SEC Approves Depository Eligibility Requirements For Nasdaq Securities
On June 1, 1995, the Securities and Exchange Commission (SEC) approved amendments to Part II, Section 1(c) of Schedule D to the NASD By-Laws and Section 11 of the NASD's Uniform Practice Code.1 The amendments require that for a domestic security2 to be eligible for inclusion in Nasdaq it must have a CUSIP number that is included in the file of eligible securities maintained by a securities depository that is registered as a clearing agency under the Securities Exchange Act of 1934. The rule change took effect June 7, 1995.
Background And Description
The Legal and Regulatory Subgroup3 of the U.S. Working Committee, Group of Thirty Clearance and Settlement Project4 has been engaged in continuing efforts to improve the system for the clearance and settlement of securities. In response to a recommendation by the U.S. Working Committee, the NASD and the national securities exchanges adopted rules in 1993 requiring members to use the facilities of a securities depository for the book-entry settlement of all transactions in depository-eligible securities with another member. The NASD's rule is in Section 11 of the Uniform Practice Code (UPC).
Recently, the Subgroup developed a proposed amendment to the listing requirements of The Nasdaq Stock MarketSM and the national securities exchanges to require the securities of a domestic issuer5 seeking listing to be depository eligible.6 The rule change requires that for a security to be eligible for inclusion in Nasdaq it must have a CUSIP number that is included in the file of eligible securities maintained by a securities depository that is registered as a clearing agency under the Securities Exchange Act of 1934. This requirement will not apply to a security if the terms of such security cannot be reasonably modified to meet the criteria for depository eligibility at all securities depositories.
The new rule sets forth additional requirements that must be met before a security will be deemed to be "depository eligible." The new rule specifies different requirements for depository eligibility depending on whether a new issue is distributed by an underwriting syndicate before or after the date a securities depository system is available for monitoring repurchases of the distributed shares by syndicate members (flipping tracking system). Before the availability of a flipping tracking system, the managing underwriter may delay the date a security is deemed "depository eligible" for up to three months after trading begins in the security. After the availability of a flipping tracking system, a new issue will be deemed to be depository eligible when trading on Nasdaq begins.
Questions about this Notice may be directed to Elliott R. Curzon, Assistant General Counsel, Office of General Counsel, at (202) 728-8451.
1 SEC Release No. 34-35798 (6/1/95); 60 F.R. 30909 (6/12/95).
2 Section 1 of Part II of Schedule D applies only to domestic and Canadian securities, and the new Subsection 1(c)(23) excludes Canadian securities. Thus, the new requirement applies only to domestic securities.
3 The rule was developed through the efforts of the Legal and Regulatory Subgroup of the U.S. Working Committee, which included representatives of the National Association of Securities Dealers, Inc., the New York Stock Exchange, Inc., the American Stock Exchange, Inc., the Philadelphia Stock Exchange, the Chicago Stock Exchange Incorporated, the Pacific Stock Exchange, the Boston Stock Exchange, the National Securities Clearing Corporation, the Depository Trust Company, the Municipal Securities Rulemaking Board, and the Commission's Division of Market Regulation.
4 The Group of Thirty is an independent, non-partisan, non-profit organization established in 1978. In 1988, the Group of Thirty initiated a project to improve the state of risk, efficiency, and cost in the world's clearance and settlement systems. See, Implementing the Group of Thirty Recommendations in the United States I-1 (November 1990).
5 The proposed amendment to the Nasdaq listing requirements is being added to Section 1(c) of Part II of Schedule D. Section 1 of Part II of Schedule D applies only to domestic and Canadian securities, and the new Subsection 1(c)(23) excludes Canadian securities. Thus, the new requirement applies only to domestic securities.
6 Although the exchanges and Nasdaq are adopting substantially the same rule language, in the NASD's case the proposed rule must appear in Section 11 of the UPC, as well as in the Nasdaq rules, because the NASD's depository settlement rule in the UPC applies to all NASD members regardless of where the securities are listed. In comparison, the depository settlement rule of the exchanges only applies to transactions in the securities listed on the exchange.
Text Of Amendments
(Note: New text is underlined; deletions are bracketed.)
Schedule D To The NASD By-Laws
Qualification Requirements For Nasdaq Stock Market Securities
Sec. 1. 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 Subsections (a) or (b), and (c) herein.
Uniform Practice Code
Delivery Of Securities