New NASDAQ Listing and Maintenance Standards

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EXECUTIVE SUMMARY

The NASD Board of Governors has approved and filed with the Securities and Exchange Commission amendments to Schedule D of the By-Laws that increase the initial and continued inclusion criteria for securities traded in the NASDAQ System. The SEC has published the proposal for public comment.

BACKGROUND

The NASD's consideration of changes to the NASDAQ listing criteria for entry and maintenance was prompted by a number of factors. The first of these was the receipt of a letter dated January 10, 1990, relating to Exchange Act Rule 15c2-6, which became effective January 1, 1990. In that letter, the Commission's Division of Market Regulation expressed concerns that certain promoters might attempt to circumvent the requirements of the Rule by seeking NASDAQ listing. The NASD was also concerned that the effects of inflation since these criteria were last amended in 1981 had seriously eroded the effectiveness of these criteria.

In response to the effectiveness of Rule 15c2-6 and to the Division's letter, various proposals for modification of the NASDAQ entry and maintenance criteria were considered by a number of NASD committees and by the Board of Governors at its March 1990 meeting. The Board determined at this meeting that it would be consistent with the public interest and the protection of investors to amend Schedule D of the By-Laws to increase the initial and continued inclusion criteria for issues on the NASDAQ System.

SUMMARY OF PROPOSED AMENDMENTS

The rule change will increase the requirements for initial listing in the NASDAQ System to $4 million in total assets and $2 million in total capital and surplus, and require $1 million in market value of public float and a minimum bid price of $3 per share. Other entry standards for listing would be retained without change.

The rule change would also increase the NASDAQ maintenance requirements to $2 million in total assets and $1 million in capital and surplus, and would require two market makers, $200,000 in market value of public float, and a minimum bid price of $1 share.

The proposed amendments would treat U.S. and Canadian issuers in an equal manner but would exempt non-Canadian foreign issues and American Depositary Receipts from the price per share and the related market value of public float requirements. The NASD believes that treating Canadian and domestic issues alike is appropriate and consistent with positions taken by the Securities and Exchange Commission in the past. (See Exchange Act Release 20624, October 6, 1983). Furthermore, the NASD believes that trading characteristics of non-Canadian foreign issuers warrant an exclusion, at this time, from the price per share and related market value of float requirements.

The increase in the maintenance requirements will be delayed until January 1, 1991 to allow issuers additional time to comply with the increased standards and is contingent upon the NASD-operated OTC Bulletin Board service being in operation at that time.

The NASD will make the rule changes to the initial inclusion criteria effective and applicable to all issuers on Commission approval. On February 15, 1990, the NASD filed with the SEC a proposal for certain interim changes to the NASDAQ entry standards. In that filing, the NASD expressed its intent that issuers that applied and were authorized for NASDAQ inclusion on or after February 15, 1990, but prior to the approval of the interim standards by the Commission, would be required to demonstrate compliance with the interim standards within 90 days of SEC approval of those standards or be subject to removal from the NASDAQ System.

The NASD has withdrawn that earlier filing and incorporated its provisions regarding the effectiveness of the new requirements into the permanent filing. The proposed entry requirements will, therefore, be applicable to issuers having applied on or after February 15, 1990, ninety (90) days after the Commission's approval of the rule changes.

Applications for NASDAQ inclusion filed prior to February 15, 1990, shall be deemed to have been withdrawn, and a new application will be required if the issuer has not entered the NASDAQ System within ninety (90) days of Commission approval of the proposal.

The new criteria may result in certain NASDAQ companies being deleted from the system. In addition, certain issuers that would qualify under the existing entry requirements may not qualify under the proposed entry requirements.

The NASD has addressed these issues in several ways. First, the NASD intends to delay the effectiveness of the increased maintenance criteria until January 1, 1991, to allow existing NASDAQ issuers a reasonable period of time to take appropriate action to remedy any deficiencies that may exist. In addition, the NASD is providing an alternative trading medium for companies that will not be eligible for NASDAQ inclusion, or that may be deleted from NASDAQ, through its proposed OTC Bulletin Board service, which will provide a viable market for issuers having securities that are not included in the NASDAQ System. The "Bulletin Board" will operate on a real-time basis, allowing member firms, for the first time, to enter, update, and view quotation information on OTC securities that are not included in the NASDAQ System. As previously indicated, the effectiveness of the proposed new maintenance standards is predicated on implementation of the Bulletin Board.

Finally, the procedures for obtaining exceptions to the qualification requirements pursuant to Part II, Section 3 of Schedule D, the procedural safeguards provided pursuant to Article IX of the NASD Code of Procedure, and review of such determinations by the Commission will continue to be available to the affected issuers.

The NASD has also considered the effect these proposed changes will have on the capital formation process. It is unquestionable that inclusion in the NASDAQ System aids in the capital formation process. However, this should not impede the ability of the NASD to impose meaningful standards for the initial and continued listing of securities in a credible marketplace. Such credibility is most important to the capital formation process, and the proposed increased standards will further enhance such credibility.

In addition, there are currently more than 10,000 securities that are publicly traded and regularly quoted outside of the NASDAQ and exchange markets that have, at some point, accessed the public capital markets without seeking inclusion in NASDAQ or an exchange. In its discussions on this issue, the NASD Board noted that traditional sources for financing of small companies have included, among others, private placements, venture capital investments, and offerings under Regulation A, all of which are still available. There is no reason to believe that such access to capital will not continue, and even be enhanced, once the increased visibility of the Bulletin Board becomes available.

Questions concerning this notice may be directed to John T. Wall, Executive Vice President, Marketing and Market Operations, at (202) 728-8200, or T. Grant Callery, Vice President and Deputy General Counsel at (202) 728-8285.

NASDAQ QUALIFICATIONS STANDARDS

*A deficiency in the maintenance standards for market value of public float, market makers, and bid price will be determined if the issue fails the individual stated requirement for 10 consecutive trading days. If failure of the 10-day test occurs, the issuer will be notified promptly and will be given 90 calendar days in which to comply with the entry-level standard of the specific area failed.