Expansion of NASDAQ National Market System

TO: All NASD Members

The SEC Release of December 18, 1984

On December 18, 1984, the Securities and Exchange Commission issued Release No. 34-21583; File No. S7-787, entitled "Designation of National Market System Securities." This Release confirms the decision taken by the Commission at an open meeting on November 16, to approve the following additional criteria for the voluntary inclusion of securities in NASDAQ/NMS:

"These (additional criteria) make a total of approximately 2,500 OTC securities eligible for NMS designation," the SEC Release stated.

The NASD's Implementation

The effective date for the SEC Release is January 22, 1985. On that date, the NASD will add 100 securities which meet the new criteria to NASDAQ/NMS. Thereafter, the NASD will add securities to NASDAQ/NMS at a rate of up to 200 a month, until all eligible securities seeking NMS designation are included.

The NASD Proposal

The new criteria approved by the Commission were proposed by the NASD on February 10, 1984 as amendments to the Commission's own criteria, which include a $5 bid price, a trading volume of 100,000 shares a month for six months and four market makers. The NASD stressed that its financial criteria, such as the profitability of operating companies and the depth of resources of development companies, are more important to investors than the temporary trading volumes of stocks.

On April 30, 1984, the Commission published the NASD's petition. It received 347 letters of comment, including 215 from OTC issuers and 113 from broker-dealers. The December 18 Release observes, "The NASD and the vast majority of OTC market participants fully supported the proposed amendments." The Release also notes that five stock exchanges were among the opponents, and it carefully cites the NASD's point-by-point rebuttals of the exchanges' arguments.

"After careful consideration," the Release says, "the Commission has determined to adopt the ... criteria proposed by the NASD, thus expanding the number of securities eligible for designation. The Commission believes that the institution of last sale reporting in the OTC market has been extremely successful and should be expanded ... Specifically, the Commission believes that this expansion is justified because it provides additional OTC securities with the benefits of last sale reporting."

The Impact on Marginability

A further benefit of the SEC decision is that more NASDAQ securities will become eligible for purchase in margin accounts. Currently, there are 2,070 NASDAQ margin stocks. The Federal Reserve Board ruled in September, 1984, that all NASDAQ/NMS securities are to be automatically marginable, and the expansion of NMS will make more than 700 additional NASDAQ securities eligible for margin. This will give investors greater flexibility and will help issuers by making their securities more attractive to a broader range of investors.

Sincerely,

Gordon S. Macklin
President