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86-83 Proposed New NASD Rule of Fair Practice Prohibiting Members From Effecting Securities Transactions During Trading Halts

IMPORTANT MAIL VOTE

OFFICERS, PARTNERS AND PROPRIETORS

TO: All NASD Members

LAST VOTING DATE IS DECEMBER 31, 1986.

EXECUTIVE SUMMARY

NASD members are invited to vote on proposed new Article III, Section 42 of the NASD Rules of Fair Practice. The proposed new rule would prohibit NASD members from effecting, directly or indirectly, over-the-counter transactions in a security as to which a trading halt is currently in effect. The rule is to be considered in conjunction with a proposed amendment to Schedule D of the NASD By-Laws, which would authorize 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 proposed new Rule of Fair Practice is the result of concerns raised by the NASD Market Surveillance and Trading Committees over continued trading during NASDAQ quotations halts and the protections afforded investors during the critical disclosure process.

The proposed new rule has been approved by the NASD Board of Governors and now requires the approval of the membership. The text of the proposed new rule is attached as Exhibit 1.

OVERVIEW

Proposed new Article III, Section 42 of the NASD Rules of Fair Practice would prohibit NASD members from effecting any over-the-counter transactions, directly or indirectly, in a security as to which a trading halt is currently in effect. The proposed new rule is to be considered in conjunction with a proposed amendment to Schedule D of the NASD By-Laws, also approved by the NASD Board of Governors, which would authorize the NASD to halt over-the-counter trading in a NASDAQ security pending the dissemination of material news by an issuer. (Schedule D currently provides only for the suspension of quotations of a NASDAQ security while material news is being disseminated to the marketplace.) The proposed amendment to Schedule D would also authorize the NASD 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 proposed amendments were published for comment on February 21, 1986 (Notice to Members 86-13), in the form of amendments to Schedule D. The Board subsequently determined, however, that the prohibition against effecting transactions in a security in which trading has been halted would be more appropriately placed in a new Rule of Fair Practice, rather than in Schedule D.

Accordingly, if approved by the membership, proposed new Article III, Section 42 of the NASD Rules of Fair Practice will be filed with the Securities and Exchange Commission. The proposed amendment to Schedule D will also be submitted to the Securities and Exchange Commission for approval. Pursuant to Article VII of the NASD By-Laws, amendments to Schedule D do not require a membership vote. The text of the related proposed amendment to Schedule D is attached as Exhibit 2 for informational purposes only.

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 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 nonrecurrent 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 to the marketplace. Such action, known as a "quotations halt," alerts the marketplace to the imminent announcement of material news and provides the public with an opportunity to evaluate the information and consider it in making investment decisions.


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