General News
Eligibility Rule: SEC Adopting Release 34-40878
The SEC's Order Granting Approval of the OTC Bulletin Board Eligibility Rule is available below as printed in the Federal Register on January 8, 1999. The Rule was approved as proposed. The full text of the rule proposal (Filing number SR-NASD-98-51) can be viewed on-line at the Federal Register.
[Federal Register: January 8, 1999 (Volume 64, Number 5)] [Notices] [Page 1255-1258] From the Federal Register Online via GPO Access [wais.access.gpo.gov] [DOCID:fr08ja99-112] -----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40878; File No. SR-NASD-98-51]
Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Granting Approval of Proposed Rule Change and Amendment No. 1 To Be Proposed Rule Change by the National Association of Securities Dealers, Inc. Relating to Microcap Initiatives-Amendments to NASD Rules 6530 and 6540
January 4, 1999.
I. Introduction
On October 7, 1998, the National Association of Securities Dealers, Inc. ("NASD"), through its wholly-owned subsidiary, the Nasdaq Stock Market, Inc. ("Nasdaq") submitted to the Securities and Exchange Commission ("SEC" or "Commission"), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 ("Exchange Act" or "Act") \1\ and Rule 19b-4 thereunder,\2\ proposed amendments to NASD Rules 6530 and 6540 to limit quotations on the OTC Bulletin Board® ("OTCBB") to the securities of issuers that are current in their reports filed with the SEC or other regulatory authority, and to prohibit a member from quoting a security on the OTCBB unless the issuer has made current filings, respectively.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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The proposed rule change, including Amendment No. 1, appeared in the Federal Register on November 4, 1998.\3\ The Commission received three comments concerning the proposed rule change.\4\ This order approves the proposed rule change, as amended.
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\3\ Securities Exchange Act Rel. No. 40606 (October 27, 1998), 63 FR 59610.
\4\ Electronic comment letters from Edward Zorek, Tai Jim, and R. Jeffrey Bacon were received by the Commission at rule- comments@sec.gov on November 11, 1998, November 28, 1998, and November 29, 1998, respectively. The substance of the comments received is discussed in Section III. Summary of Comments.
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II. Description of Proposal
The NASD has actively studied the OTC market in an effort to address abuses in the trading and sales of thinly traded, thinly capitalized (microcap) securities. These securities are not listed on Nasdaq or any exchange and trade on the OTCBB, in the "pink sheets" published by the National Quotation Bureau, Inc. ("Pink Sheets"), and in other quotation media where there are no listing requirements. With respect to its examation of the OTCBB in particular, the NASD noted the lack of reliable and current financial information about the issuers, and the perception by the public that the OTCBB is similar to a highly regulated market, such as the registered exchanges or Nasdaq.\5\
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\5\ In addition, the NASD has filed a proposed rule change through its subsidiary, NASD Regulation, to require a member to review current financial statements and other business information about the issuer of a security that is not listed on Nasdaq or a national securities exchange before that member could recommend a transaction to a customer in the security and to provide certain disclosure information on the trade confirmation for all customer transactions (solicited and unsolicited) in such securities. See SR- NASD-98-50.
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The OTCBB provides a real-time quotation medium that NASD member firms can use to enter, update, and retrieve quotation information (including unpriced indications of interest) for equity securities traded over-the-counter that are neither listed on Nasdaq nor on a primary national securities exchange. Eligible securites include national, regional, and foreign equity issues, warrants, units, Direct Participation Programs ("DPPs") \6\ and American Depositary Receipts ("ADRs") \7\ not listed on any other U.S. national securities market or exchange. Unlike Nasdaq or registered exchanges where individual companies apply for listing on the market--and must meet and maintain strick listing standards--there are no listing standards for the OTCBB, and there currently is no requirement that issuers of securities on the OTCBB make current, publicly-available reports with the SEC or other regulator. In fact, over half of the companies that are currently quoted on the OTCBB are not subject to any public reporting requirements.
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\6\ DPP's are securities offerings that permit investors to directly participate in the cash flow and tax consequences of the underlying investments. DPPs provide for the ''flow through'' of tax results. Thus, gains and losses are taxed to the investor not the issuer of the security.
\7\ ADRs are receipts for shares of foreign corporations that are held by U.S. banks and bought and sold in the U.S. by investors, without utilizing overseas markets.
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The proposed rule change was developed in an effort to balance the benefits that the transparency of the OTCBB provides with the public need for information about the issuers being quoted. The NASD is concerned that where there is no public information available regarding a security, the broad-based automated display of quotations in that security creates an unjustied perception of reliability. While the NASD realizes that the new rule may result in the lack of real-time quotations for those securities that become ineligible for the OTCBB, it believes that this loss is outweighted by the benefit to investors who would, under the proposed rule, have access to information about the companies in which they may invest. In addition, transactions in securities ineligible for the OTCBB would still be subject to real-time last sale trade reporting. These reports are publicly disseminated through market data vendors on a real-time basis.
Amendment to Rule 6530
This proposed amendment to Rule 6530 would limit quotations on the OTCBB to the securities of issuers that make current filings pursuant to Sections 13 \8\ and 15(d) of the Act,\9\ securities of depository institutions that are not required to make filings under the Act, but file publicly-available reports with the appropriate regulatory agencies, registered closed-end investment companies, and insurance companies that are exempt from registration under Section 12(g)(2)(G) of the Act.\10\
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\8\ 15 U.S.C. 78m.
\9\ 15 U.S.C. 78o-(d).
\10\ 15 U.S.C. 78l(g)(2)(G).
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To remain eligible for quotation on the OTCBB, an issuer must remain current in its filings with the SEC or applicable regulatory authority. A member would be required to inform the NASD of the issuer's reporting schedule. Based upon that schedule, the NASD will affix a modifier on the security's symbol if the NASD has not received information that the report was timely filed.\11\ The addition of the modifier to the symbol, as well as any changes to the symbol necessary to accommodate the modifier, will be publicly reported on the OTCBB Daily List, which is available to market makers and investors through the OTCBB web site at otcbb.com. Once an issuer is delinquent in filing a required report (e.g., Form 10-K, Form 10-Q, Form 20-F, Insurance Company Annual Statement, or call report), a security of the issuer may continue to be quoted on the OTCBB for a 30 or 60 calendar day grace period from the due date of the report, depending on the type of issuer. After the grace period, quotations in the security of the delinquent issuer would not be permitted on the OTCBB.
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\11\ It is contemplated that the modifier will be affixed one to two days after the report is due.
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Filings for most OTCBB issuers are available through the SEC's Electronic Data Gathering, Analysis, and Retrieval ("EDGAR") system.\12\ Foreign issuers are generally permitted to file in paper format and copies of these filings are available from the Commission. Exchange Act filings of banks and thrifts are available upon filing from the financial institution's primary bank regulatory agency. The grace period for these issuers is 30 days. In the case of banks and thrifts that are not required to make Exchange Act filings, members can obtain call report information from the National Information Center of Banking Information website (http://www.ffiec.gov/nic) or the Federal Deposit Insurance Corporation's website (http://www.fdic.gov). Call reports are filed 30 days after the end of each calendar quarter and are available to the public within 15 days of filing. Insurance companies file annual statements with the National Association of Insurance Commissioners ("NAIC") by March 1 of each year. This information is released to the public by NAIC by April 1. Because of the delay in the availability of call reports and insurance company annual statements, the proposed rule permits a 60 calendar day grace period for the quotation of securities of these companies after the deadline for the issuer to submit a report to the appropriate regulator.
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\12\ EDGAR is the SEC's system for the receipt, acceptance, and review of documents submitted in electronic format.
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Amendment to Rule 6540
This proposed amendment to Rule 6540 would prohibit member firms from quoting an issuer's security if the issuer has not made current reports with the SEC or the appropriate regulatory authority. Members must also provide such reports to the NASD, although the reports may be provided by any market maker in the security. The NASD is exploring ways to reduce the burden of this requirement for members, particularly with respect to issuers who are EDGAR filers. As discussed above, the NASD will affix a modifier to the security's symbol if the NASD has not received information that the report was timely filed. This indication will provide members with notice that the NASD has not received information that the issuer's report was timely filed. Once the NASD provides this notice, the member will have the opportunity to acquire the necessary report and provide it to the NASD before the end of the grace period.
Phase-In
The new requirements will be immediately effective upon approval of the rule for securities not previously quoted on the OTCBB. Securities quoted on the OTCBB on the date the rule becomes effective will be afforded at least six months to comply with the new requirements. Specifically, and in order to accommodate the resource demands that may be placed upon the SEC when certain issuers elect to file current public reports, the new requirements will be applied in a month-by- month staggered manner for a period from six to eighteen months from the date the rule is approved. The NASD will apply the new rule to approximately the same number of issuers for each month during that period in order to evenly distribute the SEC's anticipated work load. The delayed effectiveness of the rule should also enable market makers, investors, and issuers to take appropriate action. It should be noted that for issuers who file a Form 10 or Form 10SB with the SEC to register under Section 12(g) of the Act,\13\ all SEC comments, if any, must be cleared with the SEC before securities can be quoted on the OTCBB.
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\13\ 15 U.S.C. 78l(g).
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III. Summary of Comments
The Commission received three comments on the proposed amendments.\14\ All three commenters supported the proposal; noting that the proposed amendments should help to reduce fraud in OTCBB traded securities.
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\14\ See supra note 4.
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IV. Discussion
The Commission believes that the proposal is consistent with Section 15A of the Act \15\ as it will protect investors and the public interest by requiring issuers listed on the OTCBB to file reports containing current financial information with the Commission or appropriate regulatory agency. Specifically, the Commission believes the proposal is consistent with the requirements of Section 15A(b)(6) and (11) of the Act.\16\ Section 15A(b)(6) requires, among other things, that the association's rules be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest.\17\ Section 15A(b)(11) requires that the rules of the association be designed to produce fair and informative quotations, to prevent fictitious or misleading quotations, and to promote orderly procedures for collecting, distributing, and publishing quotations.\18\
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\15\ 15 U.S.C. 78o-3.
\16\ 15 U.S.C. 78o-3(b)(6) and (11).
\17\ 15 U.S.C. 78o-3(b)(6).
\18\ 15 U.S.C. 78o-3(b)(11).
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Under proposed Rule 6530, market makers will not be permitted to quote OTCBB traded securities unless the issuer has made current filings with the appropriate regulatory agency. The filing requirement ensures that companies trading on the OTCBB market will have current, public information that investors can access, from the appropriate regulatory agency, when considering whether to invest in an OTCBB traded security. Proposed Rule 6530 should provide investors in OTCBB securities with more information on which to base investment decisions. The Commission also believes that limiting quotations on the OTCBB to the securities of issuers that report to the SEC or applicable regulatory authority may help to reduce fraud and manipulation. As a result of the reporting requirement, financial data on issuers will be available and issuers that provide false or misleading information in their required filings may be subject to liability for making those statements.\19\ The Commission finds that proposed Rule 6530 is consistent with the Act because it will protect investors and the public interest.\20\
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\19\ See, e.g., SEC v. Savoy Industries, Inc., 587 F.2d 1149 (D.C. Cir. 1978), cert denied, 440 U.S. 913 (1979); Exchange Act Rule 10b-5, 17 CFR 240.10b-5.
\20\ 15 U.S.C. 78o-3(b)(6).
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Proposed Rule 6530 provides that domestic securities that were previously trading on the OTCBB will not be subject to the proposal until six months after the approval date. Neither foreign issuers nor issuers of securities not currently trading on the OTCBB will be able to take advantage of the phase-in provision; these issuers will be obligated to immediately comply with Rule 6530, as amended. The Commission believes that the phase-in period is reasonable and consistent with the Act. The Commission believes that the phase-in period for issuers of domestic securities that were previously trading on the OTCBB will provide these issuers with ample notice of the rule change and adequate time to comply with the new rules' requirements. Regarding issuers of domestic securities not currently quoted on the OTCBB and foreign securities, the Commission believes it is consistent with the Act and in the public interest that they be required to comply with the amendments to Rule 6530 effective immediately. The Commission finds that the phase-in period for issuers previously quoted on the OTCBB and immediate effectiveness of the amendments to Rule 6530 with respect to other issuers is reasonable, and consistent with Section 15A(b)(6) of the Act.\21\
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\21\ 15 U.S.C. 78o-3(b)(6).
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Proposed amendments to Rule 6540 will permit NASD members to quote only the securities of issuers that satisfy the requirements of proposed Rule 6530. As proposed, Rule 6540 will also necessitate that NASD members provide the NASD copies of reports filed with the Commission or other applicable regulatory authority. These reports can be provided by any market maker in the security to the NASD. Once a market maker has properly filed all necessary reports with the NASD, all market makers in the security may quote the security, as long as the reports remain current. The Commission believes that the rule should ensure that market makers have current financial information available to them regarding issuers quoted on the OTCBB and enable NASD market makers to reflect this information in their quote. The Commission finds that proposed Rule 6540 is consistent with Section 15A(b)(11) of the Act \22\ in that it is designed to produce fair and informative quotations, to prevent fictitious or misleading quotations and to promote orderly procedures for collecting, distributing, and publishing quotations.
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\22\ 15 U.S.C. 78o-3(b)(11).
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,\23\ that the proposed rule change (SR-NASD-98-51) is approved, as amended.
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\23\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\24\
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\24\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-414 Filed 1-7-99; 8:45 am]
BILLING CODE 8010-01-M
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