SEC Approval for and Startup of the OTC Bulletin Board

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EXECUTIVE SUMMARY

The OTC Bulletin Board is scheduled to start June 1. The OTC Bulletin Board includes the first real-time display of firm and nonfirm quotation information on potentially more than 10,000 thinly traded securities. It allows market makers to register in whatever number of the securities they wish and to view, enter, and update information on those securities instantaneously. The OTC Bulletin Board is expected to bring increased visibility to these securities as well as provide more efficiency and better regulation.

ADVANTAGES OF THE OTC BULLETIN BOARD

A one-year pilot of the OTC Bulletin Board will start up June 1, following its May 1 approval by the Securities and Exchange Commission (SEC). More than 50 market makers are expected to participate. The OTC Bulletin Board captures and displays on a real-time basis, during market hours, firm and nonfirm quotation information (as well as unpriced indications of interest) entered by NASD member firms that function as market makers in eligible securities. This group consists of all equity securities not listed on NASDAQ or any U.S. securities exchange.

Market makers can use the OTC Bulletin Board to view, enter, and update information on their Bulletin Board securities instantaneously. They may enter either one- or two-sided priced quotes that may be firm or indicative. They also may have unpriced entries (bid wanted, offer wanted), or they may merely enter a trading identifier and telephone number. Participation in the OTC Bulletin Board is voluntary, and market makers may register in as few or as many securities as they wish. They also can use an electronic scan function to view all securities in which they are registered.

The OTC Bulletin Board will allow all NASD members that are NASDAQ Level 2 or Level 3 subscribers to view on their terminals quotes or indications of interest on potentially more than 10,000 eligible securities. Up until now, only static quote information was available electronically or in print in the "Pink Sheets"™ published by the National Quotation Bureau.

The new OTC Bulletin Board will bring increased visibility to these securities, many of which are thinly traded, although a number of them are well-capitalized. This visibility will enable smaller companies to enjoy the benefits of a nationwide quotation medium that will help them grow to the point where they may qualify for listing on NASDAQ.

HOW THE OTC BULLETIN BOARD WILL OPERATE

NASD member firms will be able to retrieve and view OTC Bulletin Board information by means of Harris terminal devices or PC workstations authorized either for Level 2 or Level 3 NASDAQ service.

Features of the OTC Bulletin Board's pilot operation include:

• Market makers electing to participate will incur no minimum obligation as to time or the number of securities that they may quote in the OTC Bulletin Board;
• Securities chosen by participating market makers will be separately identified by the numeral "3" before the security's four- or five-letter symbol code and accessed by a special key ("P");
• A participating market maker will be permitted to enter two-sided or one-sided quotes at a specified price, to designate whether a priced bid or priced offer is firm for one unit of trading (i.e., 100 shares), to solicit a bid or offer without stipulating a price (bid wanted/offer wanted), or to advertise a general interest in trading a particular security without specifying a price (telephone number entry only);
• NASDAQ and exchange-listed securities are not eligible for quotation in the OTC Bulletin Board; and
• Several hundred American Depository Receipts (ADRs) and foreign securities will be eligible for the OTC Bulletin Board, but the quotes on them will be eligible for updating only twice each day â€" at the opening (9 to 9:30 a.m. Eastern Time) and at mid-day (12 to 12:30 p.m.). Because of this constraint, the OTC Bulletin Board will not carry firm quotes in foreign issues or ADRs.

The display of quotation information in the OTC Bulletin Board will look like this:

This hypothetical display reflects the trading interests of eight market makers that have elected to participate in the OTC Bulletin Board by entering information on the stock of ABC Development Corp. The ranking of market-maker information shown on the screen display is determined by the system design.

For example, market makers BADR and DBCC appear at the top because they have entered two-sided, firm ("F") quotes. Market makers WALC and MATS appear next because both have firm bids, but nonfirm offers. Because WALC's firm bid is higher in price, WALC is listed ahead of MATS.

BOTE and BAGN follow all market makers displaying a firm bid price because their priced bids are not designated as "firm." However, BAGN ranks ahead of BOTE on the basis of time priority. Finally, RJAA and DANI are listed below all other market makers because neither firm has made a priced entry. Multiple firms with unpriced entries in a particular security will be listed by time priority. In this example, RJAA appears ahead of DANI solely because of the former's indication of "bid wanted" ("b.w.").

All firms registering as market makers in Bulletin Board securities must enter their respective telephone numbers. These will be displayed regardless of whether the firm inserts a priced entry.

Bulletin Board information will be differentiated from market data displays for NASDAQ issues by the numeral "3" that appears before the security's symbol and by the need to use a special key (P) to retrieve information on securities included in the OTC Bulletin Board.

The new market will be separate and distinct from NASDAQ. The differences include that NASDAQ has listing standards while there are none for the OTC Bulletin Board; NASDAQ quotations must be firm, while OTC Bulletin Board quotes do not have to be; and the NASDAQ System transmits price and volume information on its securities to market data vendors and press wire services, while the OTC Bulletin Board, at least during its pilot, will not.

REGULATORY ISSUES

Market makers participating in the OTC Bulletin Board are still subject to the information maintenance requirements established by Securities Exchange Act Rule 15c2-ll. Generally, if a market maker now satisfies these information maintenance requirements (which apply on a security-by-security basis) respecting the Pink Sheets™ publication, the firm will not incur an additional compliance burden by entering quotes or other indications of interest in the OTC Bulletin Board.

During the OTC Bulletin Board's first 60 days of operation, securities quoted in the Pink Sheets™ publication will be given "grandfathered" status for purposes of Rule 15c2-ll. In most instances, market makers may initiate quotation of these securities in the OTC Bulletin Board without having to submit Rule 15c2-ll information.

AGREEMENT WITH CCH/NQB

As part of the OTC Bulletin Board, the NASD has entered into a working agreement with the Commerce Clearing House, Inc./National Quotation Bureau, Inc. (CCH/NQB). The agreement provides for CCH/NQB's processing of Rule 15c2-ll information (coordinating those functions with the NASD) in connection with market makers' entries of quotations in the OTC Bulletin Board as well as the Pink Sheets™.

In addition, the NASD will provide to CCH/NQB, twice daily, a static transmission of data captured in the OTC Bulletin Board's data base. The first transmission will occur at approximately 12 noon Eastern Time and be used in connection with publication of the next day's Pink Sheets™. The second transmission, consisting of end-of-day information, will occur after the OTC Bulletin Board closes and be provided to subscribers of CCH/NQB's electronic delivery service the following morning.

For both the Pink Sheets™ and CCH/NQB's electronic delivery service, the priced entries of market makers utilizing the OTC Bulletin Board will appear in the form of a stringline. Each market maker will be identified by a four-character alpha symbol followed by the firm's bid and/or offered prices, and an indicator to designate whether the bid and/or offer price is firm. In instances where a market maker enters only a bid or an offer price, a prefix designating the price as a bid or offer will appear.

CHARGES FOR THE OTC BULLETIN BOARD

During the pilot, NASD market makers in Bulletin Board securities will incur the following charges for displaying their trading interest through the OTC Bulletin Board:

• $85 per month for the first 10 or fewer listings, and
• $37 per month for each additional lot of one to five listings, or
• $74 per month for each additional lot of 6 to 10 listings.

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For additional information on the OTC Bulletin Board, call NASD Market Operations at (800) 635-6485. To order the OTC Bulletin Board or to obtain contracts for it, call NASD Subscriber Services at (301) 948-6162.