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Notice

Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change by the National Association of Securities Dealers, Inc. To Clarify the Income-Based Listing Standards of The Nasdaq Stock Market

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Start Preamble February 11, 2002.

Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)[1] and Rule 19b-4 thereunder,[2] notice is hereby given that on February 6, 2002, the National Association of Securities Dealers, Inc. (“NASD”), Start Printed Page 7437through its 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 Nasdaq. Nasdaq has designated this proposed rule change as “non-controversial” pursuant to Rule 19b-4(f)(6) under the Act,[3] which renders it effective immediately upon filing. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

Nasdaq is filing with the Commission a proposed rule change to clarify Nasdaq's income-based listing standards. Text of the proposed rule change appears below. New language is italicized; deletions are bracketed.

* * * * *

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)-(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) No change

(2)(A) For initial inclusion, the issuer shall have:

(i)-(ii) No change.

(iii) net income from continuing operations of $750,000 [(excluding extraordinary or non-recurring items)] 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)-(ii) No change.

(iii) net income from continuing operations of $500,000 [(excluding extraordinary or non-recurring items)] in the most recently completed fiscal year or in two of the last three most recently completed fiscal years.

* * * * *

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 paragraph (a), (b) or (c), and (d), the security shall satisfy the following criteria for inclusion in Nasdaq:

(1) No change

(2)(A) For initial inclusion, the issuer shall have:

(i) stockholders' equity of U.S. $5 million;

(ii) No change

(iii) net income from continuing operations of U.S. $750,000 [(excluding extraordinary or non-recurring items)] 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) stockholders' equity of U.S. $2.5 million;

(ii) No change

(iii) net income from continuing operations of U.S. $500,000 [(excluding extraordinary or non-recurring items)] in the most recently completed fiscal year or in two of the last three most recently completed fiscal years.

* * * * *

4420. Quantitative Designation Criteria

In order to be designated for the Nasdaq National Market, an issuer shall be required to substantially meet the criteria set forth in paragraphs (a), (b), (c), (d), (e), (f), or (g) below. Initial Public Offerings substantially 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) Entry Standard 1

(1) The issuer of the security had annual [pre-tax] income from continuing operations before income taxes of at least $1,000,000 [(excluding extraordinary or non-recurring items)] in the most recently completed fiscal year or in two of the last three most recently completed fiscal years.

(2)-(7) No change

* * * * *

I. 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

1. Purpose

The purpose of the proposed rule change is to provide greater transparency to Nasdaq's income-based listing standards. Nasdaq rules currently exclude non-recurring items from the income listing standards. These standards, however, lack transparency, as the term “non-recurring” is not defined in Generally Accepted Accounting Principles (“GAAP”). Since the intent of the income listing standards is to capture income from continuing operations, Nasdaq proposes to amend these standards to use the term “income from continuing operations” rather than to exclude non-recurring items. As defined under GAAP, the term “income from continuing operations” excludes discontinued operations, extraordinary items, and the cumulative effect from changes in accounting principles. Nasdaq believes that the proposed amendments to its initial and continued inclusion income listing standards will help to clarify these listing standards for issuers and investors.

The proposed rule change also clarifies that the equity listing standard for non-Canadian foreign securities and American Depositary Receipts is based on U.S. dollars.

2. Statutory Basis

Nasdaq believes that the proposed rule change is consistent with the provisions of section 15A(b)(6) of the Act[4] in that it is designed to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest. As previously noted, Nasdaq is proposing to amend the income-based listing standards to Start Printed Page 7438provide greater clarity and transparency for issuers, their counsel, and investors.

B. Self-Regulatory Organization's Statement on Burden on Competition

Nasdaq does not believe that the proposed rule change would result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others

Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action

Nasdaq asserts that the proposed rule change is effective upon filing pursuant to section 19(b)(3)(A) of the Act [5] and paragraph (f)(6) of Rule 19b-4 thereunder,[6] because the proposed rule change: (1) Does not significantly affect the protection of investors or the public interest; (2) does not impose any significant burden on competition; and (3) does not become operative for 30 days after the date of the filing, or such shorter time as the Commission may designate if consistent with the protection of investors and the public interest.[7]

Nasdaq has requested that the Commission waive the 30 day pre-operative period, which would make the proposed rule operative immediately. The Commission finds that it is consistent with the protection of investors and the public interest to waive the 30-day pre-operative period in this case.[8] The Commission believes that the new rule will provide greater transparency to Nasdaq's listing standards, thereby reducing uncertainty for issuers and investors.

At any time within 60 days of this filing, the Commission may summarily abrogate this proposal if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. 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 in the Commission's Public Reference Room. Copies of such filing will also be available for inspection and copying at the principal office of the NASD. All submissions should refer to File No. SR-NASD-2002-16 and should be submitted by March 12, 2002.

Start Signature

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[9]

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble

Footnotes

7.  In addition, Rule 19b-4(f)(6) requires that the self-regulatory organization give the Commission five days' written notice of its intent to file the proposed rule change. The NASD, through Nasdaq, complied with this requirement. See e-mail from John Nachmann, Senior Attorney Nasdaq, to Florence Harmon, Senior Special Counsel, Division of Market Regulation, Commission, dated January 4, 2002.

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8.  For purposes only of accelerating the operative date of this proposal, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f).

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[FR Doc. 02-3868 Filed 2-15-02; 8:45 am]

BILLING CODE 8010-01-P