Notice To Members 95-55

SEC Approves Depository Eligibility Requirements For Nasdaq Securities

Published Date:

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Executive Summary

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

Part II

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.

(a) and (b) No change.
(c) In addition to the requirements contained in Subsections (a) or (b) above, and unless otherwise indicated, a security shall satisfy the following criteria for inclusion in Nasdaq:
(1) through (22) No change.
(23)
(a) For initial inclusion, a security, except for the security of a Canadian issuer, shall have a CUSIP number identifying the securities included in the file of eligible issues maintained by a securities depository registered as a clearing agency under Section 17A of the Securities Exchange Act of 1934 ("securities depository" or "securities depositories"), in accordance with the rules and procedures of such securities depository; except that this paragraph shall not apply to a security if the terms of the security do not and cannot be reasonably modified to meet the criteria for depository eligibility at all securities depositories.
(b) A security depository's inclusion of a CUSIP number identifying a security in its file of eligible issues does not render the security "depository eligible" under Section 11 to the Uniform Practice Code until:
(i) in the case of any new issue distributed by an underwriting syndicate on or after the date a securities depository system for monitoring repurchases of distributed shares by the underwriting syndicate is available, the date of the commencement of trading in such security on The Nasdaq Stock Market; or
(ii) in the case of any new issue distributed by an underwriting syndicate prior to the date a securities depository system for monitoring repurchases of distributed shares by the underwriting syndicate is available where the managing underwriter elects not to deposit the securities on the date of the commencement of trading in such security on The Nasdaq Stock Market, such later date designated by the managing underwriter in a notification submitted to the securities depository; but in no event more than three (3) months after the commencement of trading in such security on The Nasdaq Stock Market;

Uniform Practice Code

Delivery Of Securities

Book-Entry Settlement

Sec. 11.

(a) A member shall use the facilities of a securities depository for the book-entry settlement of all transactions in depository eligible securities with another member or a member of a national securities exchange or a registered securities association.
(b) A member shall not effect a delivery-versus-payment or receipt-versus payment transaction in a depository eligible security with a customer unless the transaction is settled by book-entry using the facilities of a securities depository.
(c) For purposes of this rule, the term "securities depository" shall mean a securities depository registered as a clearing agency under Section 17A of the Securities Exchange Act of 1934.
(d) The term "depository eligible securities" shall mean securities that
(i) are part of an issue of securities that is eligible for deposit at a securities depository and (ii) with respect to a particular transaction, are eligible for book-entry transfer at the depository at the time of settlement of the transaction. A determination under Subsection 1(c)(23) to Part II of Schedule D of the NASD By-Laws or under the corresponding rule of a national securities exchange that a security depository has included a CUSIP number identifying a security in its file of eligible issues does not render the security "depository eligible" under this Section of the Uniform Practice Code until:
(i) in the case of any new issue distributed by an underwriting syndicate on or after the date a securities depository system for monitoring repurchases of distributed shares by the underwriting syndicate is available, the date of the commencement of trading in such security on The Nasdaq Stock Market; or
(ii) in the case of any new issue distributed by an underwriting syndicate prior to the date a securities depository system for monitoring repurchases of distributed shares by the underwriting syndicate is available where the managing underwriter elects not to deposit the securities on the date of the commencement of trading in such security on The Nasdaq Stock Market, such later date designated by the managing underwriter in a notification submitted to the securities depository; but in no event more than three (3) months after the commencement of trading in such security on The Nasdaq Stock Market;