Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the National Association of Securities Dealers, Inc. Relating to Revision of the Listing Standards for The Nasdaq Stock Market, Inc.
Federal RegisterApr 9, 1997
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38469; International Series Release No. 1070; File No.
SR-NASD-97-16]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the National Association of Securities Dealers, Inc. Relating
to Revision of the Listing Standards for The Nasdaq Stock Market, Inc.
April 2, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),1 and Rule 19b-4 2 thereunder, notice is hereby
given that on March 3, 1997,3 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 (``Commission'') the
proposed rule change as described in Items I, II and III below, which
Items have been prepared by the self-regulatory organization. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ On March 27, 1997, Nasdaq filed Amendment No. 1 to the
proposed rule change. On April 1, 1997, Nasdaq filed Amendment No. 2
to the proposed rule change. Amendment No. 1 and Amendment No. 2
make technical and conforming changes to the proposed rule filing.
See letter from Robert E. Aber, Vice President and General Counsel,
Nasdaq to Katherine England, Assistant Director, Commission, dated
March 27, 1997 and letter from Robert E. Aber, Vice President and
General Counsel, Nasdaq to Katherine England, Assistant Director,
Commission, dated April 1, 1997.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
Nasdaq proposes to amend Rules 4200, 4300, 4310, 4320, 4400, 4420,
4450, 4460, 4470 and 4480 of the NASD to revise the listing standards
for Nasdaq. Below is the text of the proposed rule change. Proposed new
language is in italic; proposed deletions are in brackets.
All references to ``the Association'' in Rules 4300 through 4480
inclusive should be replaced with ``Nasdaq,'' except in Rule 4300, Rule
4310(c)(16), Rule 4320(e)(15), Rule 4400, Rule 4420(f) and Rule 4420(g)
which are amended as indicated, below.
4200. Definitions.
For purposes of the Rule 4000 Series, unless the context requires
otherwise:
(a)--(f) No change.
[(g) ``Capital and surplus'' means total stockholders' equity as
presented in accordance with generally accepted accounting principles
as reflected on the issuer's statement of financial condition or
comparable statement.]
(h)--(j) Renumbered as (g)--(i).
(j) ``Independent director'' means a person other than an officer
or employee of the company or its subsidiaries or any other individual
having a relationship which, in the opinion of the company's board of
directors, would interfere with the exercise of independent judgment in
carrying out the responsibilities of a director.
(k)--(aa) No change.
(bb) ``Round lot holder'' means a holder of a normal unit of
trading.
(bb)--(dd) Renumbered as (cc)--(ee).
4300. Qualification Requirements For Nasdaq Stock Market Securities
The Nasdaq Stock Market [The Association, as operator of The Nasdaq
Stock Market,] is entrusted with the authority to preserve and
strengthen the quality of and public confidence in its market. The
Nasdaq Stock Market stands for integrity and ethical business practices
in order to enhance investor confidence, thereby contributing to the
financial health of the economy and supporting the capital formation
process. Nasdaq issuers, from new public companies to companies of
international stature, by being included in Nasdaq, are publicly
recognized as sharing these important objectives of the Nasdaq Stock
Market.
No further change.
4310. Qualification Requirements for Domestic and Canadian
Securities
To qualify for inclusion in Nasdaq, a security of a domestic or
Canadian issuer shall satisfy all applicable requirements contained in
paragraphs (a) or (b), and (c) hereof.
(a) No change.
(b) No change.
(c) In addition to the requirements contained in paragraph (a) or
(b) above, and unless otherwise indicated, a security shall satisfy the
following criteria for inclusion in Nasdaq:
[(1) For initial and continued inclusion, the issue shall have two
registered and active market makers, one of which may be a market maker
entering a stabilizing bid.]
(1) For initial inclusion, the issue shall have three registered
and active market makers, and for continued inclusion, the issue shall
have two registered and active market makers, one of which may be a
market maker entering a stabilizing bid.
[(2) For initial inclusion, the issuer shall have total assets of
at least $4 million. For continued inclusion, the issuer shall have
total assets of at least $2 million. An issuer's total assets will be
determined on the basis of a balance sheet prepared in accordance with
generally accepted accounting principles. Assets that are temporary or
restricted in their use will be excluded from the determination of
total assets.]
[(3) For initial inclusion, the issuer shall have capital and
surplus of at least $2 million. For continued inclusion, the issuer
shall have capital and surplus of at least $1 million. Only issues of
common and preferred stock will be included in capital and surplus.
Debentures and redeemable securities with the redemption provision
within the sole control of the holder will be excluded from the
determination of capital and surplus.]
(2)(A) For initial inclusion, the issuer shall have:
(i) net tangible assets of $4 million;
(ii) market capitalization of $50 million; or
(iii) net income of $750,000 in the most recently completed fiscal
year or in two of the last three most recently completed fiscal years.
(B) For continued inclusion, the issuer shall maintain:
(i) net tangible assets of $2 million;
(ii) market capitalization of $35 million; or
(iii) net income of $500,000 in the most recently completed fiscal
year or in two of the last three most recently completed fiscal years.
(3) For initial inclusion, the issuer shall have an operating
history of at least one year or market capitalization of $50 million.
(4) For initial inclusion, common or preferred stock shall have a
minimum bid price of [$3] $4 per share. For continued inclusion the
minimum bid price per share shall be $1 [, provided however that an
issuer shall not be required to maintain the $1 per share minimum bid
price if it maintains market value of public float of $1 million and $2
million in capital and surplus].
(5) No change.
(6) In the case of common stock, there shall be at least 300 round
lot holders of the security. An account of a member that is
beneficially owned by a customer (as defined in Rule 0120) will be
considered a holder of a security upon appropriate verification by the
member.
(7) In the case of common stock, there shall be at least [100,000]
1,000,000 publicly held shares for initial inclusion and 500,000
publicly held shares for continued inclusion. For initial inclusion
such shares shall have a market value of at least [$1] $5 million.
[[Page 17263]]
For continued inclusion such shares shall have a market value of at
least [$200,000] $1 million. Shares held directly or indirectly by any
officer or director of the issuer and by any person who is the
beneficial owner of more than 10 percent of the total shares
outstanding are not considered to be publicly held.
(8)(A) No change.
(B) A failure to meet the continued inclusion requirements for
minimum bid price and market value of public float shall be determined
to exist only if the deficiency for the applicable criterion continues
for a period of [10] 30 consecutive business days. Upon such failure,
the issuer shall be notified promptly and shall have a period of 90
calendar days from such notification to achieve compliance with the
applicable continued inclusion standard. Compliance can be achieved by
meeting the applicable standard for a minimum of 10 consecutive
business days during the 90 day compliance period.
(9)--(15) No change.
(16) Except in unusual circumstances, the issuer shall make prompt
disclosure to the public through the news media of any material
information that would reasonably be expected to affect the value of
its securities or influence investors' decisions and shall, prior to
the release of the information, provide notice of such disclosure to
Nasdaq's Market Watch Department [the Association's Market Surveillance
Department].*
*This notice shall be made to the Market Watch [Market
Surveillance] Department at 9513 Key West Avenue, Rockville, Maryland
20850-3389. The telephone number is 1-800-537-3929, (301) 590-6411, or
from 7 p.m. to 8 a.m. Eastern Time, (301) 590-6413. The fax number is
(301) 590-6482.
(17)--(24) No change.
(25) Corporate Governance Requirements--Nasdaq shall review the
issuer's past corporate governance activities when the issuer's
securities were traded on or after withdrawal from Nasdaq or a
securities exchange which imposes corporate governance requirements.
Based on such review, Nasdaq may take any appropriate action, including
placing of restrictions on or additional requirements for listing, or
the denial of listing of a security if Nasdaq determines that there
have been violations or evasions of such corporate governance
standards. Determinations under this subparagraph shall be made on a
case-by-case basis as necessary to protect investors and the public
interest.
(A) Distribution of Annual and Interim Reports
(i) Each issuer shall distribute to shareholders copies of an
annual report containing audited financial statements of the company
and its subsidiaries. The report shall be distributed to shareholders a
reasonable period of time prior to the company's annual meeting of
shareholders and shall be filed with Nasdaq at the time it is
distributed to shareholders.
(ii) Each issuer which is subject to SEC Rule 13a-13 shall make
available copies of quarterly reports including statements of operating
results to shareholders either prior to or as soon as practicable
following the company's filing of its Form 10-Q with the Commission. If
the form of such quarterly report differs from the Form 10-Q, the
issuer shall file one copy of the report with Nasdaq in addition to
filing its Form 10-Q pursuant to Rule 4310(c)(14). The statement of
operations contained in quarterly reports shall disclose, as a minimum,
any substantial items of an unusual or nonrecurrent nature and net
income before and after estimated federal income taxes or net income
and the amount of estimated federal taxes.
(iii) Each issuer which is not subject to SEC Rule 13a-13 and which
is required to file with the Commission, or another federal or state
regulatory authority, interim reports relating primarily to operations
and financial position, shall make available to shareholders reports
which reflect the information contained in those interim reports. Such
reports shall be made available to shareholders either before or as
soon as practicable following filing with the appropriate regulatory
authority. If the form of the interim report provided to shareholders
differs from that filed with the regulatory authority, the issuer shall
file one copy of the report to shareholders with Nasdaq in addition to
the report to the regulatory authority that is filed with Nasdaq
pursuant to Rule 4310(c)(14).
(B) Independent Directors
Each issuer shall maintain a minimum of two independent directors
on its board of directors.
(C) Audit Committee
Each issuer shall establish and maintain an Audit Committee, a
majority of the members of which shall be independent directors.
(D) Shareholder Meetings
Each issuer shall hold an annual meeting of shareholders and shall
provide notice of such meeting to Nasdaq.
(E) Quorum
Each issuer shall provide for a quorum as specified in its by-laws
for any meeting of the holders of common stock; provided, however, that
in no case shall such quorum be less than 33\1/3\ percent of the
outstanding shares of the company's common voting stock.
(F) Solicitation of Proxies
Each issuer shall solicit proxies and provide proxy statements for
all meetings of shareholders and shall provide copies of such proxy
solicitation to Nasdaq.
(G) Conflicts of Interest
Each issuer shall conduct an appropriate review of all related
party transactions on an ongoing basis and shall utilize the company's
Audit Committee or a comparable body of the board of directors for the
review of potential conflict of interest situations where appropriate.
(H) Shareholder Approval
(i) Each issuer shall require shareholder approval of a plan or
arrangement under subparagraph a. below or, prior to the issuance of
designated securities under subparagraph b., c., or d. below:
a. when a stock option or purchase plan is to be established or
other arrangement made pursuant to which stock may be acquired by
officers or directors, except for warrants or rights issued generally
to security holders of the company or broadly based plans or
arrangements including other employees (e.g. ESOPs). In a case where
the shares are issued to a person not previously employed by the
company, as an inducement essential to the individual's entering into
an employment contract with the company, shareholder approval will
generally not be required. The establishment of a plan or arrangement
under which the amount of securities which may be issued does not
exceed the lesser of 1% of the number of shares of common stock, 1% of
the voting power outstanding, or 25,000 shares will not generally
require shareholder approval;
b. when the issuance will result in a change of control of the
issuer;
c. in connection with the acquisition of the stock or assets of
another company if:
1. any director, officer or substantial shareholder of the issuer
has a 5% or greater interest (or such persons collectively have a 10%
or greater interest), directly or indirectly, in the
[[Page 17264]]
company or assets to be acquired or in the consideration to be paid in
the transaction or series of related transactions and the present or
potential issuance of common stock, or securities convertible into or
exercisable for common stock, could result in an increase in
outstanding common shares or voting power of 5% or more; or
2. where, due to the present or potential issuance of common stock,
or securities convertible into or exercisable for common stock, other
than a public offering for cash:
A. the common stock has or will have upon issuance voting power
equal to or in excess of 20% of the voting power outstanding before the
issuance of stock or securities convertible into or exercisable for
common stock; or
B. the number of shares of common stock to be issued is or will be
equal to or in excess of 20% of the number of shares or common stock
outstanding before the issuance of the stock or securities; or
d. in connection with a transaction other than a public offering
involving:
1. the sale or issuance by the issuer of common stock (or
securities convertible into or exercisable for common stock) at a price
less than the greater of book or market value which together with sales
by officers, directors or substantial shareholders of the company
equals 20% or more of common stock or 20% or more of the voting power
outstanding before the issuance; or
2. the sale or issuance by the company of common stock (or
securities convertible into or exercisable common stock) equal to 20%
or more of the common stock or 20% or more of the voting power
outstanding before the issuance for less than the greater of book or
market value of the stock.
(ii) Exceptions may be made upon application to Nasdaq when:
a. the delay in securing stockholder approval would seriously
jeopardize the financial viability of the enterprise; and
b. reliance by the company on this exception is expressly approved
by the Audit Committee or a comparable body of the board of directors.
A company relying on this exception must mail to all shareholders
not later than ten days before issuance of the securities a letter
alerting them to its omission to seek the shareholder approval that
would otherwise be required and indicating that the Audit Committee or
a comparable body of the board of directors has expressly approved the
exception.
(iii) Only shares actually issued and outstanding (excluding
treasury shares or shares held by a subsidiary) are to be used in
making any calculation provided for in this subparagraph (25)(H)(i)d.1.
Unissued shares reserved for issuance upon conversion of securities or
upon exercise of options or warrants will not be regarded as
outstanding.
(iv) Voting power outstanding as used in this Rule refers to the
aggregate number of votes which may be cast by holders of those
securities outstanding which entitle the holders thereof to vote
generally on all matters submitted to the company's security holders
for a vote.
(v) An interest consisting of less than either 5% of the number of
shares of common stock or 5% of the voting power outstanding of an
issuer or party shall not be considered a substantial interest or cause
the holder of such an interest to be regarded as a substantial security
holder.
(vi) Where shareholder approval is required, the minimum vote which
will constitute shareholder approval shall be a majority of the total
votes cast on the proposal in person or by proxy.
(26) Listing Agreement
Each issuer shall execute a Listing Agreement in the form
designated by Nasdaq.
(27) Peer Review
(A) Each issuer must be audited by an independent public accountant
that:
(i) has received an external quality control review by an
independent public accountant (``peer review'') that determines whether
the auditor's system of quality control is in place and operating
effectively and whether established policies and procedures and
applicable auditing standards are being followed; or
(ii) is enrolled in a peer review program and within 18 months
receives a peer review that meets acceptable guidelines.
(B) The following guidelines are acceptable for the purposes of
subparagraph (c)(27):
(i) The peer review should be comparable to AICPA standards
included in Standards for Performing on Peer Reviews, codified in the
AICPA's SEC Practice Section Reference Manual;
(ii) The peer review program should be subject to 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; and
(iii) The administering entity and the independent oversight body
of the peer review program must, as part of their rules of procedure,
require the retention of the peer review working papers for 90 days
after acceptance of the peer review report and allow Nasdaq access to
those working papers.
(d) No change.
4320. Qualification Requirements for Non-Canadian Foreign Securities
and American Depositary Receipts
To qualify for inclusion in Nasdaq, a security of a non-Canadian
foreign issuer, an American Depositary Receipt (ADR) or similar
security issued in respect of a security of a foreign issuer shall
satisfy the requirements of paragraphs (a), (b) or (c), and (d) and (e)
of this Rule.
(a)--(d) No change.
(e) In addition to the requirements contained in paragraphs (a),
(b) or (c), and (d), the security shall satisfy the following criteria
for inclusion in Nasdaq:
(1) [For initial and continued inclusion, the issue shall have two
registered and active market makers.] For initial inclusion, the issue
shall have three registered and active market makers, and for continued
inclusion, the issue shall have two registered and active market
makers. A failure to meet the continued inclusion requirement for
number of market makers shall be determined to exist only if the
deficiency continues for a period of 10 consecutive business days. Upon
such failure the issuer shall be notified promptly and shall have a
period of 30 calendar days from such notification to achieve compliance
with the market maker requirements.
(2) [For initial inclusion, the issuer shall have total assets of
at least U.S. $4 million. For continued inclusion, the issuer shall
have total assets of at least U.S. $2 million.]
(A) For initial inclusion, the issuer shall have:
(i) net tangible assets of U.S. $4 million;
(ii) market capitalization of U.S. $50 million; or
(iii) net income of U.S. $750,000 in the most recently completed
fiscal year or in two of the last three most recently completed fiscal
years.
(B) For continued inclusion, the issuer shall maintain:
(i) net tangible assets of U.S. $2 million;
(ii) market capitalization of U.S. $35 million; or
(iii) net income of U.S. $500,000 in the most recently completed
fiscal year or in two of the last three most recently completed fiscal
years.
(C) An issuer's [total] net tangible assets will be determined on
the basis of a balance sheet prepared in accordance with U.S. generally
accepted
[[Page 17265]]
accounting principles or those accompanied by detailed schedules
quantifying the differences between U.S. generally accepted accounting
principles and those of the issuer's country of domicile. [Assets that
are temporary or restricted in their use will be excluded from the
determination of total assets.]
[(3) For initial inclusion, the issuer shall have capital and
surplus of at least U.S. $2 million. For continued inclusion, the
issuer shall have capital and surplus of at least U.S. $1 million. Only
issues of common, preferred or equivalent stock will be included in
capital and surplus. Debentures and redeemable securities with the
redemption provision within the sole control of the holder will be
excluded from the determination of capital and surplus.]
[(4)] (3) In the case of a convertible debt security, for initial
inclusion, there shall be a principal amount outstanding of at least
U.S. $10 million. For continued inclusion, there shall be a principal
amount outstanding of at least U.S. $5 million.
[(5)] (4) In the case of foreign shares, there shall be at least
300 round lot holders of the security. An account of a member that is
beneficially owned by a customer (as defined in Rule 0120) will be
considered a holder of a security upon appropriate verification by the
member.
[(6)] (5) In the case of foreign shares, there shall be at least
[100,000] 1,000,000 publicly held shares for initial inclusion and
500,000 publicly held shares for continued inclusion. Shares held
directly or indirectly by any officer or director of the issuer and by
any person who is the beneficial owner of more than 10 percent of the
total shares outstanding are not considered to be publicly held.
(7)--(15) renumbered as subparagraphs (6)--(14)
(15)[16] Except in unusual circumstances, the issuer shall make
prompt disclosure to the public in the United States through
international wire services or similar disclosure media of any material
information that would reasonably be expected to affect the value of
its securities or influence investor' decisions and shall, prior to the
release of the information, provide notice of such disclosure to Nasdaq
[the Association].*
*This notice shall be made to the Market Watch [Market
Surveillance] Department at 9513 Key West Avenue, Rockville, Maryland
20850-3389. The telephone number is 1-800-537-3929, (301) 590-6411, or
from 7 p.m. to 8 a.m. Eastern Time, (301) 590-6413. The fax number is
(301) 590-6482.
(17)--(21) renumbered as subparagraphs (16)--(20)
(21) Corporate Governance Requirements--No provisions of this
subparagraph shall be construed to require any foreign issuer to do any
act that is contrary to a law, rule or regulation of any public
authority exercising jurisdiction over such issuer or that is contrary
to generally accepted business practices in the issuer's country of
domicile. Nasdaq shall have the ability to provide exemptions from the
applicability of these provisions as may be necessary or appropriate to
carry out this intent.
Nasdaq shall review the issuer's past corporate governance
activities when the issuer's securities were traded on or after
withdrawal from Nasdaq or a securities exchange which imposes corporate
governance requirements. Based on such review, Nasdaq may take any
appropriate action, including placing of restrictions on or additional
requirements for listing, or the denial of listing of a security if
Nasdaq determines that there have been violations or evasions of such
corporate governance standards. Determinations under this subparagraph
shall be made on a case-by-case basis as necessary to protect investors
and the public interest
(A) Distribution of Annual and Interim Reports
(i) Each issuer shall distribute to shareholders copies of an
annual report containing audited financial statements of the company
and its subsidiaries. The report shall be distributed to shareholders a
reasonable period of time prior to the company's annual meeting of
shareholders and shall be filed with Nasdaq at the time it is
distributed to shareholders.
(ii) Each issuer which is subject to SEC Rule 13a-13 shall make
available copies of quarterly reports including statements of operating
results to shareholders either prior to or as soon as practicable
following the company's filing of its Form 10-Q with the Commission. If
the form of such quarterly report differs from the Form 10-Q, the
issuer shall file one copy of the report with Nasdaq in addition to
filing its Form 10-Q pursuant to Rule 4310(c)(14). The statement of
operations contained in quarterly reports shall disclose, as a minimum,
any substantial items of an unusual or nonrecurrent nature and net
income before and after estimated federal income taxes or net income
and the amount of estimated federal taxes.
(iii) Each issuer which is not subject to SEC Rule 13a-13 and which
is required to file with the Commission, or another federal or state
regulatory authority, interim reports relating primarily to operations
and financial position, shall make available to shareholders reports
which reflect the information contained in those interim reports. Such
reports shall be made available to shareholders either before or as
soon as practicable following filing with the appropriate regulatory
authority. If the form of the interim report provided to shareholders
differs from that filed with the regulatory authority, the issuer shall
file one copy of the report to shareholders with Nasdaq in addition to
the report to the regulatory authority that is filed with Nasdaq
pursuant to Rule 4310(c)(14).
(B) Independent Directors
Each issuer shall maintain a minimum of two independent directors
on the board of directors.
(C) Audit Committee
Each issuer shall establish and maintain an Audit Committee, a
majority of the members of which shall be independent directors.
(D) Shareholder Meetings
Each issuer shall hold an annual meeting of shareholders and shall
provide notice of such meeting to Nasdaq.
(E) Quorum
Each issuer shall provide for a quorum as specified in its by-laws
for any meeting of the holders of common stock; provided, however, that
in no case shall such quorum be less than 33 \1/3\ percent of the
outstanding shares of the company's common voting stock.
(F) Solicitation of Proxies
Each issuer shall solicit proxies and provide proxy statements for
all meetings of shareholders and shall provide copies of such proxy
solicitation to Nasdaq.
(G) Conflicts of Interest
Each issuer shall conduct an appropriate review of all related
party transactions on an ongoing basis and shall utilize the company's
Audit Committee or a comparable body of the board of directors for the
review of potential conflict of interest situations where appropriate.
(H) Shareholder Approval
(i) Each issuer shall require shareholder approval of a plan or
arrangement under subparagraph a.
[[Page 17266]]
below or, prior to the issuance of designated securities under
subparagraph b., c., or d. below: a. when a stock option or purchase
plan is to be established or other arrangement made pursuant to which
stock may be acquired by officers or directors, except for warrants or
rights issued generally to security holders of the company or broadly
based plans or arrangements including other employees (e.g. ESOPs). In
a case where the shares are issued to a person not previously employed
by the company, as an inducement essential to the individual's entering
into an employment contract with the company, shareholder approval will
generally not be required. The establishment of a plan or arrangement
under which the amount of securities which may be issued does not
exceed the lesser of 1% of the number of shares of common stock, 1% of
the voting power outstanding, or 25,000 shares will not generally
require shareholder approval;
b. when the issuance will result in a change of control of the
issuer;
c. in connection with the acquisition of the stock or assets of
another company if:
1. any director, officer or substantial shareholder of the issuer
has a 5% or greater interest (or such persons collectively have a 10%
or greater interest), directly or indirectly, in the company or assets
to be acquired or in the consideration to be paid in the transaction or
series of related transactions and the present or potential issuance of
common stock, or securities convertible into or exercisable for common
stock, could result in an increase in outstanding common shares or
voting power of 5% or more; or
2. where, due to the present or potential issuance of common stock,
or securities convertible into or exercisable for common stock, other
than a public offering for cash:
A. the common stock has or will have upon issuance voting power
equal to or in excess of 20% of the voting power outstanding before the
issuance of stock or securities convertible into or exercisable for
common stock; or
B. the number of shares of common stock to be issued is or will be
equal to or in excess of 20% of the number of shares or common stock
outstanding before the issuance of the stock or securities; or
d. in connection with a transaction other than a public offering
involving:
1. the sale or issuance by the issuer of common stock (or
securities convertible into or exercisable for common stock) at a price
less than the greater of book or market value which together with sales
by officers, directors or substantial shareholders of the company
equals 20% or more of common stock or 20% or more of the voting power
outstanding before the issuance; or
2. the sale or issuance by the company of common stock (or
securities convertible into or exercisable common stock) equal to 20%
or more of the common stock or 20% or more of the voting power
outstanding before the issuance for less than the greater of book or
market value of the stock.
(ii) Exceptions may be made upon application to Nasdaq when:
a. the delay in securing stockholder approval would seriously
jeopardize the financial viability of the enterprise; and
b. reliance by the company on this exception is expressly approved
by the Audit Committee or a comparable body of the board of directors.
A company relying on this exception must mail to all shareholders
not later than ten days before issuance of the securities a letter
alerting them to its omission to seek the shareholder approval that
would otherwise be required and indicating that the Audit Committee or
a comparable body of the board of directors has expressly approved the
exception.
(iii) Only shares actually issued and outstanding (excluding
treasury shares or shares held by a subsidiary) are to be used in
making any calculation provided for in this subparagraph (21)(H)(i)d.1.
Unissued shares reserved for issuance upon conversion of securities or
upon exercise of options or warrants will not be regarded as
outstanding.
(iv) Voting power outstanding as used in this Rule refers to the
aggregate number of votes which may be cast by holders of those
securities outstanding which entitle the holders thereof to vote
generally on all matters submitted to the company's security holders
for a vote.
(v) An interest consisting of less than either 5% of the number of
shares of common stock or 5% of the voting power outstanding of an
issuer or party shall not be considered a substantial interest or cause
the holder of such an interest to be regarded as a substantial security
holder.
(vi) Where shareholder approval is required, the minimum vote which
will constitute shareholder approval shall be a majority of the total
votes cast on the proposal in person or by proxy.
(22) Listing Agreement
Each issuer shall execute a Listing Agreement in the form
designated by Nasdaq.
(23) Peer Review
(A) Each issuer must be audited by an independent public accountant
that:
(i) has received an external quality control review by an
independent public accountant (``peer review'') that determines whether
the auditor's system of quality control is in place and operating
effectively and whether established policies and procedures and
applicable auditing standards are being followed; or
(ii) is enrolled in a peer review program and within 18 months
receives a peer review that meets acceptable guidelines.
(B) The following guidelines are acceptable for purposes of
subparagraph (e)(23):
(i) The peer review should be comparable to AICPA standards
included in Standards for Performing on Peer Reviews, codified in the
AICPA's SEC Practice Section Reference Manual;
(ii) The peer review program should be subject to 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; and
(iii) The administering entity and the independent oversight body
of the peer review program must, as part of their rules of procedure,
require the retention of the peer review working papers for 90 days
after acceptance of the peer review report and allow Nasdaq access to
those working papers.
(f) No change.
4400. Nasdaq National Market--Issuer Designation Requirements
Pursuant to SEC Rule 11Aa2-1, those securities for which
transaction reporting is required by an effective transaction reporting
plan are designated as national market system securities. A transaction
reporting plan has been filed with the Commission under which
securities satisfying the requirements of this Rule 4400 Series are
covered by the transaction reporting plan and transactions in such
securities are subject to the transaction reporting provision of the
Rule 4630 Series. [The Association has filed with the Commission a
transaction reporting plan under which securities satisfying the
requirements of this Rule 4400 Series are covered by the transaction
reporting plan and transactions in such securities are subject to the
transaction reporting provisions of the Rule 4630 Series.]
4420. Quantitative Designation Criteria
In order to be designated, an issuer shall be required to
substantially meet the criteria set forth in paragraphs (a), (b), (c),
(d), [or (e)] (e), (f), or (g) below. Initial Public Offerings
substantially
[[Page 17267]]
meeting such criteria are eligible for immediate inclusion in the
Nasdaq National Market upon prior application and with the written
consent of the managing underwriter that immediate inclusion is
desired. [All other qualifying issues, excepting special situations,
are included on the next inclusion date established by Nasdaq.]
(a) [Alternative 1] Entry Standard 1
(1) The issuer of the security had annual pre-tax income of at
least [$750,000] $1,000,000 [and net income of at least $400,000] in
the most recently completed fiscal year or in two of the last three
most recently completed fiscal years.
(2) There are at least [500,000] 1,100,000 publicly held shares.
(3) The market value of publicly held shares is at least [$3] $8
million.
(4) The bid price per share [on each of the five business days
prior to the date of application by the issuer] is $5 or more.
(5) The issuer of the security has net tangible assets of at least
[$4] $6 million.
(6) The issuer has a minimum of [800] 400 round lot shareholders
[if the issuer has between 500,000 and 1 million shares publicly held,
or a minimum of 400 shareholders if the issuer has either (A) over 1
million shares publicly held or (B) over 500,000 shares publicly held
and average daily trading volume in excess of 2,000 shares per day for
the six months preceding the date of application].
(7) There are [A] at least [two] three registered and active
[dealers act as Nasdaq] market makers with respect to the security [on
each of the five business days preceding the date of application by the
issuer].
(b) [Alternative 2] Entry Standard 2
(1) The issuer of the security has net tangible assets of at least
[$12] $18 million.
(2) There are at least [1 million] 1,100,000 publicly held shares.
(3) The market value of publicly held shares is at least [$15] $18
million.
(4) The bid price per share [on each of the five business days
prior to the date of application by the issuer] is [$3] $5 or more.
(5) There are [A] at least [two] three registered and active
[dealers act as Nasdaq] market makers with respect to the security [on
each of the five business days preceding the date of application by the
issuer].
(6) The issuer has a [three-year] two-year operating history.
(7) The issuer has a minimum of 400 round lot shareholders.
(c) Entry Standard 3
An issuer designated under this paragraph need not also be in
compliance with the quantitative criteria for initial inclusion in the
Rule 4300 series.
(1) There are at least 1,100,000 publicly held shares.
(2) The market value of publicly held shares is at least $20
million.
(3) The bid price per share is $5 or more.
(4) There are at least four registered and active market makers
with respect to the security.
(5) The issuer has a minimum of 400 round lot shareholders.
(6) The issuer has:
(A) a market capitalization of $75 million; or
(B) total assets and total revenue of $75 million each for the most
recently completed fiscal year or two of the last three most recently
completed fiscal years.
[(c)] (d) Warrants
(1) No change.
(2) No change.
[(d)] (e) Computations
The computations required by paragraph (a)(1), (a)(5), and (b)(1)
shall be taken from the issuer's most recent financial information
filed with Nasdaq. The computations required in paragraphs (a)(2),
(a)(3), (b)(2),[ and] (b)(3), (c)(1), and (c)(2) shall be as of the
date of application of the issuer. Determinations of beneficial
ownership for purposes of paragraphs (a)(2) [and], (b)(2), and (c)(1)
shall be made in accordance with SEC Rule 13d-3. In the case of
American Depositary Receipts, the computations required by paragraphs
(a)(1), (a)(5), and (b)(1) shall relate to the foreign issuer and not
to any depositary or any other person deemed to be an issuer for
purposes of Form S-12 under the Securities Act of 1933.
[(e)] (f) Other Securities
(1) Nasdaq [The corporation] will consider designating any security
not otherwise covered by the criteria in paragraphs (a), (b), [or] (c),
or (d) of this Rule, provided the instrument is otherwise suited to
trade through the facilities of Nasdaq. Such securities will be
evaluated for designation against the following criteria:
(A) The issuer shall have assets in excess of $100 million and
stockholders' equity of at least $10 million. In the case of an issuer
which is unable to satisfy the income criteria set forth in paragraph
(a)(1), Nasdaq [the Corporation] generally will require the issuer to
have the following: (i) assets in excess of $200 million and
stockholders' equity of at least $10 million; or (ii) assets in excess
of $100 million and stockholders' equity of at least $20 million.
(B)--(D) No change.
(2) No change.
(3) No change.
[(f)] (g) Nasdaq will consider designating as Nasdaq National
Market securities Selected Equity-linked Debt Securities (SEEDS) that
generally meet the criteria of this paragraph [(f)] (g). SEEDS are
limited-term, non-convertible debt securities of an issuer where the
value of the debt is based, at least in part, on the value of another
issuer's common stock or non-convertible preferred stock (or sponsored
American Depositary Receipts (ADRs) overlying such equity securities).
(1)--(2) No change.
(3) No change.
(A)--(B) No change.
(C) be issued by:
(i) No change.
(ii) a non-U.S. company (including a company that is traded in the
United States through sponsored ADRs) (for purposes of this paragraph
(g) [(f)], a non-U.S. company is any company formed or incorporated
outside of the United States) if:
a. the Association or its subsidiaries has a comprehensive
surveillance sharing agreement in place with the primary exchange in
the country where the security is primarily traded (in the case of an
ADR, the primary exchange on which the security underlying the ADR is
traded);
b. the combined trading volume of the non-U.S. security (a security
issued by a non-U.S. company) and other related non-U.S. securities
occurring in the U.S. market and in markets with which the Association
or its subsidiaries has in place a comprehensive surveillance sharing
agreement represents (on a share equivalent basis for any ADRs) at
least 50% of the combined world-wide trading volume in the non-U.S.
security, other related non-U.S. securities, and other classes of
common stock related to the non-U.S. security over the six month period
preceding the date of designation; or
c.--d. No change.
(4) No change.
(5) Prior to the commencement of trading of a particular SEEDS
designated pursuit to this subsection, the Association or its
subsidiaries will distribute a circular to the membership providing
guidance regarding member firm compliance responsibilities (including
suitability recommendation
[[Page 17268]]
and account approval) when handling transactions in SEEDS.
4450. Quantitative Maintenance Criteria
After designation as a Nasdaq National Market security, a security
must substantially meet the criteria set forth in paragraphs (a) or
(b), and (c), (d), (e), and (f) below to continue to be designated as a
national market system security. A security maintaining its designation
under paragraph (b) need not also be in compliance with the
quantitative maintenance criteria in the Rule 4300 series.
(a) Maintenance Standard 1--Common Stock, Preferred Stock, Shares
or Certificates of Beneficial Interest of Trusts and Limited
Partnership Interests in Foreign or Domestic Issues
(1) [200,000] 750,000 shares publicly held;
(2) Market value of publicly held shares of [$1] $5 million;
(3) The issuer has net tangible assets of at least $4 million; [:]
[(A) $1 million;
(B) $2 million if the issuer has sustained losses from continuing
operations and/or net losses in two of its three most recent fiscal
years; or
(C) $4 million if the issuer sustained losses from continuing
operations and/or net losses in three of its four most recent fiscal
year;]
(4) 400 shareholders [or 300 shareholders] of round lots; and
(5) Minimum bid price per share of $1 [or, in the alternative,
market value of public float of $3 million and $4 million of net
tangible assets].
(b) Maintenance Standard 2--Common Stock, Preferred Stock, Shares
or Certificates of Beneficial Interest of Trusts and Limited
Partnership Interests in Foreign or Domestic Issues
(1) The issuer has:
(A) a market capitalization of $50 million; or
(B) total assets and total revenue of $50 million each for the most
recently completed fiscal year or two of the last three most recently
completed fiscal years.
(2) 1,100,000 shares publicly held;
(3) Market valve of publicly held shares of $15 million;
(4) Minimum bid price per share of $5;
(5) 400 shareholders of round lots; and
(6) At least four registered and active market makers.
[(b)] (c) Other Securities Designated Pursuant to Rule 4420 [(e)] (f)
The aggregate market value or principal amount of publicly-held
units must be at least $1 million.
[(c)] (d) Rights and Warrants
Common stock of issuer must continue to be designated.
[(d)] (e) Market Makers
At least two [authorized] registered and active market makers,
except that an issue must have at least four registered and active
market makers to satisfy Maintenance Standard 2 under paragraph (b) of
this rule.
[(e)] (f) Bankruptcy and/or Liquidation
Should an issuer file under any of the sections of the Bankruptcy
Act or announce that liquidation has been authorized by its board of
directors and that it is committed to proceed, Nasdaq may suspend or
terminate the issuer's securities unless it is determined that the
public interest and the protection of investors would be served by
continued designation.
4460. Non-Quantitative Designation Criteria for Issuers Excepting
Limited Partnerships
(a)-(b) No change.
(c) Independent Directors
Each NNM issuer shall maintain a minimum of two independent
directors on its board of directors. [For purposes of this section,
``independent director'' shall mean a person other than an officer or
employee of the company or its subsidiaries or any other individual
having a relationship which, in the opinion of the board of directors,
would interfere with the exercise of independent judgement in carrying
out the responsibilities of a director.]
(d)-(g) No change.
(h) Conflicts of Interest
Each NNM issuer shall conduct an appropriate review of all related
party transactions on an ongoing basis and shall utilize the company's
Audit Committee or a comparable body of the board of directors for the
review of potential conflict of interest situations where appropriate.
(i) Shareholder Approval
(1) No change.
(2) Exceptions may be made upon application to Nasdaq [the
Association] when:
(A) No change.
(B) reliance by the company on this exception is expressly approved
by the Audit Committee [of the Board] or a comparable body of the board
of directors.
(C) in connection with the acquisition of the stock or assets of
another company if:
(i) No change.
(ii) where, due to the present or potential issuance of common
stock, or securities convertible into or exercisable for common stock,
other than a public offering for cash[,];
a. [if] the common stock has or will have upon issuance voting
power equal to or in excess of 20% of the voting power outstanding
before the issuance of stock or securities convertible into or
exercisable for common stock[,]; or
b. the number of shares of common stock to be issued is or will be
equal to or in excess of 20% of the number of shares or common stock
outstanding before the issuance of the stock or securities; or
(D) No change.
(3)-(6) No change.
(j)-(l) No change.
(m) Peer Review
(1) Each issuer must be audited by an independent public accountant
that:
(A) has received an external quality control review by an
independent public accountant (``peer review'') that determines whether
the auditor's system of quality control is in place and operating
effectively and whether established policies and procedures and
applicable auditing standards are being followed; or
(B) is enrolled in a peer review program and within 18 months
receives a peer review that meets acceptable guidelines.
(2) The following guidelines are acceptable for purposes of
paragraph (m):
(A) The peer review should be comparable to AICPA standards
included in Standards for Performing on Peer Reviews, codified in the
AICPA's SEC Practice Section Reference Manual;
(B) The peer review program should be subject to 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; and
(C) The administering entity and the independent oversight body of
the peer review program must, as part of their rules of procedure,
require the retention of the peer review working papers for 90 days
after acceptance of the peer review report and allow Nasdaq access to
those working papers.
4470. Non-Quantitative Designation Criteria for Issuers That Are
Limited Partnerships
(a)-(h) No change.
(i) Conflict of Interest
Each NNM issuer which is a limited partnership shall conduct an
[[Page 17269]]
appropriate review of all related party transactions on an ongoing
basis and shall utilize the Audit Committee or a comparable body of the
board of directors for the review of potential material conflict of
interest situations where appropriate.
4480. Termination Procedure
(a) No change.
(b) An issuer that is subject to termination of its designation may
request a review by a Panel authorized to hear appeals [Committee of
the Board of Governors]. If a review is requested, the issuer is
entitled to submit materials and arguments in connection with such
review.
(c) The Panel [Committee] may grant or deny continued designation
on the basis of the written submission by the issuer and whatever other
date it deems relevant.
(d) Determinations by the Panel [Committee] may be appealed to the
Nasdaq Listing and Hearing Review Committee [Association's Board of
Governors] by any aggrieved person. An appeal to the Nasdaq Listing and
Hearing Review Committee [Board] shall not operate as a stay of the
decision of the Panel unless the Nasdaq Listing and Hearing Review
Committee [Board] in its discretion determines to grant such stay.
(e) The Rule 9700 series sets forth procedures applicable to the
review of the termination of an issuer's designation.
(e) Renumbered as (f).
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, Nasdaq 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. Nasdaq 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
Background
Nasdaq qualification requirements for listing of securities on the
National Market and SmallCap Market were last revised in 1989 and 1991,
respectively.4 Since that time, Nasdaq has witnessed significant
growth in terms of the size and number of listings, and volume of
transactions. Accompanying this growth has been an increase in
participation of individual investors, and heightened public awareness
and expectations for Nasdaq listed companies. Nasdaq recognizes that
along with this growth and the changes in the market, a commensurate
level of quality and investor protection must be assured. Nasdaq
believes it is extremely important to place an emphasis not only on
ensuring that all Nasdaq companies warrant listing by virtue of their
compliance with the applicable qualification requirements, but also
that the qualification requirements themselves are in fact appropriate
and designed to foster the protection of investors and enhance the
credibility of the market.
---------------------------------------------------------------------------
\4\ These requirements are contained in NASD Rule 4300 Series
and Rule 4400 Series.
---------------------------------------------------------------------------
Given Nasdaq's objective of providing necessary safeguards to
public investors in Nasdaq securities, and given the growth and changes
in the market, the structural enhancements to Nasdaq now underway, and
the time that has passed since the listing standards were last changed,
Nasdaq determined to undertake a thorough review of its qualifications
requirements. In conducting this review, Nasdaq carefully sought to
balance its role in facilitating legitimate capital formation for
issuers with Nasdaq's responsibility to provide the appropriate
protection to public investors in its markets, and to maintain the
trust and confidence reposed in Nasdaq generally. Such capital
formation continues to be an important source of new jobs and
investment opportunities in the United States today.
While Nasdaq recognizes that certain companies may not be able to
meet the more stringent standards proposed herein, it is important to
note that companies not in compliance will have the opportunity to
achieve compliance with the applicable standards during a reasonable
interval of time. In addition, for those companies who are unable to
effect compliance with the new standards, a meaningful alternative is
now available through their eligibility for quotation in the OTC
Bulletin Board (``OTCBB''). The OTCBB is a quotation medium used by
NASD members to reflect quotations in non-Nasdaq securities. Securities
quoted in the OTCBB are subject to real-time trade reporting,5
thus providing a level of transparency not present when the listing
standards were last revised.
---------------------------------------------------------------------------
\5\ See NASD Rule 6550 (requiring that transactions in OTCBB-
eligible securities be reported pursuant to the requirements of the
Rule 6600 Series).
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Summary of Proposed Rule Change 6
---------------------------------------------------------------------------
\6\ See Nasdaq Bulletin dated November 15, 1996, attached as
Exhibit 2 to the rule filing, for a detailed chart comparing the
current listing standards to the proposed rule change.
---------------------------------------------------------------------------
Elimination of the Alternative to the $1 Minimum Bid Price. Under
the existing standards, issuers with securities trading below $1 may
remain listed on the Nasdaq National and SmallCap Markets if they meet
an alternative test.7 Nasdaq is proposing to eliminate the
alternative test for several reasons. First, it will remove the
incentive to engage in large, below market private placements
(generally pursuant to Regulation S) which cause dilution and
concomitant harm to Nasdaq investors. It will also provide a safeguard
against certain market activity associated with low-priced securities.
Further, when the alternative test was adopted, it was intended to
address ``temporary adverse market conditions'' resulting in a bid
price below $1.8 Contrary to this intent, issuers have used the
alternative test as a permanent means of meeting the listing standards.
Finally, Nasdaq believes that a $1 minimum bid price would serve to
increase investor confidence and the credibility of its market
commensurate with its increased prominence.
---------------------------------------------------------------------------
\7\ On SmallCap, the alternative requirement is $1 million in
market value of public float and $2 million in capital and surplus.
On the National Market, the alternative requirement is $3 million in
market value of public float and $4 million in net tangible assets.
\8\ See Exchange Act Release No. 28391 (September 5, 1990), 55
FR 36372.
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After careful consideration of comments received on this provision
of the proposal, and as discussed further below, Nasdaq believes that
the proposal should be modified to provide for a reasonable expansion
in the time period that an issuer's stock price remains below $1 before
it is deemed a deficiency.
Corporate Governance Standards for SmallCap Issuers. Nasdaq is
proposing to extend the important shareholder protection benefits of
its corporate governance requirements to the SmallCap Market. These are
the same requirements that currently apply to National Market issuers,
and include, among other things: (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
[[Page 17270]]
corporate actions.9 These requirements provide investors with a
means to become more actively involved in corporate affairs. The
shareholder approval requirement should prevent the further potential
for dilutive stock issuances in the SmallCap Market without the prior
knowledge of investors. The audit committee, independent director and
annual meeting requirements will provide vastly enhanced safeguards to
the investing public.
---------------------------------------------------------------------------
\9\ It is contemplated that, as is currently the case with
respect to National Market issuers, Nasdaq 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.
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Increase in the Quantitative Standards for Both the SmallCap and
National Markets. Increases to the quantitative standards are believed
to be wholly appropriate given the passage of time since the standards
were last adjusted, the opportunities for improvement gleaned from
experience over that period, and the concomitant increases in the
growth of the market and the rate of inflation. These increases are
believed capable of further strengthening the financial criteria
consistent with the goal of enhancing the quality of Nasdaq companies,
while preserving the ability of qualified Nasdaq companies to raise
capital.
Market Capitalization Test for National Market. Consistent with the
abiding interest of Nasdaq in facilitating capital formation for high-
technology industries and the corresponding opportunity for growth in
employment, it was determined that there was a need to recognize and
appropriately respond to the unique operating characteristics of
certain industries represented in this market. Nasdaq has therefore
proposed an accommodation for companies that may fail to comply with
the National Market 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.
Specifically, an issuer that is unable to meet either of two
alternative net tangible asset tests, as amended by the proposed rule
change,10 could be afforded designation as a National Market
issuer provided it initially had a market capitalization of $75
million, or total assets and total revenue of $75 million each. For
continued listing, these issuers would have to maintain a market
capitalization of $50 million, or total assets and total revenue of $50
million.
---------------------------------------------------------------------------
\10\ 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 NASD Rule 4200(w).
---------------------------------------------------------------------------
The changes provide access for Nasdaq National Market caliber
companies that would otherwise not qualify due to accounting
conventions associated with certain business combinations and
specialized industries.
Peer Review for Auditors of Nasdaq Listed Companies. Nasdaq
solicited comment to further its evaluation of a requirement that
auditors of Nasdaq listed companies be subject to a practice monitoring
program under which the auditor's quality control system would be
reviewed by an independent peer auditor on a periodic basis. Currently,
companies whose shares are publicly traded are not required to have
auditors who are subject to such peer review. Although neither the New
York Stock Exchange nor the American Stock Exchange have a peer review
requirement, certain banking agencies such as the Federal Deposit
Insurance Corporation (``FDIC'') have successfully implemented a peer
review requirement for certain financial institutions. In addition, the
Commission has generally expressed support for the concept of peer
review.11 Although it withdrew its mandatory peer review proposal,
the Commission nonetheless confirmed its belief that ``the peer review
process contributes significantly to improving the quality control
systems of accounting firms auditing Commission registrants and
enhances the consistency and quality of practice before the
Commission.'' 12
---------------------------------------------------------------------------
\11\ See Securities Act Release No. 6695 (April 1, 1987), 52 FR
11665.
\12\ See Exchange Act Release No. 31197 (September 17, 1992), 57
FR 45287, n. 26.
---------------------------------------------------------------------------
Consistent with this, Nasdaq also received strong support from
commenters on this requirement. Accordingly, Nasdaq has determined to
include a peer review requirement as part of the proposed changes to
the listing criteria.
The language of the proposed rule is similar to the peer review
requirement of the FDIC.13 Specifically, all independent public
accountants auditing Nasdaq listed companies must have received, 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, 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, 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.
---------------------------------------------------------------------------
\13\ See 12 CFR 363, Appendix A.
---------------------------------------------------------------------------
Other Clarifying and Conforming Changes. Nasdaq also is proposing
changes to specify that the shareholder number requirements in the
SmallCap Market are based on the number of ``round lot'' holders of an
issuer's shares. This conforms with the standards on the National
Market and other exchanges, and ensures that issuers maintain a broad
and significant shareholder base justifying a listing on a national
securities market.
In addition, Nasdaq is proposing to conform the stock price
compliance mechanism for initial listing under the National Market
standards with that of the SmallCap Market by specifying that the
applicable price is the bid price, and by removing the provisions under
the National Market 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.'' This clarifies and ensures
that issuers must 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, where possible, certain provisions and cross-
references have been conformed and renumbered, outdated references and
a definition have been deleted, and headings have been renamed for
clarity.
Impact Analysis
Nasdaq analyzed the impact the new listing standards would have on
both the SmallCap and National Market by applying the proposed
standards to current Nasdaq issuers, using financial data from periodic
filings to the Commission, and relevant price and volume data. With
respect to the listing standards for initial entry for each market,
Nasdaq applied the proposed criteria to issuers successfully listing
[[Page 17271]]
from June 30, 1994 to August 30, 1996. With respect to maintenance
standards, Nasdaq applied the proposed criteria to all current Nasdaq
issuers. This resulted in the following estimated impact.
With respect to the SmallCap Market entry criteria, of the 457
issuers successfully listing from June 30, 1994 to August 30, 1996, 229
or 50% would not have qualified for listing. With respect to the
SmallCap Market maintenance criteria, of the 1,318 issuers currently
listed on SmallCap, 394 or 30% would no longer be eligible for
continued listing.
With respect to the National Market entry criteria, of the 1,151
issuers successfully listing from June 30, 1994 to August 30, 1996, 176
or 15% would not have qualified for listing. With respect to the
National Market maintenance criteria, of the 3,910 issuers currently
listed on National Market, 171 or 4% would no longer be eligible for
continued listing.
Nasdaq believes the analysis overstates the impact of the proposed
listing standards on issuers for several reasons. For example, certain
of the standards, such as public float, are within the control of the
issuer and may be adjusted to meet the new standards within a
relatively short time frame. Further, a majority of the issuers failing
the new criteria only failed one of the standards. Given time, many of
these issuers may be able to come into compliance, by, for example,
raising additional capital. Past experience supports this belief. In
1991, Nasdaq performed a similar analysis which predicted that 526
issuers would not qualify upon application of the new standards. In
fact, after undertaking corrective corporate actions, only 125 issuers
(24%) were unable to qualify.
Implementation
Nasdaq recognizes the potential impact the proposed standards would
have on existing issuers and issuers applying for initial listing.
Therefore, Nasdaq believes the new standards should be made effective
six months after the proposed rule change is approved by the Commission
to provide current issuers with adequate time to enact the corporate
actions necessary to comply with the new rules.
For issuers applying for initial listing after the date the
proposed rule change is submitted to the SEC, the new listing standards
would be retroactively applied once the proposed rule change was
approved. This provides advance notice to issuers applying for listing
that they would be subject to higher listing standards upon approval of
the rule, so such issuers would not be prejudiced. These issuers will
be afforded ninety days after the SEC approves the proposed rule change
to meet the new listing entry criteria. In addition, an issuer will be
deemed to have satisfied the new listing entry criteria once the
proposed rule change is approved by the Commission, if the issuer is in
compliance with the new listing standards at any time after the issuer
commenced trading, but prior to Commission approval. This removes an
incentive to apply prior to approval of the new criteria for the
purpose of circumventing the new standards. Thus, it avoids a rush to
apply and provides for the orderly processing of listing applications
by Nasdaq staff.
For initial listing of an issuer that applied before the proposed
rule change is submitted to the Commission, but which is still pending
as of that date, the issuer would have 90 days from the date the
proposed rule change is submitted to commence trading on Nasdaq under
the existing listing entry criteria. These issuers would not be
required to meet the new listing entry criteria after approval by the
Commission, but like all other listed issuers, would have to meet the
new maintenance criteria six months after approval by the Commission.
These procedures are similar to those used when the listing standards
were last revised.
Basis
Nasdaq believes that the proposed rule change is consistent with
the provisions of Section 15A(b)(6) of the Act 14 in that it is
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, and in general, to
protect investors and the public interest. Nasdaq believes that the
extension of the corporate governance requirements to the SmallCap
market will permit greater participation by investors in corporate
affairs. The elimination of the alternative to the $1 minimum bid price
requirement is an important step to provide a safeguard against certain
market activity associated with low priced securities, to remove the
incentive for large, below market issuances, and to generally enhance
the credibility of the market. The increase in the quantitative
standards for both the National Market and SmallCap Market is necessary
and appropriate to strengthen the qualification requirements for Nasdaq
issuers, and is consistent with a nationwide securities marketplace.
Finally, the peer-review requirement for auditors of Nasdaq companies
will provide further safeguards for investors by ensuring that an
auditing firm's quality control systems are subject to an industry-
accepted level of review.
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\14\ 15 U.S.C. 78o-3.
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In sum, the proposed rule change has been designed to ensure the
protection of investors and the public interest while maintaining the
proper balance between small entrepreneurial companies' access to
capital and investors' access to quality companies. Nasdaq has
carefully considered public feedback while developing this proposal and
appropriate modifications were made where necessary.
B. Self-Regulatory Organization's Statement on Burden on Competition
Nasdaq states that it 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
In November of 1996, Nasdaq sought public comment on the proposed
rule change. In an effort to seek the broadest possible solicitation of
comments from investors, Nasdaq widely distributed a Nasdaq Bulletin
and a Nasdaq Notice to NASD Members to investors, issuers, NASD member
firms, and other interested parties. In addition, the entire proposal
was posted on the Nasdaq website (www.nasdaq.com), which also solicited
comments via E-mail. In total, 227 comments were received. A copy of
the Nasdaq Bulletin is attached to the rule filing as Exhibit 2. Copies
of the comments received are attached to the rule filing as Exhibit 3.
Of the 227 comments received, 143 were from private investors. 109
comments expressed an opinion regarding the overall proposal, of which
32 were in favor and 77 were opposed. Of those comments expressing
general opposition, many were in the form of a brief E-mail, and at
least fifteen were reproductions of a letter submitted by a trade
association.15 The single issue evoking the most significant
negative comment, mostly from investors, concerned the elimination of
an alternative to the $1 bid price requirement. Commenters expressed
strong support for the proposals to extend corporate governance
requirements to the SmallCap Market and to establish a peer review
[[Page 17272]]
requirement for auditors of Nasdaq issuers.
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\15\ See letter from Jeffrey Adduci, President, Regional
Investment Bankers Association to Perry Peregoy, Vice President,
Nasdaq, dated December 19, 1996.
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Of those comments expressing opposition to the proposed rule
change, three general themes emerged:
The bid price is not within the direct control of the
issuer.
The proposal singles out small issuers.
More emphasis should be placed on regulating the activity
of broker-dealers who engage in fraudulent activity, rather than
stigmatizing issuers.
First, with respect to comments opposing the proposed rule change
on the basis that the bid price is not within the direct control of the
issuer, Nasdaq notes that elimination of the alternative to the minimum
bid price requirement is intended to address the following: (1) The
concern that securities trading below $1 are more susceptible to
certain activity by stock promoters; (2) the elimination of the
incentive for large, below market issuances which may harm Nasdaq
investors; (3) the curtailing of its use as a permanent solution to bid
price deficiencies; and (4) the enhancement of the credibility of the
market. Some issuers argued that a stock's bid price is not within
their direct control, and thus the $1 minimum bid price may unfairly
penalize these issuers. Market anomalies such as year-end tax selling
or short-term price swings could trigger a bid price deficiency
resulting in the initiation of de-listing proceedings for what may
otherwise be a viable company with long-term prospects. In a related
vein of comments, many investors argued that, as current investors in
low-priced stocks, they would be harmed if these companies were to lose
their Nasdaq listing.
Nasdaq continues to believe that the minimum bid price would be an
important component to the listing standards, and would benefit, in the
long run, all market participants, including both present and future
investors. However, in response to concerns that bid price is not
within the direct control of the issuer, Nasdaq is proposing to expand
from 10 to 30 consecutive business days the time period that an
issuer's stock price, and its related market value of public float,
must remain below the applicable standard before it is deemed a
deficiency. Once an issuer's stock falls below $1 for 30 consecutive
business days, it will continue to have 90 days to come back into
compliance with the maintenance standards. Compliance can be achieved
with respect to the bid price or market value deficiency by meeting the
applicable maintenance standard for any consecutive 10 business days
during the 90 day compliance period.
Secondly, with respect to comments opposing the proposed rule
change on the basis that it singles out small issuers, Nasdaq
recognizes that some companies may be unable to satisfy the revised
listing standards. As discussed in the section on implementation above,
companies that are at risk of not complying with the new maintenance
standards would have a period of time to come into compliance.
Companies that are ultimately delisted would be eligible for quotation
in the OTCBB, which currently provides real-time quote and real-time
last sale price information for issuer's securities.16 Moreover,
Nasdaq is currently in the process of requesting an exemption from the
Securities and Exchange Commission under SEC Rule 15c2-11, similar to
an exemption obtained in 1992 after standards were last increased. This
would, under most circumstances, permit member firms to continue
providing liquidity by quoting issuers in the OTCBB without
interruption immediately following a de-listing from Nasdaq.
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\16\ Contrary to statements mischaracterizing the OTCBB, as
contained in letters from the Regional Investment Bankers
Association and others echoing statements therein, NASD rules in
fact permit market makers to insert unlimited quotation updates
throughout the day for domestic equity securities quoted in the
OTCBB. These quotes are in turn disseminated to the public on a
real-time basis. See NASD Rules 6520 and 6540(b)(1). The ``twice-
daily update restriction'' referred to in these letters only applies
to certain unregistered foreign securities subject to a limitation
involving an exemption from registration under Exchange Act Rule
12g3-2(b). Furthermore, transactions in domestic and Canadian
securities quoted in the OTCBB are now subject to real-time last
sale trade reporting and dissemination, thus providing a level of
transparency not present when the listing standards were last
revised.
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Finally, commenters stated that more emphasis should be placed on
regulating the activity of broker-dealers who engage in fraudulent
activity, rather than stigmatizing issuers. Nasdaq agrees that a strong
regulatory and enforcement program is an indispensable element in the
operation of any securities marketplace. Nasdaq consulted with its
sister corporation responsible for regulating the activities of broker-
dealers, NASD Regulation, Inc. (``NASDR''),17 in developing these
revised listing standards. Further, Nasdaq continues to work with NASDR
on formulating regulatory initiatives to enhance the oversight and
regulation of activities of NASD member firms generally. It should be
noted that NASDR has brought a record number of disciplinary actions
this past year.18 Nonetheless, Nasdaq believes that these efforts
can and should be complemented with appropriately designed listing
standards to further the NASD's obligation as a self-regulatory
organization to provide the necessary protection that investors and the
marketplace have come to expect and deserve.
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\17\ NASDR is also a wholly owned subsidiary of the NASD.
\18\ These include the recent expulsion of Stratton Oakmont,
Inc., a firm with an extensive and serious regulatory history. Major
enforcement cases have also been brought against: Sterling Foster;
H.J. Meyers & Co. (f/k/a Thomas James Associates, Inc.); A.R. Baron
& Co., Inc.; and Lew Lieberbaum & Company, Inc.
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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 self-regulatory organization 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. The Commission requests comments on
the proposed listings standards in light of the goals of the Exchange
Act; the impact of the proposals on small businesses; and on any
alternatives to the proposal that could achieve the objectives
identified by the NASD and Nasdaq. Commenters are encouraged to provide
data where possible.
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 at the Commission's Public
Reference Room. Copies of such filing will also be
[[Page 17273]]
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 April 30, 1997.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.19
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\19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-9004 Filed 4-8-97; 8:45 am]
BILLING CODE 8010-01-P
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.