Notice To Members 83-19

Approval of Revisions to Qualification Requirements of Foreign Issues on NASDAQ

Published Date:

TO: All NASD Members, NASDAQ Foreign Issuers and Other Interested Persons

The NASD has adopted revisions to Section C of Part II of Schedule D under Article XVI of the By-Laws which contains eligibility and authorization requirements for inclusion of foreign issues on the NASDAQ System. These revisions to the qualification requirements were formulated in response to the strong concern expressed by the Securities and Exchange Commission regarding continued quotations in NASDAQ of foreign securities exempt from the registration provisions of Section 12(g) of the Securities Exchange Act of 1934 pursuant to Rule 12g3-2(b) thereunder. As a result, a study of factors surrounding the inclusion of foreign securities on NASDAQ was conducted by the Association's Ad Hoc Committee on Foreign Securities and the Association's Board of Governors.

The Commission believed that the promoters of certain of the foreign companies on NASDAQ take advantage of the absence of complete disclosure regarding their companies and the increased exposure NASDAQ companies enjoy to create order demand and unjustifiable price levels. Furthermore, the Enforcement Division of the Commission has emphasized the difficulty it encounters when attempting to bring enforcement actions against such companies because of the lack of jurisdiction.

The NASD Board recognized the problems which the Commission had but decided against requiring full Section 12(g) registration in attempting to achieve the desired results. The Association believed that requiring full registration would result in many sound and reputable companies being removed from the NASDAQ System merely because many foreign issuers do not want to be subject to the SEC's jurisdiction rather than because of any improper activity or motives on their part. Nevertheless, the Board was concerned about the effects on the credibility of the NASDAQ System which the referred to activities would have and adopted the alternative qualification requirements hereinafter described which it believed would address the primary concerns expressed by the Commission staff.

Under the revised qualifications requirements, securities exempted from registration pursuant to Rule 12g3-2(b) will be permitted to be included in NASDAQ only if financial information, independently certified in accordance with generally accepted accounting practices of the issuer's country of domicile, is made available on a timely basis to shareholders and the Association by the issuer. Such information is considered to be a basic component of disclosure necessary for the protection of the investing public. The responsibility for assuring that audited financials are received by shareholders in the United States would lie with the foreign issuer (or the underlying foreign issuer in the case of ADR's) but that responsibility may be discharged by an ADR bank or broker/dealer acting on behalf of the issuer. The Association will maintain, on its premises, a file of such documents for each foreign issuer to facilitate member and public access to this important information.

The revisions also require a foreign issuer, in order for its security to remain on NASDAQ, to promptly disclose any material information to the public which may effect the value of the security or influence investors' decisions by attempting to disseminate such information in the United States through international wire services or similar media.

The requirements also provide that exempted foreign securities which meet the foregoing requirements shall be subject to deletion from NASDAQ if over-the-counter trading is suspended by the Commission under Section 12(k) of the Exchange Act. This provision is designed to respond to the Commission's dilemma presented by the provisions of the 1934 Act, and certain judicial determinations, preventing it from suspending a company from trading for more than one ten-day period in most instances notwithstanding the nature of the improper activity discovered. It is believed that deletion from NASDAQ would have an effect comparable to a mandated cessation of trading by the Commission. The proposed deletion from NASDAQ would only be invoked, however, upon a finding that such action would be consistent with the public interest. Thus, the issuer company in respect to which a deletion is proposed would be entitled to a hearing before a committee of the Association.

A requirement has also been implemented that foreign issuers whose principal marketplace fails to coordinate its regulatory activities with the Association will not be permitted on the system, or if on, will be removed.

The Association believes that with these additional requirements of certified financial statements, disclosure of material information, removal from the system in the case of a Section 12(k) suspension where the public interest so requires or removal where foreign issuers' principal marketplace fails to coordinate its regulatory activities with the NASD will go a long way toward enhancing the quality of the NASDAQ market for foreign securities. At the same time, foreign companies will not be forced to subject themselves to Commission jurisdiction in order to stay on NASDAQ.*/ The Association also believes that foreign issuers should be provided additional time within which to comply with that portion of the qualification requirements concerning the filing of certified financial information. This will assure each issuer an adequate opportunity to make arrangements for the preparation and submission of the appropriate documentation. Accordingly, that portion of the qualification requirements calling for receipt of an annual balance sheet and statement of operations independently certified (or the equivalent) in accordance with the generally accepted accounting practices of the issuer's country of domicile, will not become effective until August 1, 1983. All remaining elements of the qualification requirements applicable to foreign issuers are effective immediately. Questions regarding the meaning or applicability of these requirements should be addressed to Robert E. Aber, Assistant General Counsel, at (202) 728-8290.

Sincerely,

Frank J. Wilson
Executive Vice President
and General Counsel

Attachments

TEXT OF AMENDMENTS TO SCHEDULE C OF PART II OF SCHEDULE D

(Language to be deleted is bracketed, language to be added is underlined)

C. Rules for Authorized Foreign Securities and American Depositary Receipts
1. A security shall be eligible to be an authorized security if it is:
a. issued by a foreign issuer where either the issuer is required to file reports pursuant to Section 15(d) of the Securities Exchange Act or the security is exempt from registration under Section 12(g) of that Act by reason of the applicability of Rule 12g3-2(b) promulgated by the Securities and Exchange Commission, or
b. an American Depositary Receipt or similar security issued in respect of a security authorized under Subdivision (a) of this paragraph 1.
2. Notwithstanding a security's exemption from registration pursuant to Rule 12g3-2(b), a security of a foreign issuer (or an ADR or similar security issued with respect thereto) shall not be eligible to be an authorized security:
a. if the issuer of such security, and in the case of ADR's the issuer of the security underlying the ADR, does not timely make available to its shareholders and, upon application for authorization and annually thereafter the Corporation does not receive, a balance sheet and statement of operations independently certified (or the equivalent) in accordance with the generally accepted accounting practices of the issuer's country of domicile; or
b. if the principal marketplace of the issuers securities does not coordinate regulatory activities with the Corporation sufficiently to assure a fair and orderly market in the security and protection of investors and the public interest.
[2.]
3. An eligible security shall not be authorized, and an authorized security shall be subject to suspension or termination of authorization, if:
a. at any time there is a failure to comply with the eligibility standards set forth in paragraphs 1 and 2 above;
[a.]
b. it shall have been suspended from being traded over-the-counter by the Securities and Exchange Commission pursuant to Section [15(c)(5)] 12(k) of the Securities Exchange Act and the Corporation shall determine that the public interest requires suspension or termination of authorization as an authorized security;
[b.]
c. there shall have been a failure by the issuer promptly to disclose to the public by attempts to disseminate in the United States through international wire services or similar disclosure media [through the press] any material information which may affect the value of its securities or influence investors' decisions;
[c]
d. there shall have been a failure to comply with any obligation of any person regarding filing or disclosure of information material to the issuer or the security, whether the obligation arises under a federal or state statute or rule and the Corporation shall determine that the public interest requires suspension;
[d.]
e. there shall have been a failure by the issuer to pay the NASDAQ Issuer Quotations Fee as specified in Section III hereof;
[e.]
f. in the case of a security not yet authorized, there shall be fewer than three market makers registered; in the case of an authorized security there shall be fewer than one market maker registered;
[f.]
g. in the case of an authorized security, the average daily volume reported by market makers during the first 90 calendar days after authorization is less than 500 shares per day;
[g.]
h. the principal amount outstanding shall be less than $10,000,000 in the case of a convertible debt security eligible but not authorized or $5,000,000 in the case of an authorized convertible debt security;
[h.]
i. the issuer's total assets shall be less than $2,000,000 in the case of an eligible security not yet authorized or $750,000 in the case of an authorized security;*/
[i.]
j. the issuer's total capital and surplus shall be less than $1,000,000 in the case of an eligible security not yet authorized or $375,000 in the case of an authorized security;*/
[j.]
k. in the case or rights or warrants, the underlying security is not an authorized security.

*/ It should be noted, however, that the Commission has proposed a rule in Release No. 34-19187 which would require all foreign issues or ADR's included in the NASDAQ System to be registered with the Commission in accordance with the provisions of Section 12(g) of the Securities Exchange Act of 1934. Although the formal comment period ended March 11, 1983, it is expected that at least several weeks will elapse before this proposal can be formally considered by the Commission. It is, therefore, possible that comments received after this date can and will be considered. All such comments should refer to File No. S7-951 and be sent to George A. Fitzsimmons, Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. A copy of the Association's comment letter in opposition to the Commission's proposal is attached.

*/ Until August 24, 1982, the minimum amounts for authorized securities shall be $500,000 total assets and $250,000 total capital and surplus.