Notice To Members 88-46

Adoption of Rule Amendment to Authorize Trading Halts in NASDAQ Securities.

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EXECUTIVE SUMMARY

The Securities and Exchange Commission (SEC) recently approved new Section 42 of Article III of the NASD Rules of Fair Practice. The section prohibits NASD members from effecting, directly or indirectly, over-the-counter transactions in a security in which a trading halt is currently in effect.

The SEC also approved an amendment to Schedule D of the NASD By-Laws that provides procedures to be used by the NASD to halt over-the-counter trading in a NASDAQ security pending the dissemination of material news by the issuer or to halt over-the-counter trading in a security listed on a national securities exchange during a trading halt imposed by the exchange to permit the dissemination of material news.

The text of new Section 42 and the amendment to Schedule D are attached.

BACKGROUND

On May 5,1988, the SEC approved Section 42 of Article HI of the NASD Rules of Fair Practice. The new section prohibits an NASD member from effecting any transactions in the over-the-counter market in a security subject to a trading halt called by the NASD.1 The SEC also approved amendments to Schedule D to the NASD By-Laws to provide procedures to be used by the NASD when a trading halt is called. These procedures stipulate that the NASD may call a trading halt pending the dissemination of material news by the issuer of a NASDAQ security or halt over-the-counter trading in a security listed on a national securities exchange during a trading halt imposed by the exchange to permit the dissemination of material news. Finally, the SEC also approved conforming amendments to the provisions of Part n of Schedule D to the NASD By-Laws relating to the "Notification to NASD of News Releases" that reflect the changes to Schedule D and to Article HI relating to trading halts.

EXPLANATION OF AMENDMENTS

Article HI, Section 42 of the NASD Rules of Fair Practice prohibits NASD members from effecting any over-the-counter transactions, directly or indirectly, in a security in which a trading halt is currently in effect

Part H, Section 5 of Schedule D provides that the NASD may authorize the initiation of a trading halt in NASDAQ securities in the over-the-counter market pending the dissemination of material news or a trading halt in the over-the-counter market of a security listed on a national securities exchange during a trading halt imposed by the exchange to permit the dissemination of material news.

Procedures for initiating a trading halt are provided in flie amendments to Schedule D. These procedures include notifying the NASD Market Surveillance Section by NASDAQ issuers of the release of any material news. Upon receipt of such information from

a NASDAQ issuer, and in consultation with the issuer, the NASD will evaluate the information, estimate its potential impact on the market, and determine whether a trading halt in the security is appropriate.

If a trading halt is deemed appropriate, notice of the trading halt will appear on the NASDAQ NEWS frame. As soon as notice of a trading halt appears on the NASDAQ NEWS frame, members will be prohibited from effecting any transactions in the halted security. Trading in the halted security will resume as soon as adequate time to disseminate the news has been given and upon notice via the NASDAQ NEWS frame that the trading halt is no longer in effect

If 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 commencement of the trading halt through the NASDAQ NEWS frame. When notice of a trading halt appears on the NASDAQ NEWS frame, members will be prohibited from effecting any over-the-counter transactions in the halted security. As soon as adequate time for dissemination of the news has been given, over-the-counter trading may resume, as indicated via the NASDAQ NEWS frame, notwithstanding an ongoing halt on the exchange for order imbalances or other non-regulatory reasons.

The amendments to Part n of Schedule D relating to "Notification to NASD of News Releases" merely conforms the provisions of this section to reflect the changes to Schedule D and to Article HI of the Rules of Fair Practice relating to trading halts.

Trading halts will normally last for one-half hour after the news has been published. The provisions of Section 42 and amended Schedule D are effective immediately.

Questions regarding this notice can be directed to either Eneida Rosa, NASD Assistant General Counsel, at (202) 728-8284, or James M. Cangiano, Director, NASD Market Surveillance, at (202) 728-8186.

ARTICLE III OF THE NASD RULES OF FAIR PRACTICE NEW RULE

Note: New language is underlined; deleted language is in brackets.

Sec 42.

No member or person associated with a member shall, directly or indirectly, effect any transaction in a security as to which a trading halt is currently in effect

AMENDMENTTO PART II OF SCHEDULE D TO THE NASD BY-LAWS

Sec 5.

A. Authority to Initiate Trading Halts

In circumstances in which the Association deems it necessary to protect investors and the public interest, the Association may, pursuant to the procedures set forth in paragraph B:

(1) 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
(2) 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 pe~mit 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 Schedule D of the NASD By-Laws.
(2) Notification shall be provided directly to the NASD Market Surveillance Section by telephone, telecopier, or other means of immediate notificatioa' Information communicated orally by authorized representatives of a NASDAQ issuer should be confirmed promptly in writing. Where public release of information occurs after 6:00 p.m. Eastern Time, telephone notification should be made by 8:30 am. 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 to themaricetplace is necessary and in the public interest, the trading halt will become effective simultaneously with appropriate notice in the NASDAQ NEWS frame.
(5) Should a national securities exchange notify the NASD that it has halted 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 he 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

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 man 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 pjn. Eastern Time, notification should be made by 9:30 am. 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] trading halts. A [quotations] tjading halt benefits current and potential shareholders by halting the [display of quotations through] trading of securities in 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] fiadjng halt normally lasts [about one to two hours] one half hour 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] trading 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 nonrecurrent 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] trading 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 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 of 1934.

1 See File No. SR-NASD-87-13, Securities Exchange Act Release No. 25669 (May 5,1988).

2 Subsequent to approval of the rule amendments discussed in this notice, the SEC approved additional amendments to Part n of Schedule D relating to the "Notification to NASD of News Releases" to require that NASDAQ companies notify the NASD of the release of material information no later than simultaneously with the companies' release of such information to the public through the press and recommends that issuers provide such information at least 10 minutes prior to the release of the information. This amendment will be the subject of a separate notice to members in the near future. See File No. SR-NASD-88-16, Securities Exchange Act Release No. 25792 (June 9,1988).

1 The current telephone number is (202) 728-8221.