Request for Comments on Proposed Revisions to Schedule D of the NASD By-Laws

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

LAST DATE FOR COMMENTS: SEPTEMBER 15, 1986.

The National Association of Securities Dealers, Inc. (NASD), requests comments on proposed revisions to Schedule D of the NASD By-Laws. Schedule D governs the operations of the NASDAQ System. The text of the proposed revisions is included as Attachment I. The text of the current Schedule D is included as Attachment II.

BACKGROUND

The proposed revisions are the result of a comprehensive review of Schedule D undertaken by the NASD Board of Governors Ad Hoc Committee on Schedule D. The committee's major goal in reviewing Schedule D was to increase the Schedule's usefulness as a reference tool for NASDAQ issuers, NASDAQ market makers and other NASD members.

In addition to making certain organizational changes and editorial revisions, the committee has attempted to update Schedule D to reflect current practice and procedure and to incorporate in the Schedule material that now appears in the NASDAQ Symbol Directory and other NASD publications and notices. The Schedule will also contain a Table of Contents and a definitional section.

To facilitate review of the proposed revisions, the following is a summary of the changes made to each part.

PART I

Part I is new. It provides definitions for the terms used in Schedule D, with the exception of terms relating to options which, for the present time, will remain in the options section of Schedule D, renumbered as Part VIII.

PART II

Part II contains the qualification requirements for domestic and foreign NASDAQ securities. The major changes to these requirements are summarized as follows:

• Firm commitment offerings may be included in NASDAQ upon the effective date of the registration statement, while offerings conducted on a "best efforts" basis may be included only upon the closing of the offering.
• Annual reports filed with the NASD must contain audited financial statements prepared in accordance with generally accepted accounting principles.
• Assets that are temporary in nature or severely restricted in their use shall not be included in determining an issuer's total assets.
• Convertible debentures and redeemable preferred stock with a redemption provision under the sole control of the holder shall not be included in the calculation of an issuer's capital and surplus.
• Foreign issuers shall be required to register pursuant to Section 12(g) of the Securities Exchange Act of 1934 to be eligible for initial inclusion in the NASDAQ System.
• Minimum average daily trading volume requirements for foreign shares during the first 90 days of trading have been eliminated.
• The number of market makers required for a foreign issue's initial inclusion in NASDAQ has been reduced to two from three.
• Requirements of 100,000 shares of float and 300 shareholders for foreign issues have been added.
• NASDAQ issuers involved in bankruptcy proceedings or whose financial statements contain a disclaimer opinion may be suspended or terminated from inclusion in the NASDAQ System.

PART III

Part III is new. It contains the qualitative and quantitative qualification requirements for NASDAQ National Market System securities that are currently part of the NASD's National Market System Designation Plan. In addition to setting forth the application procedures for NASDAQ/NMS designation, this part includes the alternative Tier 2 quantitative criteria now contained in SEC Rule HAa2-l. The Tier 1 mandatory designation criteria are eliminated. Corporate governance criteria, which have already been approved by the NASD Board and are on file with the Securities and Exchange Commission, will be included in this part.

PARTS IV and V

Parts IV and V were formerly numbered as Parts VI and VII. No changes have been made at this time.

PART VI

Part VI, formerly Part I, contains the requirements applicable to NASDAQ market makers. This part now includes:

• Registration requirements for NASDAQ market makers.
• An explicit requirement for market makers to maintain a two-sided market.
• NASD authority to suspend the quotations of a market maker whose quotations are not reasonably related to the market and who fails to update its quotations.
• The table of maximum allowable spreads currently located in the NASDAQ Symbol Directory.
• Revised procedures for withdrawing quotations. Currently, market makers are permitted to withdraw their quotations as long as they obtain excused withdrawal status prior to re-entering quotations. The revised procedures require a market maker to obtain excused withdrawal status prior to withdrawing quotations. New limits are also placed on the length of excused withdrawals. Excused withdrawals based on illness, vacations or physical circumstances beyond the market maker's control may be granted for up to five days, unless extended. Excused withdrawals based on a firm's investment banking activities may be granted for up to 60 days.

PART VII

Part VII, formerly Part III, contains the requirements applicable to market makers participating in the Consolidated Quotations Service (CQS). The changes made to this part parallel those made to new Part VI with respect to NASDAQ market makers. This part now includes:

• Registration procedures for market makers participating in CQS.
• An explicit statement of the requirement of SEC Rule HAcl-1 that quotations in reported securities be firm for a normal unit of trading or for the size displayed.
• A requirement that quotations displayed in both CQS and the NASDAQ System be identical.
• Revised procedures for withdrawing quotations in CQS securities. Market makers will be required to obtain excused withdrawal status prior to withdrawing quotations in CQS securities. New limits are also placed on the length of an excused withdrawal. An excused withdrawal based on illness, vacations or physical circumstances beyond the market maker's control may be granted for up to five days. An excused withdrawal based on a firm's investment banking activities may be granted for up to 60 days.

PART VIII

Part VIII was formerly numbered as Part IV. No changes have been made at this time.

PART IX

Part IX was formerly numbered as Part V. No changes have been made at this time.

PARTS X THROUGH XIII

Parts X through XIII were formerly numbered as Parts VIII through XI. No changes have been made at this time.

* * * * * *

All members and other interested persons are invited to submit written comments on the proposed revisions to Schedule D. Comments should be received no later than September 15, 1986, and should be directed to:

Mr. Lynn Nellius, 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 changes 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 S. William Broka, Vice President, NASDAQ Operations-Companies, at (202) 728-8050, or Mary S. Head, Senior Attorney, NASD Office of General Counsel, at (202) 728-8284.

Sincerely

Frank J. Wilson
Executive Vice President and General Counsel

Attachments

Attachment I

TABLE OF CONTENTS

PART I

DEFINITIONS

For purposes of Schedule D, unless the context requires otherwise:

PART II

QUALIFICATION REQUIREMENTS FOR NASDAQ SECURITIES

Sec. 1. Qualification Requirements for Domestic Securities

To qualify for inclusion in the NASDAQ System, a security shall satisfy all applicable requirements contained in subsections (a) or (b), and (c) herein.

Sec. 2. Qualification Requirements for Foreign Securities and American Depositary Receipts

To qualify for inclusion in the NASDAQ System, a security of a foreign issuer, an American Depositary Receipt (ADR) or similar security issued in respect of a security of a foreign issuer shall satisfy the requirements of paragraphs (a), (b) or (c), and (d) and (e) herein.

Sec. 3. Suspension or Termination of Inclusion of a Security and Exceptions to Inclusion Criteria ^1/

Sec. 4. Use of the NASDAQ System on a Test Basis

Notwithstanding the eligibility standards set forth in Part n of Schedule D, the Association may at any time authorize the use of the NASDAQ System on a test basis for whatever studies it considers necessary.

PART III

DESIGNATION OF NASDAQ NATIONAL MARKET SYSTEM SECURITIES

Sec. 1. Applications for Designation

Sec. 2. Quantitative Designation Criteria

In order to be designated, an issue shall be required to substantially meet the criteria set forth in paragraph (a), (b) or (c) below.

Initial public offerings (IPOs) are eligible for immediate inclusion in NASDAQ/NMS upon prior application and with the written consent of the managing underwriter that immediate inclusion is desired. All other qualifying issues, excepting special situations, are included on regularly scheduled phase-in dates.

Sec. 3. Registration Standards

In addition to meeting the quantitative criteria for NASDAQ/NMS inclusion, the issue must also be:

Sec. 4. Quantitative Maintenance Criteria

After designation as a NASDAQ National Market System security, a security must substantially meet the criteria set forth below to continue to be designated as a national market system security. Failure to meet any of the maintenance criteria may result in the termination of an issue's designation in NASDAQ/NMS upon notice by the Association.

Sec. 5. Non-Quantitative Designation Criteria

(This section is identical to the language in a proposed rule on corporate governance currently pending approval by the SEC.)

PART IV

NASDAQ ISSUER QUOTATION FEES

No change.

PART V

PUBLICATION AND DISSEMINATION OF QUOTATIONS TO THE NEWS MEDIA

No change.

PART VI

REQUIREMENTS APPLICABLE TO NASDAQ MARKET MAKERS

Sec. 1. Registration as a NASDAQ Market Maker

Sec. 2. Character of Quotations

A market maker shall, prior to entering a quotation that locks or crosses another quotation, make reasonable efforts to avoid such locked or crossed market by executing transactions with all market makers whose quotations would be locked or crossed.

Sec. 3. Stabilizing Bids

Sec. 4. Reports

Sec. 5. Normal Business Hours

A NASDAQ market maker shall be open for business as of 9:30 a.m. Eastern Time and shall close no earlier than 4 p.m. Eastern Time. Should a market maker wish to remain open for business later than 4 p.m. Eastern Time, it shall so notify NASDAQ Operations-Members via a NASDAQ terminal and shall close only on the hour or the half hour, but no later than 6:30 p.m. Eastern Time.

Sec. 6. Clearance and Settlement

Sec. 7. Withdrawal of Quotations

Sec. 8. Voluntary Termination of Registration

A market maker may voluntarily terminate its registration in a security by withdrawing its quotations from the NASDAQ System. A market maker that voluntarily terminates its registration in a security may not re-register as a market maker in that security for two business days.

Sec. 9. Suspension and Termination of Quotations By Association Action

The Association may, pursuant to the procedures set forth in the NASD Code of Procedure, suspend, condition, limit, prohibit or terminate a market maker's authority to enter quotations in one or more authorized securities for violations of the applicable requirements or prohibitions contained in this Schedule.

Sec. 10. Termination of NASDAQ Service

The Association may, upon notice, terminate NASDAQ service in the event that a market maker fails to qualify under specified standards of eligibility or fails to pay promptly for services rendered by the NASDAQ System.

PART VII

CONSOLIDATED QUOTATIONS SERVICE (CQS)

Sec. 1. Registration as a CQS Market Maker

Sec. 2. Obligations of CQS Market Makers

Pursuant to SEC Rule HAcl-1, a CQS market maker's quotations in reported securities are required to be firm for the size displayed or, if no size is displayed, for a normal unit of trading. If a market maker displays quotations in both CQS and the NASDAQ System, the market maker shall maintain identical quotations in each service.

Sec. 3. Normal Business Hours

A CQS market maker shall be open for business as of 9:30 a.m. Eastern Time and shall close no earlier than 4 p.m. Eastern Time. A CQS market maker shall designate a closing time for each security between 4 p.m. and 6:30 p.m. Eastern Time. A designated closing time may be set only on the hour or half hour. A CQS market maker whose market is closed may re-open its market as late as 6:30 p.m. Eastern Time upon appropriate notification to the Association.

Sec. 4. Withdrawal of Quotations

Sec. 5. Voluntary Termination of Registration

A CQS market maker may voluntarily terminate its registration in an reported security by withdrawing its quotations from the NASDAQ System. A CQS market maker that voluntarily terminates its registration in a reported security may not, however, re-register as a CQS market maker in that security for two days.

Sec. 6. Suspension and Termination of Quotations by Association Action

The Association may, pursuant to the procedures set forth in the NASD Code of Procedure, suspend, condition, limit, prohibit or terminate a CQS market maker's authority to enter quotations in a reported security for violations of the applicable requirements or prohibitions of this Schedule.

parts VIII - XIII

No change.

National Association of Securities Dealers,-Inc.
1735 K Street, N.W.
Washington, D.C. 20006
(202) 728-8000

M E M O R A N D U M

TO: District Directors
Department Heads
Selected Staff

FROM: Raymond W. Cocchi

DATE: September 3, 1986

RE: Blue-Sky Exemption for NASDAQ/NMS

The attached brochure was designed to encourage state legislators to sponsor and support legislation to exempt NASAQ/NMS securities from their blue-sky laws.

During the 1987 legislation session, corrective legislation will be sought in a number of the following states:

If you or members of your staff are acquainted with any state legislators or other elected officials in any of these states who you feel may wish to assist us, please call me at (202) 728-8370.

* * * * *

Attachment

Attachment II

Schedule D

Introduction

This schedule has been prepared pursuant to Article VII, Section l(a)(6) of the Corporation's By-Laws and is applicable to the nationwide automated quotations system, which is operated under the direction and control of the Corporation, known as the NASDAQ System, and also is applied to the publication in newspapers or other media of quotations in NASDAQ securities and over-the-counter quotations for securities not in NASDAQ. The operating agreement preserves the Corporation's proprietary rights in the quotations handled by the System, and retains for the Corporation the power to decide who may obtain access to System services and data, what securities may be quoted on the System, and the charges to be collected by the operator for System services and data.

This schedule contains (a) the qualifications for registered market makers and other subscribers for System services; (b) the standards for authorized securities; (c) the schedule of charges for System services; (d) the procedures for hearing and disposition of grievances and complaints arising out of the administration and operation of the NASDAQ System; and (e) the standards governing the publication of quotations in newspapers for national and local quotations lists of NASDAQ and other over-the-counter issues.

I

QUALIFICATIONS OF USERS OF SERVICES

A. Level 1 Service

B. Level 2 Service

C. Level 3 Service

• • • Explanation of the Board of Governors

The Board of Governors has determined that, for purposes of this rule, clearing facilities are available if located within 25 miles of a market maker. Notwithstanding its proximity to a particular clearing facility, a market maker may clear its transactions through any registered clearing facility with continuous net settlement: enter into a correspondent clearing arrangement with a member which clears through a continuous net settlement clearing facility: or use direct mail settlement.

[Subparagraph (e) added effective April. 1982.]

A market maker's initial registration in a security not previously authorized may become immediately effective if a request for registration is received by the Corporation within five business days of authorization of the security.

D. Termination of Service and Failure to Promptly Pay Fines Assessed by the Trading Committee.

II

QUALIFICATIONS FOR AUTHORIZED SECURITIES

A. Introduction

Paragraphs B.I and C.I define an eligible pool of securities which may be authorized for NASDAQ. Generally, this pool contains any security which is registered under the Exchange Act.* This means securities listed on national securities exchanges and a variety of over-the-counter stocks, warrants, rights and convertibles (which the Act defines as "equity" securities), and bank securities (registered not with the SEC but with the Federal Reserve System, FDIC, or the Comptroller). Beyond these registered securities, also included in the pool are certain insurance company and investment company securities, plus foreign securities and ADRs where specified information is available in the United States. And, finally, under paragraph B.2, a new domestic issue may go into the pool immediately upon its registration being declared effective by the Securities and Exchange Commission, in which case it shall be eligible to be an authorized security on the same day that its registration is declared effective.

Securities from the eligible pool will be authorized if certain other criteria—set out in paragraphs B.3 or C.3 of the Rules—are met. Generally, there will have to be at least two market makers for domestic securities or three market makers for foreign securities and American Depositary Receipts, public distribution of at least 100,000 shares, a minimum capital and surplus of $1,000,000, and compliance with certain disclosure standards. In the case of foreign securities, the number of shares publicly held in the United States is generally not available. Therefore, foreign securities or American Depositary Reteipts, providing they satisfy those standards set forth in Section C, will first receive a provisional authorization for a period of 90 calendar days. If the average daily volume reported by market makers during the 90-day provisional period is less than 500 shares per day, the authorization will be suspended. A foreign security or American Depositary Receipt so suspended will not be reconsidered for authorization for at least 90 days following the suspension. For suspension of authorization the same disclosure and public distribution criteria as for initial authorization apply, plus $750,000-assets, and $375,000-capital-and-surplus tests. Depending on the circumstances of each case the Corporation may make exceptions from these criteria or apply additional or more stringent criteria.

In the main the Rules can be administered on the basis of reports already filed publicly by the issuers. Hence, whenever it shall appear to the Corporation that a security is eligible to be an authorized security under paragraphs B.I, B.2 or C.I, and that none of the conditions of paragraphs B.3 or C.2 applies, the Corporation will simply declare that the security is an authorized security.
[Subparagraph A amended effective June 1, 1974 and December 17, 1974; May 17, 1976.]

B. Rules for Authorized Domestic Securities*

C. Rules for Authorized Foreign Securities and American Depositary-Receipts

• • • Selected NASD Notices to Members

D. Suspension or Termination of Authorization of a Security and Exceptions to Authorization Criteria

• • • Selected NASD Notice to Members

E. Use e System on a Test Basis

Notwithstanding the eligibility standards set forth in Part II of Schedule D, the Board of Governors may at any time and from time to time authorize the use of the system on a test basis for whatever studies it considers necessary and appropriate.
[Subparagraph "E" added effective March 29, 1971.]

NOTIFICATION TO NASD OF NEWS RELEASES

Schedule D requires NASDAQ companies to disclose promptly to the public through the press any material information which may affect the value of their securities or influence investors' decisions. The Board of Governors recommends that NASDAQ companies notify the NASD of the release of any such information no later than simultaneously with its release to the public through the press. Notification may be provided directly to the NASD Market Surveillance Department by telephone (call 202 728-8204). Information communicated orally should be confirmed promptly in writing. Where public release of information occurs after 5 :30 p.m. Eastern Time, notification should be made by 9:30 a.m. of the following trading day.

The purpose of this recommendation is to assist in maintaining a stable and orderly market for NASDAQ securities. One of the methods used by the NASD to accomplish such is the institution of NASDAQ quotation halts. A quotations halt benefits current and potential shareholders by halting the display of quotations through the NASDAQ System until there has been an opportunity for the information to be disseminated to the public. This decreases the possibility of some investors acting on information known to them but which is not known to others. A quotations halt normally lasts about one to two hours after the appearance of the news on wire services, but it may last longer if a determination is made that the news has not been adequately disseminated. A quotations halt provides the public with an opportunity to evaluate the information and consider it in making investment decisions. It also alerts the marketplace to the fact that news has been released.

Upon receipt of the information from the company, the NASD, after consultation with the company, will immediately evaluate the information, estimate its potential impact on the market and determine whether a quotations halt in the security is appropriate.

Material information which might reasonably be expected to affect the value of the securities of a company or influence investors' decisions would include information regarding corporate events of an unusual and/or non-recurrent nature. The following list of events, while not an exhaustive summary of all situations in which disclosure to the NASD should be considered, may be helpful in determining whether information is material. It should also be noted that every development that might be reported to the NASD in these areas would not necessarily be deemed to warrant a quotations halt.

• a merger, acquisition or joint venture ;
• a stock split or stock dividend;
• earnings and dividends of an unusual nature :
• the acquisition or loss of a significant contract:
• a significant new product or discovery ;
• a change in control or a significant change in management;
• a call of securities for redemption :
• the public or private sale of a significant amount of additional securities ;
• the purchase or sale of a significant asset;
• a significant change in capital investment plans ;
• a significant labor dispute ;
• establishment of a program to make purchases of the company's own shares;
• a tender offer for another company's securities ; and
• an event requiring the filing of a current report under the Securities Exchange Act.

• • • Selected NASD Notice to Members

III

CONSOLIDATED QUOTATIONS SERVICE

A. Description of Service

The Consolidated Quotations Service (CQS) provides the subscriber with access to bid/ask quotations and quotation sizes for securities listed on national stock exchanges. The CQS includes all common stocks, preferred stocks, warrants and rights registered or admitted to unlisted trading privileges on the American Stock Exchange, and the New York Stock Exchange and certain securities listed on the regional stock exchanges. The Subscriber will have access to quotations and quotation sizes in such securities from all registered CQS Third Market Makers and the American, Boston. Midwest. New York. Pacific and Philadelphia Stock Exchanges. Quotations are required by SEC Rule HAcl-1 to be firm for the displayed size or if no size is displayed for a normal unit of trading.

The CQS will operate between 9:00 a.m. and 6:30 p.m. Eastern Time. All quotations for marketplaces that are open will be listed according to the best bid quotation or the best ask quotation following the quotations of the open marketplaces. If a stock exchange suspends trading in a security, a "HALT" notation will be displayed along with the last quotation. During any such suspension, quotations from marketplaces remaining open will continue to be displayed.

B. Definitions

C. Initiating Service

Every Third Market Maker shall communicate to the Corporation through the NASDAQ System his bids, offers and quotation sizes in reported securities by registering with the Corporation as a Third Market Maker. If accepted for registration, and a terminal is in place, a Third Market Maker's registration shall be effective at the start of business on the second business day following receipt of its application by the Corporation. Otherwise registration shall be effective at the. start of business on the second business day following installation of the terminal.

D. Obligations of Third Market Makers

The rules and regulations with respect to the obligations of Third Market Makers in reported securities are contained in SEC Rule llAcl-1 which is hereby incorporated as part of this Schedule D.

E. Business Hours

A registered Third Market Maker shall be open and active as of 10:00 a.m. Eastern Time and no Third Market Maker shall close sooner than 4:00 p.m. Eastern Time. A registered Third Market Maker shall designate a closing time for each security from 4:00 p.m. to 6:30 p.m. Eastern Time, and the closed symbol will be appended to the quotation at the designated time. The designated closing time may only be on the hour or the half hour. A registered Third Market Maker may reopen its market in a security up to 6:30 p.m. Eastern Time upon appropriate notification to the Corporation.

F. Withdrawal Procedure

G. Voluntary Termination

A registered Third Market Maker may voluntarily terminate its registration as to a given security by withdrawing its quotations from the System.

H. Suspension and Termination of Quotations by Action of the Corporation

The Corporation may, pursuant to the procedures set out in the Code of Procedure, suspend, condition, limit, prohibit, or terminate a registered Third Market Maker's authority to enter quotations on one or more authorized securities for violations of the applicable standards of this Schedule D.

[New Section III added effective January 19, 1977; prior Section III redesignated Section V; amended effective July 26, 1978.]

IV

NASDAQ INDEX OPTIONS

Section 1

Definitions

Section 2

NASDAQ Index Options Services Available

Section 3

Registration, Qualification and Other General Requirements Applicable to All NASDAQ Index Options Market Makers

Section 4

Character of Index Options Quotations Entered Into the NASDAQ Index Options Service by All NASDAQ Index Options Market Makers

Section 5

Commitment Rules Applicable to Options Market Makers in NASDAQ Index Options

The following examples illustrate the commitment rule for index option market makers established by this Section 5.

Section 6

Sanctions Applicable to NASDAQ Index Options Market Makers

The following example illustrates the sanction for index options market makers established by paragraph (a) above.

Market Maker A, without approval of the Corporation, withdraws quotations from the NASDAQ Index Options Service for a series of NASDAQ-ICO Index™ options causing the member's registration in all NASDAQ-100 Index™ options series to be terminated pursuant to paragraph (a)(l) above.

At the time market maker A's registration is terminated, January, February and March NASDAQ-100 Index™ options are trading. Pursuant to paragraph (a) (2) above, any application by member A to again register as a market maker in NASDAQ-100 Index™ options would not be granted effectiveness by the Corporation until the expiration of the February NASDAQ-100 Index™ options.

Section 7

Requirements Applicable to NASDAQ Index Options Order Entry Firms

Section 8

Transaction Reporting and Other Reporting Requirements

Section 9

Authorization of NASDAQ Index Option Market Making

Section 10

NASDAQ Index Option Contracts Authorized for Trading

The Corporation may from time to time approve for display on NASDAQ put option contracts and call option contracts in respect of underlying indexes which have been selected by the Corporation and approved for trading. All such option contracts shall be designated as to the type of option, the underlying index, the expiration month and the exercise price. Only quotations in respect to option contracts in a class or series of options approved by the Corporation and currently open for display on the Service may be quoted by a registered NASDAQ index options market maker on the NASDAQ Index Options Service.

Section 11

Series of NASDAQ Index Options Open for Trading

Section 12

Unit of Trading

The unit of trading in each series of options displayed on the Service shall be the unit of trading established by The Options Clearing Corporation pursuant to the rules of The Options Clearing Corporation.

Section 13

Suspension of Authorization of NASDAQ Index Option Contracts

Section 14

Trade Comparison Procedures for NASDAQ Index Options

Section 15

Clearance and Settlement Procedures for NASDAQ Index Options

Section 16

Rules of General Applicability

The provisions of Part X of Schedule D to Article XVI of the By-Laws shall, to the extent not inconsistent with the provisions hereof, apply to NASDAQ index options.
[Part IV added effective September 13, 1985.]

V

SCHEDULE OF CHARGES

A. System Services

B. Equipment Charges

The charge for using NASDAQ terminal equipment shall be $180 per month for the first terminal and $125 per month for each additional terminal where all terminals are located on the same premises.

C. Special Options

D. Installation, Removal or Relocation

Upon installation, removal, relocation of terminal and related equipment, or combination thereof, the subscriber shall pay charges incurred by NASD or its subsidiaries, on behalf of the subscriber for the work being performed by the maintenance organization retained by NASD or its subsidiaries. A minimum charge of $80 per site visit will be imposed upon the subscriber for any service provided under this Part.

E. Other Services

F. Partial Month Charges

The charges for the month of commencement or termination of service will be a pro rata share of the full monthly charge computed by dividing the number of business days the service was provided during that month by a standard 20 business day month.

G. Late Fees

All NASDAQ charges which are past due for 60 days or more shall be subject to a late fee of 10% of the amount past due.

H. Mutual Fund Quotation Program

Funds included in the Mutual Fund Quotation Program shall be assessed an annual fee of $150 per fund authorized for the News Media Lists and $100 per fund authorized for the Supplemental List. Funds authorized during the course of an annual billing period shall receive a proration of these fees but no credit or refund shall accrue to funds terminated during an annual billing period.

I. Minor Modifications in Charges

In order to compensate for minor variations in annual net income, the Board of Governors may increase or decrease the total charges in this Schedule by 10% from the base charges as adopted on August 28, 1979 upon filing such change with the Commission pursuant to Section 19(b)(3) of the Act.

[Section A.5. added effective October 6. 1982; amended effective July 24, 1984; Section A.6. added effective October 16, 1982; Section A7. added effective March 1, 1983; Section A.8. added effective January 3, 1984; amended effective July 30. 1985: renumbered as Part V effective September 13, 1985.]

VI

NASDAQ ISSUER QUOTATION FEE

A. Entry Fee

B. Annual Fee

C. Interim Inclusion Fee

[Part III added effective June 1, 1977; redesignated as Part V effective January 19, 1977; Section c amended effective December 29, 1977; Part V renumbered as Part VI effective September 13, 1985; amended effective March 1. 1986.]

VII

PUBLICATION AND DISSEMINATION OF QUOTATIONS TO THE NEWS MEDIA

The Information Committee shall recommend lists of quotations of NASDAQ securties for dissemination by the news media. The criteria for such lists shall he determined by the Information Committee in light of the space available for publication and the information desired by the news media and the investing public.

The criteria shall be based on a combination of the following:

The Information Committee may, under appropriate circumstances, grant exceptions to its established criteria if it determines that it is in the public interest to do so.

Criteria for Inclusion in Quotation Lists

I. Bankruptcy and/or Liquidation

A security shall not be included in the National List if the issuer shall have filed under any of the sections of the Bankruptcy Act or announced that liquidation has been authorized by its Board of Directors and that the company is committed to proceed.

II. Composition of the Lists

There shall be two recommended lists of NASDAQ securities provided to the media: the "National List" and the "Additional List". Inclusion on the lists shall be determined semi-annually on the basis of information available to the Association on the selection date. All quotations released shall be Level I quotations.

III. National List

A. Domestic Common Stock

1. Initial Inclusion Criteria

The financial criteria for domestic common stock are separated into two alternative categories detailed below. Issuers which meet either one of the alternative criteria will be included in the National List regardless of their dollar volume. Alternative No. 1 includes a net income requirement while Alternative No. 2 has no income requirement but establishes higher financial requirements for those development companies which have no operating income:

Alternative No. 1

Alternative No. 2

2. Maintenance Criteria

Upon inclusion in the National List under either of the alternative sets of initial inclusion criteria, issuers must satisfy the maintenance criteria set forth below to remain eligible for inclusion in the National List.

B. Foreign Securities

Foreign issues and American Depository Receipts. (ADR's) registered pursuant to Section 12(g) under the Securities Exchange Act of 1934, as well as issues for which all relevant information has been filed with the Securities and Exchange Commission pursuant to Rule 12g3-2, shall meet the same criteria as domestic common stock except that the publicly held shares requirement for ADR's shall be determined by the number of ADR's outstanding.

C. Warrants

Common stock of issuer must be in the National List and all criteria for domestic common stock apply except that the publicly held shares requirement is replaced with 450,000 warrants publicly held at the time of the initial distribution.

D. Convertible Debentures

Common stock of issuer must be in the National List and $100 million of the issue must be outstanding.

E. Units

All criteria for domestic common stock apply except that the publicly held shares requirement is replaced with 350,000 publicly held units at time of initial distribution.

F. Rights

Automatically included if common stock of issuer is quoted in the National List.

G. Preferred Stock, Shares or Certificates of Beneficial Interest of Trusts, Limited Partnership Interests, Real Estate Investment Trusts and Closed End Funds

Same criteria as domestic common stock.

H. New Issues

Securities that meet the above criteria immediately following an initial distribution or secondary offering will be added to the National List on the day of the distribution.

IV. Additional List

All positions in the Additional List will be rilled on the basis of dollar value of average weekly volume.*

Amended effective July, 1982.

[Part VI renumbered as Part VII effective September 13, 1985.]

VIII

LOCAL QUOTATIONS PROGRAM

The NASD Local Quotations Program is a service of the Association designed to provide a source of quotations to the media for securities of particular interest to specific communities. All quotations shall be inter-dealer quotations, represent the market for the security and, except for unusual circumstances, contain both bid and asked quotations. Nominal and "asked only" quotations shall not be released.

A. Authority of the NASDAQ Committee

The Local Quotations Program is administered by the Information Committee of the Corporation. It shall appoint the members of the Local Quotations Committees, consider requests for exceptions from the national inclusion standards set forth in Section C of this Part VII, and review and establish procedures for the administration of the program.

B. Role of the Local Quotations Committees

The various Local Quotations Committees shall be designated by the Information Committee and their members appointed by it. The Local Quotations Committees shall select securities to be included on their local quotations list, supervise the administration of the local quotation program, and develop local inclusion standards.

C. National Inclusion Standards

D. Local Inclusion Standards

Whether an issue is selected to be included on a local quotations list shall depend upon considerations of sufficient shareholder interest, reflected by the number of shareholders residing in the area, or other fair and reasonable standards. Local Quotations Committees may, in response to local market conditions or space limitations, impose additional inclusion requirements, or inclusion requirements greater than the national requirements set forth in Section C, for its local quotations list. It shall file such increased standards with the Information Committee.

[Part VII renumbered as Part VIII effective September 13, 1985.]

IX

PROCEDURES FOR ACCESS TO THE NASDAQ SYSTEM BY NON-NASDAQ MARKET MAKERS

These procedures permit a registered NASDAQ market maker, upon approval by the Corporation, to enter quotations into the NASDAQ System on behalf of another market maker who does not subscribe to Level 3 NASDAQ service.

X

REPORTING TRANSACTIONS IN NASDAQ NATIONAL MARKET SYSTEM DESIGNATED SECURITIES

This Part has been adopted pursuant to Article VII of the Corporation's By-Laws and applies to the reporting by all members of transactions in NASDAQ/National Market System securities ("designated securities") through the Transaction Reporting System. These securities have been designated pursuant to the "National Market System Securities Designation Plan with Respect to NASDAQ Securities" ("Plan") which has been approved by the Securities and Exchange Commission pursuant to Rule HAa2-l.

Section 1—Definitions

Section 2—Transaction Reporting

[Amended effective August 3. 1984: renumbered as Part X effective September 13. 1985.]

• • • Selected NASD Notices to Members

XI

MUTUAL FUND QUOTATION PROGRAM

A. Description

The Mutual Fund Quotation Program collects and disseminates through the NASDAQ System prices for both mutual funds and money market funds.

B. Eligibility Requirements

To be eligible for participation in the Mutual Fund Quotation Program, a fund shall:

C. News Media Lists

D. Supplemental List

An eligible fund shall be authorized for inclusion in the Supplemental List released to vendors of NASDAO Level 1 Service if the fund has at least 300 shareholders at the time of initial application for inclusion in the Supplemental List.

E. Determination of Number of Shareholders

For the purposes of this Part X. the number of shareholders of a fund shall be measured by the sum of record holders, as reported by the fund to the Securities and Exchange Commission, and the number of accounts of members of the Corporation beneficially owned by customers (as defined in Article II, Section l(f) of the Rules of Fair Practice) ; provided, however, that an account with more than one beneficial owner shall be considered one account.

[Part XI adopted effective July 30, 1985.]

* No page numbers are assigned to these parts. No changes have been made at this time so the text is not included in Attachment I. See Attachment II for current text.

^1/ The NASD is currently considering a proposal that would authorize the initiation of trading halts in the over-the-counter market in NASDAQ and listed securities to permit the release and dissemination of material news.

^2/ The following are the current maximum allowable spreads approved by the NASD Board of Governors.

MAXIMUM ALLOWABLE SPREADS

For an average spread of 3 or more, the maximum allowable spread is 125 percent of the average spread rounded to the next highest whole number.

* The Exchange Act requires registration if an "equity" security has 500 or more holders of record and the issuer's total assets exceed $1,000,000. However, an issuer may voluntarily register under the Exchange Act even though it does not meet these requirements. For a security to be eligible to be an authorized security, it must register with the SEC under the Exchange Act and must have 300 or more holders of record and the issuer's total assets must exceed $2,000,000.

* For purposes of this Section, securities of foreign issuers or American Depositary Receipts or similar securities issued in respect of securities of foreign issuers registered under section 12(g) of the Securities Exchange Act of 1934 shall be considered "domestic" securities.

¹ Service charges will not become effective until one year after the date CAES is expanded to include NASDAQ/NMS securities.

* On July 13, 1984, the Association's Board of Governors voted to indefinitely defer the increase in the charge from $7.50 to $10.00.

* Explanation of Average Weekly Volume—To monitor security volume data in NASDAQ, a statistical moving average method called exponential averaging is used and is recomput3d weekly. This technique gives more weight to the most current volume and less weight to the most distant past. For example, at present the weighting parameter is chosen to give 10% weight to the most current volume and less than 1% weight to the volume that occurred 23 weeks ago. Thus, the significance of the reported volume as maintained for more than 6 months is virtually nil.