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Self-Regulatory Organizations; Order Approving Proposed Rule Change by the National Association of Securities Dealers, Inc., Amending Its Rules for the Listing of Additional Shares

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Start Preamble January 20, 2000.

I. Introduction and Background

On October 19, 1999, the National Association of Securities Dealers, Inc. (“NASD”), through its wholly owned subsidiary the Nasdaq Stock Market, Inc. (“Nasdaq”), filed with the Securities and Exchange Commission (“Commission”) a proposed rule change pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) [1] and Rule 19b-4 thereunder.[2] The proposed rule change modifies the procedures employed by the NASD in assessing fees against issuers listing additional shares on either the Nasdaq National Market (“NNM”) or Nasdaq SmallCap Market (“NSCM”).

Notice of the proposed rule change was published for comment in the Federal Register on December 16, 1999.[3] The Commission received no comments on the proposal.

II. Description of the Proposal

The Commission recently approved a rule change filed by the NASD to modify the fee rate structures and notification requirements applicable to issuers listing additional shares on the NNM and NSCM.[4] The rule change harmonizes the fee structures applicable to issuers of additional shares of NNM and NSCM securities, and allows issuers to file notifications of several issuances on a single form.

To further simplify the administration of the Listing of Additional Shares (“LAS”) Program, the NASD is modifying notification procedures applicable to issuers of additional shares, and Nasdaq's monitoring and assessment of fees on the listing of such additional shares.

Nasdaq staff employ the LAS Program to monitor compliance by issuers with Nasdaq listing rules governing shareholder approval, public interest concerns, reverse mergers, and voting rights. Since 1992, all Nasdaq issuers have been required to file a notification form upon the creation of a stock option, employee stock purchase, or other stock remuneration plan, or upon the issuance of additional shares of any class of securities included in Nasdaq.[5]

The NASD believes that the current LAS Program is difficult and unduly time-consuming to administer. Specifically, the NASD believes that, under the current LAS Program, it is difficult for an issuer to calculate the number of shares to be reported for LAS purposes: an issuer must track the number of shares approved by Nasdaq according to current LAS criteria (a number not otherwise monitored by issuers and which has often proved difficult for Nasdaq staff and issuers to reconcile) instead of the total number of shares outstanding reported in periodic reports required to be filed with the Commission. Furthermore, the timing of the notifications required by the current LAS Program varies depending on the nature of the action undertaken by an issuer and, as a result, has proved confusing to issuers and their counsel. This in turn has led to delays in filing or failures to comply with LAS Program notification and fee requirements.

To remedy these deficiencies, the NASD proposal makes the following changes to the current LAS Program:

1. In order to address the problem of monitoring the number of fee-assessable shares, the billing aspect of the LAS Program will be separated from required compliance reviews. Issuers will be billed each quarter for any increase in their total shares outstanding (“TSO”) as reported in publicly available periodic reports required to be filed with the Commission.[6] This modification will ensure that the LAS Program is administered based on a publicly disclosed TSO number rather than on the number of approved shares currently calculated by Nasdaq according to existing LAS criteria. This modification will thereby eliminate the current procedure of establishing a baseline number of shares upon an issuer's initial listing as well as the resultant confusion surrounding when transactions resulting in new shares being issued must be reported to Nasdaq. This modification will also permit Nasdaq staff to rely on the publicly reported TSO when performing reconciliations.

2. To address the uncertainty which has surrounded issuers' LAS notification requirements, the process of reporting to Nasdaq will be streamlined by confining issuers' notification requirements to those transactions implicated by the Nasdaq's corporate governance compliance requirements.[7] Consequently, notification will not be required, unless:

(a) a stock option plan, purchase plan or other arrangement is established without shareholder approval; or

(b) the issuer enters into a transaction that may result in a change of control; or

(c) the issuer issues common stock or a security convertible into common stock in connection with the acquisition of the stock or assets of another company, if any officer or director or substantial shareholder of the issuer has an interest of 5% or more (or if a group of such persons collectively holds an interest of 10% or more) in the company to be acquired or in the consideration to be paid; or

(d) the issuer enters into a transaction that may result in the potential issuance of common stock (or securities convertible into common stock) representing more than 10% of either the total shares outstanding or voting power outstanding on a pre-transaction basis.

Under the proposed rule change, all LAS notifications will be required to be filed 15 calendar days prior to issuance (except for stock splits and dividends Start Printed Page 4458which are required to be filed 10 calendar days prior to the record date pursuant to Rule 10b-17 under the Act [8] ). This requirement eliminates the numerous timing requirements under the current LAS Program and enables Nasdaq staff to consider the most current information when evaluating such transactions.

The NASD believes that these changes will improve Nasdaq's administration of the LAS Program by focusing on the TSO reported publicly in periodic reports required to be filed with the Commission instead of relying on a calculated number of approved shares. In addition, the NASD believes that the changes will streamline the filing requirements imposed on issuers by reducing the filing burden to the extent that no filings will be required for issuances that do not raise corporate governance concerns, while simultaneously streamlining the notification filing time frame. Finally, the NASD believes that the changes will allow Nasdaq staff to focus on larger and more complex transactions in its review of issuers' compliance with corporate governance rules and other continued listing standards by eliminating the requirement that issuers file information about issuances that do not raise corporate governance concerns.

III. Discussion

The Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to the NASD. Specifically, the Commission finds that the rule change is consistent with the provisions of Sections 15A(b)(5) and (6) of the Act.[9] Section 15A(b)(5) requires that the rules of the NASD provide for the equitable allocation of reasonable dues, fees, and other charges among members, issuers and other persons using any facility or system which the NASD operates or controls. Section 15A(b)(6) requires in pertinent part that the rules of the NASD be designed to promote just and equitable principles of trade and not to permit unfair discrimination between customers, issuers, brokers or dealers. The Commission believes that the amended rules, which affect the notification and billing processes associated with the LAS Program, are consistent with the Act because they are designed to simplify the procedures applicable to Nasdaq issuers listing additional shares on the NNM and NSCM, as well as those of Nasdaq staff monitoring such issuers. This in turn will increase the issuers' levels of compliance and the staff's surveillance effectiveness.

IV. Conclusion

The Commission finds that the rule change is consistent with the Act, in general, and in particular with Sections 15A(b)(5) and (6) of the Act.

It is therefore ordered, pursuant to Section 19(b)(2) of the Act,[10] that the proposed rule change (SR-NASD 99-61) be, and hereby is, approved.[11]

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[12]

Start Signature

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble


3.  Securities Exchange Act Release No. 42214 (Dec. 9, 1999), 64 FR 70309.

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4.  Securities Exchange Act Release No. 42300 (Dec. 30, 1999), 65 FR 1210 (Jan. 7, 2000) (SR-NASD-99-40).

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5.  See NASD Rules 4310(c)(17) and 4320(e)(15). The Commission granted permanent approval to the LAS Program in 1993. See Securities Exchange Act Release No. 31859 (February 16, 1993), 58 FR 9584 (Feb. 22, 1993) (SR-NASD-92-27).

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6.  Billing for all issuers will be conducted on a calendar year basis and LAS fees will then be assessed on any increase in the TSO number set forth in an issuer's most recent periodic report filed with the Commission pursuant to Section 13 or 15(d) of the Act. Telephone conversation between Arnold Golub, Senior Attorney, Office of the General Counsel, Nasdaq, and Matthew Boesch, Paralegal, Division of Market Regulation, Commission, on December 6, 1999.

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7.  See NASD Rules 4310(c)(25) and 4320(e)(21).

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9.  15 U.S.C. 780-3(b)(5) and (6).

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11.  In approving the proposal, the Commission has considered the rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

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[FR Doc. 00-1970 Filed 1-26-00; 8:45 am]