Notice To Members 86-13

Request for Comments on Proposed Amendment to Schedule D of the NASD By-Laws to Authorize Trading Halts in NASDAQ Securities and Listed Securities Traded Over-the-Counter

Published Date:

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

LAST DATE FOR COMMENT: MARCH 23, 1986

The National Association of Securities Dealers, Inc. (NASD), requests comments on a proposed amendment to Schedule D of the NASD By-Laws that would authorize the NASD to halt over-the-eounter trading in a NASDAQ security pending the dissemination of material news by the issuer. Schedule D currently provides only for the suspension of NASDAQ System quotations in a NASDAQ security while material news is being disseminated. The proposed amendment would also authorize the NASD to halt over-the-counter trading in a security listed on a national securities exchange when a trading halt is imposed by the exchange to permit the dissemination of material news.

The NASD Board of Governors has approved the text of the proposed amendment to Schedule D, which is attached.

BACKGROUND

In March 1979, pursuant to Schedule D of the NASD By-Laws, the Board of Governors adopted a recommendation that NASDAQ issuers notify the NASD of the pending release of material news in advance of or simultaneously with the release of such information to the press, as required by Paragraph B.3.b. of Part II of Schedule D. "Material news" for this purpose is information that might reasonably be expected to affect the value of an issuer's securities or influence investors' decisions. Material news would include information regarding corporate events of an unusual or non-recurrent nature.

The purpose of such notification is to enable the NASD to evaluate the information and its potential impact on the marketplace and to determine, through consultation with the issuer, whether the public interest would be served by halting quotations in the security through the NASDAQ System while the news is disseminated. Such action, known as a "quotations halt," alerts the marketplace that material news is being announced to the public. Quotations halts, which normally last one hour after the appearance of the news on wire services, provide the public with an opportunity to evaluate the information and consider it when making investment decisions.

Both before and after the adoption of the 1979 recommendation, questions existed as to the permissibility of trading in securities subject to a quotations halt. In Notice to Members 79-37 (November 29, 1979), members were advised that if a market maker decides to trade a security during a quotations halt, it should ensure that all counterparties to such transactions are aware that a quotations halt in the security is in effect pending the release of material news. If the news has been published but quotations are still being held pending full dissemination of the news, the market maker should advise the counterparties that a quotations halt is in effect. If retail customers are involved, the text of the news should also be disclosed.

Members were also advised that should trading activity of a questionable nature occur during a quotations halt, action will be taken by the NASD to determine whether such activity was in conformance with NASD rules and the anti-fraud provisions of the Securities Exchange Act of 1934.

PROPOSED AMENDMENT

The NASD's Market Surveillance and Trading Committees have recently become aware of certain instances in which members have engaged in trading in NASDAQ securities, including NASDAQ National Market System (NASDAQ/NMS) securities, during quotations halts. The appearance of trading during quotations halts has raised questions about the protections afforded investors during the critical disclosure process.

In response to this situation, the Board of Governors is proposing for comment an amendment to Schedule D of the NASD By-Laws to prohibit NASD members from trading a NASDAQ security in the over-the-counter market pending the dissemination of material news, or trading a listed security in the over-the-counter market during a halt imposed by an exchange to permit the dissemination of material news. The Board believes that the authority to halt trading under the limited circumstances specified above would be useful in protecting public investors and maintaining the integrity of the NASDAQ market.

Under the proposed amendment, the Board of Governors will recommend that NASDAQ issuers notify the NASD Market Surveillance Section of the release of any material news no later than simultaneously with the release of such information to the press. Upon receipt of information from a NASDAQ issuer, and in consultation with the issuer, the NASD will promptly evaluate the information, estimate its potential impact on the market and determine whether a trading halt is appropriate. If so, notice of the trading halt will appear on the NASDAQ "NEWS" frame. As soon as notice of a trading halt appears, members will be prohibited from executing any transactions in the halted security. Trading in the halted security will resume after there has been adequate time to disseminate the news and upon notice via the NASDAQ "NEWS" frame that the trading halt is no longer in effect.

In the event that an exchange notifies the NASD that it has halted or will halt trading in a listed security pending the dissemination of material news, the NASD may halt over-the-counter trading in the security. Members will be notified of the trading halt through the NASDAQ "NEWS" frame. When notice of a trading halt appears, members will be prohibited from executing any over-the-counter transactions in the halted security.

As soon as there has been adequate time for dissemination of the news, over-the-counter trading may resume, notwithstanding an ongoing halt on the exchange for order imbalances or other non-regulatory reasons. Trading in a halted security will resume upon notice via the NASDAQ "NEWS" frame that a trading halt is no longer in effect.

All members and other interested persons are invited to submit written comments on the proposed rule. Comments should be received no later than March 23, 1986, and should be directed to:

Mr. James M. Cangiano, Secretary
National Association of Securities Dealers, Inc.
1735 K Street, N.W.
Washington, D.C. 20006

Comments received by the indicated date will be considered by the NASD Board of Governors. Any rule change approved by the Board must be filed with and approved by the Securities and Exchange Commission before becoming effective.

Questions concerning this notice may be directed to Christopher R. Franke, Director, NASD Market Surveillance, at (202) 728-8186, or John E. Pinto, Senior Vice President, NASD Surveillance, at (202) 728-8233.

Sincerely,

Frank J. Wilson
Executive Vice President and General Counsel

Attachment

PART ____ OF SCHEDULE D

A. Authority to Initiate Trading Halts
In circumstances in which the Corporation deems it necessary to protect investors and the public interest, the Corporation may, pursuant to the procedures set forth in paragraph B:
(a) halt trading in the over-the-counter market of a security authorized for inclusion in the NASDAQ System pending the dissemination of material news; or
(b) halt trading in the over-the-counter market of a security listed on a national securities exchange during a trading halt imposed by such exchange to permit the dissemination of material news.
B. Procedure for Initiating a Trading Halt
1. The Board of Governors recommends that NASDAQ issuers notify the NASD of the release of any material news no later than simultaneously with the release of such information to the press as required by Paragraph B.3.b. of Part n of Schedule D of the NASD By-Laws.
2. Notification shall be provided directly to the NASD Market Surveillance Department by telephone. 1/ Information communicated orally by authorized representatives of a NASDAQ issuer should be confirmed promptly in writing. Where public release of information occurs after 5 p.m. Eastern Time, telephone notification should be made by 9 a.m. Eastern Time the following trading day.
3. Upon receipt of the information, the NASD, after consultation with the issuer, will promptly evaluate the information, estimate its potential impact on the market and determine whether a trading halt in the security is appropriate.
4. Should the NASD determine that a trading halt pending the dissemination of material news is necessary and in the public interest, the trading halt will be ffective simultaneously with appropriate notice in the NASDAQ "NEWS" frame.
5. Should a national securities exchange notify the NASD that it has alted or will halt trading in a security listed on that exchange pending the dissemination of material news, the NASD may halt trading in such security in the over-the-counter market. The commencement of the trading halt will be effective simultaneously with appropriate notice in the NASDAQ "NEWS" frame.
6. Trading in a halted security shall resume upon notice via the NASDAQ "NEWS" frame that a trading halt is no longer in effect.
C. Execution of Transactions During a Trading Halt
It shall constitute a violation of the provisions of Schedule D and Article III, Section 1 of the NASD Rules of Fair Practice for any member or any person associated with a member to engage in any transaction in a security for which a trading halt is in effect.

1/ The current telephone number is (202) 728-8187.