bid price will have an impact on some issuers,

the potential impact is not unreasonable when viewed in light of the

goals of the revised standards. In enhancing its market, Nasdaq would

like to remove extremely low-priced stocks. The Commission finds that

the $1 bid price minimum is a reasonable measure for the NASD to use to

maintain its quality

[[Page 45899]]

control standards for issuers quoted on Nasdaq. As of May 31, 1997, the

average bid price for an NNM common stock was $15.62 and the average

bid price for a SmallCap common stock was $5.44. The Commission notes

that the $1 bid price minimum is approximately 6.4% of the NNM bid

price average and approximately 18.4% of the SmallCap bid price

average. In establishing criteria to uphold the quality of the market,

it is appropriate for the NASD to set a minimum for the stock price

that is acceptable in conjunction with the other standards for listing

and maintenance. The $1 price minimum is well below the price of most

Nasdaq securities and is a reasonable standard to use to remove low-

priced securities from Nasdaq. In addition, the Commission believes

that because share price may be increased by a reverse stock split, not

all issuers predicted to fail this maintenance standard will actually

do so.

Some of the listing and maintenance standards, as modified, will

have an impact on the ability of some issuers currently designated as

NNM and SmallCap issuers to remain as such. Since the SmallCap listing

standards were last revised in 1991, there have been modifications to

the OTCBB.\51\ Pursuant to rules patterned after the Nasdaq reporting

requirements, NASD rules now require member firms effecting

transactions in OTCBB eligible securities to transmit last sale reports

of transactions made during normal market hours within 90 seconds after

execution.\52\ The OTCBB also has a firm quote requirement pursuant to

NASD rules, obligating market makers to display firm quotes for

domestic equity securities up to a minimum quotation size \53\

determined by the bid or offer price of the security.\54\ Like

information for Nasdaq issuers, last sale prices and quotes for the

OTCBB are distributed on a real-time basis through Nasdaq Workstations

and market data vendors, which in turn distribute this information to

approximately 250,000 terminals worldwide.

---------------------------------------------------------------------------

\51\ On March 31, 1997, the Commission issued an order granting

permanent approval to the OTCBB. Exchange Act Release No. 38456

(March 31, 1997), 62 FR 16635 (April 7, 1997).

\52\ See Rule 6550.

\53\ See Rule 6540(b)(1)(B). The OTCBB did mandate a firm quote

requirement when the SmallCap listing standards were last revised;

however, the firm quote requirement did not have a minimum quote

size component. This was approved by the Commission on July 1, 1993.

Exchange Act Release No. 32570 (July 1, 1993), 58 FR 36725 (July 8,

1993).

\54\ See Rule 6750. Generally, the rule provides that the lower

the share price, the higher the minimum quote requirement. For

example, an issue with a bid price of $.50 has a minimum quote

requirement of 5,000 shares; an issue with a $9.50 bid price has a

minimum quote requirement of 500 shares. See id.

---------------------------------------------------------------------------

Hence, while there may be some effect on the quality of the market

for an issuer designated as SmallCap that moves to the OTCBB, the

impact of such a move may be less than in 1991. For example, it appears

that the average number of market makers per issuer on the OTCBB for

issuers that lost their SmallCap designation is not significantly lower

than for those same issuers on Nasdaq, just prior to losing their

SmallCap designation.

In summary, the Commission believes it is reasonable for the NASD

to raise its criteria for issuer inclusion. The heightened standards

reflects the NASD's judgment that it wants only higher quality

companies to avail themselves of the Nasdaq marketplace, and the

imprimatur that such inclusion confers. The increase in standards is

neither discriminatory nor arbitrary, and the standards are directly

related to the NASD's intended goals of enhancing its listing

standards. Therefore, the Commission believes that the proposal is

consistent with the Act.

In approving this rule change, the Commission finds that the NASD

has reached an acceptable balance between the burden that may be

imposed on issuers seeking NNM or SmallCap designation, and the market

and investor benefits to be gained by increased listing and maintenance

standards for NNM and SmallCap issuers. Issuers desire to list and

trade on Nasdaq to improve their visibility and aid in their capital

formation. Against this, the NASD must balance its statutorily mandated

obligation to maintain the integrity of the Nasdaq market, and to

protect investors and their confidence in the market. In response to

these considerations, the NASD is working to achieve its general goal

of improving the quality and nature of the market.\55\ The Commission

believes that the potential impact on some small issuers resulting from

the proposed revision to the Nasdaq listing and maintenance standards

is not unreasonable when weighed against the anticipated benefits to

the market and investors.

---------------------------------------------------------------------------

\55\ The 21(a) report and the undertakings agreed to be the NASD

have been well publicized. See August 8, 1996 Order issued pursuant

to Administrative Proceeding File No. 3-9056. The NASD is also

working to conform itself to the undertakings agreed to pursuant to

this action. See id.

---------------------------------------------------------------------------

The Commission finds good cause for approving Amendment No. 3 to

the filing prior to the 30th day after the date of publication of the

notice of the filing. Amendment No. 3 merely serves to effect a

clarification to the NASD's proposal, raises no new regulatory issues,

and does not materially impact the substance of the proposal.\56\

Accordingly, the Commission believes there is good cause, consistent

with Sections 15A(b)(6) and 19(b)(2) of the Act, to approve Amendment

No. 3 to the proposal on an accelerated basis.

---------------------------------------------------------------------------

\56\ See supra n.3.

---------------------------------------------------------------------------

V. Solicitation of Comments

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

arguments concerning Amendment No. 3. Persons making written

submissions should file six copies 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. Sec. 552, will be available for inspection and copying the

SEC'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 No. SR-NASD-97-16, and

should be submitted by September 19, 1997.

VI. Conclusion

For the reasons discussed above, the Commission finds that the

proposal is consistent with the Act, and, in particular, Section 15A of

the Act.

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

Act,\57\ that the proposed rule change (SR-NASD-97-16), as amended, is

approved.

\57\ 15 U.S.C. Sec. 78s(b)(2).

---------------------------------------------------------------------------

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97-23008 Filed 8-28-97; 8:45 am]

BILLING CODE 8010-01-M