Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Order Granting Approval to Proposed Rule Change and Notice of Filing and Order Granting Accelerated Approval to Amendment No. 1 To Modify the Bid Price Compliance Periods on the Nasdaq National Market and SmallCap Market and To Require Non-Canadian Foreign Issuers To Satisfy the Bid Price and Market Value of Publicly Held Shares Requirements Applicable to Domestic Issuers for Continued Listing on the SmallCap Market

I. Introduction

On October 1, 2004, the National Association of Securities Dealers, Inc. (“NASD”), through its subsidiary, The Nasdaq Stock Market, Inc. (“Nasdaq”), filed with the Securities and Exchange Commission (“Commission”) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), and Rule 19b-4 thereunder, a proposed rule change to modify the bid price compliance periods on the Nasdaq National Market and the Nasdaq SmallCap Market and to require non-Canadian foreign issuers to satisfy the minimum bid price and market value of publicly held shares requirements applicable to domestic issuers for continued listing on the Nasdaq SmallCap Market. The proposed rule change was published for notice and comment in the Federal Register on October 21, 2004. The Commission received no comments on the proposal. On November 24, 2004, Nasdaq filed Amendment No. 1. This order approves the proposed rule change. Simultaneously, the Commission provides notice of filing of Amendment No. 1 and grants accelerated approval of Amendment No. 1.

II. Description of the Proposal

A. Modification of the Bid Price Compliance Periods

Nasdaq rules relating to the minimum bid price requirement were approved on a pilot basis by the Commission in February 2002 and modified in March 2003 and December 2003. The pilot, which expires on December 31, 2004, provides 180 calendar days for a National Market issuer trading below $1.00 to regain compliance. Upon the expiration of the first 180 calendar days, an issuer able to satisfy all initial listing criteria is eligible for an additional grace period of another 180 calendar days. Thereafter, a National Market issuer may phase down to the SmallCap Market to take advantage of an additional grace period if it meets all SmallCap initial listing criteria except for bid price. If a National Market issuer is not in compliance 45 days before the expiration of its second grace period, Nasdaq would send a warning letter to the issuer and the issuer could request a hearing at that time, if one were desired.

The current pilot also provides 180 calendar days for a SmallCap Market issuer to regain compliance. Upon the expiration of the first 180-day grace period, an issuer satisfying all initial listing criteria for the SmallCap Market is eligible for an additional grace period of 180 days. Thereafter, an issuer can receive a third grace period, up to the time of its next shareholders meeting (but not more than two years from the original notice of deficiency), if the issuer seeks shareholder approval for a reverse stock split at that meeting and implements the reverse stock split promptly afterward.

Having reviewed its experience with the pilot program, Nasdaq proposes to modify the bid price rules and seeks permanent Commission approval of the revised rules. Under the proposal, a National Market issuer would now have 180 days to regain compliance on the National Market, after which it could transfer to the SmallCap Market if it complied with all SmallCap initial inclusion requirements except for bid price. The new rules would provide a SmallCap issuer with an initial 180-calendar-day period to regain compliance. Thereafter, the issuer could receive a second 180-day grace period if it complied with all initial SmallCap inclusion requirements except for bid price. The third grace period under the pilot rules, which allows a SmallCap issuer to remain listed while it seeks shareholder approval of a reverse stock split, would be eliminated. An issuer in a compliance period under the pilot rules at the time the new rules become effective would be able to finish that period, but thereafter could only use grace periods afforded by the new rules.

B. Nasdaq SmallCap Market Continued Listing Requirements for non-Canadian Foreign Issuers

Nasdaq proposes to amend NASD Rule 4320 to require non-Canadian foreign issuers to satisfy the minimum bid price and market value of publicly held shares requirements applicable to domestic issuers for continued listing on the SmallCap Market. Currently no such continued listing requirements apply to SmallCap non-Canadian foreign issuers. To allow these issuers sufficient time to take any necessary action to achieve compliance, Nasdaq proposes that this requirement be effective 18 months after approval by the Commission.

III. Amendment No. 1

In Amendment No. 1 Nasdaq modified the text of NASD Rule 4450(i)(1) to provide that a National Market issuer deemed not in compliance prior to the expiration of the compliance period for bid price may transfer to SmallCap Market if it meets all applicable requirements for initial inclusion on the SmallCap Market. The prior text of the rule referred to requirements for “continued” rather than “initial” inclusion.

According to Nasdaq, Amendment No. 1 corrects an inconsistency in both the existing and proposed rule concerning the appropriate standard pursuant to which an issuer may transfer between the Nasdaq National Market and the SmallCap Market. This inconsistency first arose following the approval of SR-NASD-2003-44. In SR-NASD-2003-44, Nasdaq proposed that a SmallCap issuer must meet all initial inclusion requirements for the SmallCap Market to be eligible for an additional compliance period. As such, an issuer that transferred from the National Market would not be eligible for an additional compliance period on the SmallCap Market unless it met all SmallCap initial inclusion standards.

In addition, NASD Rules 4310(c)(8)(D) and 4320(e)(2)(E)(ii) would permit an issuer to qualify for a second 180-day compliance period on the SmallCap Market only if that issuer met all criteria for initial inclusion (except for the bid price requirement) on the SmallCap Market. Thus, even if an issuer were permitted to transfer to the SmallCap Market based on the continued inclusion criteria at the end of its compliance period on the National Market, the issuer would be subject to immediate delisting because it would be ineligible for any additional compliance periods with respect to its bid price deficiency.

The text of NASD Rule 4450(i)(1) as Nasdaq is proposing to amend it is below. New text is in italics and deletions are in brackets.

If a National Market issuer has not been deemed in compliance prior to the expiration of [a] the compliance period for bid price provided in Rule 4450(e)(2), it may transfer to The Nasdaq SmallCap Market, provided that it meets all applicable requirements for [continued] initial inclusion on the SmallCap Market set forth in Rule 4310(c) [(other than the minimum bid price requirement of Rule 4310(c)(4))] or Rule 4320(e), as applicable , other than the minimum bid price requirement. A Nasdaq National Market issuer transferring to The Nasdaq SmallCap Market must pay the entry fee set forth in Rule 4520(a). The issuer may also request a hearing to remain on The Nasdaq National Market pursuant to the Rule 4800 Series.

IV. Discussion and Commission Findings

The Commission has reviewed carefully the proposed rule change, as amended, and finds that it is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities association. In particular, the Commission believes that the proposal is consistent with Section 15A(b)(6) of the Act, which requires that an association's rules be designed to prevent fraudulent and manipulative acts and practices, promote just and equitable principles of trade, remove impediments to, and perfect the mechanism of, a free and open market and, in general, protect investors and the public interest.

The Commission believes that a 180-day grace period for bid price compliance on the Nasdaq National Market and a 360-day grace compliance period on the SmallCap Market will allow a reasonable period for issuers to regain compliance with the bid price rules before being subject to delisting. These time frames are generally consistent with bid price compliance periods available on other markets that have been approved by the Commission. The Commission also believes that requiring non-Canadian foreign issuers to satisfy the same continued listing standards for minimum bid price and market value of publicly held shares applicable to domestic issuers is reasonable and will establish consistent standards applicable to all SmallCap issuers.

The Commission finds good cause for approving proposed Amendment No. 1 before the 30th day after the date of publication of notice of filing thereof in the Federal Register. NASD Rule 4450(i)(1) currently states that a National Market issuer deemed not in compliance prior to the expiration of the compliance period may transfer to the SmallCap Market if it meets all applicable requirements for continued inclusion on the SmallCap Market. Nasdaq contends that use of the word “continued” in Rule 4450(i)(1) is inadvertent and has provided evidence that the rule language instead should have used the word “initial” from its inception. The Commission agrees and finds good cause for accelerating approval of Amendment No. 1, thereby allowing the text of NASD Rule 4450(i)(1) to mirror the original intent of the rule without delay.

V. Solicitation of Comments

Interested persons are invited to submit written data, views, and arguments concerning Amendment No. 1, including whether Amendment No. 1 is consistent with the Act. Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's Internet comment form ( http://www.sec.gov/rules/sro.shtml ); or
• Send an e-mail to rule-comments@sec.gov. Please include File Number SR-NASD-2004-147 on the subject line.

Paper Comments

• Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609.

All submissions should refer to File Number SR-NASD-2004-147. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site ( http://www.sec.gov/rules/sro.shtml ). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to Amendment No. 1 between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission's Public Reference Section, 450 Fifth Street, NW., Washington, DC 20549. Copies of such filing also will be available for inspection and copying at the principal office of the NASD. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-NASD-2004-147 and should be submitted on or before December 27, 2004.

VI. Conclusion

It is therefore ordered, pursuant to Section 19(b)(2) of the Act, that the proposed rule change (File No. SR-NASD-2004-147) be, and it hereby is, approved, and that Amendment No. 1 to the proposed rule change be, and hereby is, approved on an accelerated basis.