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06-27 SEC Approves Amendments to Rule 6740 Relating to Submission of SEC Rule 15c2-11 Information to NASD; Effective Date: June 29, 2006

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GUIDANCE

Amendments to Rule 6740

SUGGESTED ROUTING

KEY TOPICS

Internal Audit
Legal & Compliance
Operations
Registered Representatives
Senior Management
Trading
Form 211
Rule 6740
SEC Rule 15c2-11

Executive Summary

On March 27, 2006, the Securities and Exchange Commission (SEC) approved amendments to NASD Rule 6740 relating to submission of SEC Rule 15c2-11 information to NASD prior to quotation of non-NASDAQ securities.1 The rule change relieves members of their obligation to file with NASD copies of information that is electronically accessible through the SEC's Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. In addition, the rule change creates an exclusion from the requirements of Rule 6740 for quotation activity for which the SEC has granted an exemption under SEC Rule 15c2-11(h).

The amended rule language is set forth in Attachment A of this Notice. The amendments become effective on June 29, 2006. As of that date, members will be required to use a revised Form 211 to demonstrate compliance with Rule 6740 and SEC Rule 15c2-11. A copy of the revised Form 211 is included as Attachment B of this Notice. It will also be available at www.otcbb.com.

Questions/Further Information

Questions regarding this Notice may be directed to the Legal Section, Market Regulation, at (240) 386-5126; or Office of General Counsel, Regulatory Policy and Oversight, at (202) 728-8071. For compliance questions regarding Form 211, please contact Ken Worm, Associate Director, Market Regulation, at (240) 386-5121.

Background and Discussion

NASD Rule 6740 prohibits a member from initiating or resuming the quotation of a non-NASDAQ security2 in a quotation medium unless the member has demonstrated compliance with the requirements of SEC Rule 15c2-11 pertaining to the review and maintenance of information about the security and its issuer. Generally, SEC Rule 15c2-11 requires that a broker-dealer review and maintain in its records specified information about a security and issuer (e.g., prospectuses, offering circulars and annual reports) prior to publishing a quotation for a security in any quotation medium. In addition, SEC Rule 15c2-11 requires that upon reviewing the specified information, a broker-dealer must have a reasonable basis to believe that the information is accurate in all material respects and the sources of such information are reliable.

To demonstrate compliance with both Rule 6740 and SEC Rule 15c2-11, a member must file with NASD a Form 211, together with the information required under SEC Rule 15c2-11(a), at least three business days before the quotation is published or displayed.

Submission of Information Available through SEC's EDGAR System

Much of the information that is required under SEC Rule 15c2-11(a) for reporting issuers is publicly available through the SEC's EDGAR system. As amended, Rule 6740(b) relieves members of the obligation to file with NASD copies of information that is accessible through EDGAR and thus, eliminates the administrative burden and cost imposed on members in furnishing such information to NASD. Although members are no longer required to file copies of EDGAR information with NASD, they nonetheless remain obligated to review and maintain information as required by SEC Rule 15c2-11.

In addition, members currently are required to identify on Form 211 the type and date of each report or statement that is submitted to NASD.3 The rule change does not relieve members of this obligation. Thus, where copies of documents are not submitted to NASD because they are available through EDGAR, members must identify on Form 211 the type and date of each report or statement that the member relied upon in satisfying its information review obligations under Rule 6740 and SEC Rule 15c2-11(a). In addition, members must provide the date the report or statement became available through EDGAR, as well as the requisite identifying information for any subsequent amendments to the report or statement. Finally, members also must provide the 10-digit Central Index Key (CIK) number for issuers that are EDGAR filers.4

Exemptions under SEC Rule 15c2-11(h)

Rule 6740(a) currently tracks the exceptions to the information review and maintenance requirements of SEC Rule 15c2-11(f), including, for example, an exception for quotations of NASDAQ securities or securities admitted to trading on a national securities exchange. Rule 6740(a), however, does not contain an exclusion for those quotations with respect to which the SEC has granted an exemption, upon request or its own motion, under SEC Rule 15c2-11(h).

As amended, Rule 6740(a) relieves members of their obligations under Rule 6740 in the event that the SEC has granted an exemption for a quotation pursuant to SEC Rule 15c2-11(h). Thus, members will not be required to review, maintain and file information under the NASD rule if there is no similar obligation under the SEC rule. To the extent that the SEC's exemptive relief applies any terms and conditions to such relief, those same terms and conditions would apply to the exclusion under Rule 6740.

1 See Securities Exchange Act Release No. 53556 (March 27, 2006), 71 FR 16603 (April 3, 2006) (File No. SR-NASD-2005-098).

2 For purposes of this rule, "non-NASDAQ security" is defined in Rule 6710(c) as "any equity security that is neither included in The NASDAQ Stock Market nor traded on any national securities exchange."

3 Under Rule 6740(b), members must also identify on the Form 211 the issuer, the issuer's predecessor in the event of a merger or reorganization within the previous 12 months, the type of non-NASDAQ security to be quoted (e.g., ADR, warrant, unit, or common stock), the quotation medium to be used, the member's initial or resumed quotation, and the particular subsection of SEC Rule 15c2-11 with which the member is demonstrating compliance.

4 The CIK is a unique identifier assigned by the SEC to all persons and entities that file disclosure documents through EDGAR.


ATTACHMENT A

New language is underlined; deletions are in brackets.

6740. Submission of Rule 15c2-11 Information on Non-Nasdaq Securities

(a) Except as provided in SEC Rule 15c2-11(f)(1), (2), (3), and (5) and 15c2-11(h) under the Act, no member shall initiate or resume the quotation of a non-Nasdaq security in any quotation medium unless the member has demonstrated compliance with this rule and the applicable requirements for information maintenance under Rule 15c2-11. A member shall demonstrate compliance by making a filing with, and in the form required by, [the Association] NASD, which filing must be received at least three business days before the member's quotation is published or displayed in the quotation medium.
(b) The information to be filed shall contain one copy of all information required to be maintained under SEC Rule 15c2-11(a)(1), (2), (3)(iii), (4)(ii), or (5), including any information that may be required by future amendments thereto. Members are not required to file with NASD copies of any information that is available through the SEC's Electronic Data Gathering, Analysis, and Retrieval ("EDGAR") system; provided, however, that the filing with NASD shall contain identifying information for each issuer report or statement available through EDGAR that was relied upon in satisfying the member's obligations under this Rule and SEC Rule 15c2-11(a), including the type of report, report date and any other information as may be requested by NASD. In addition, this filing shall identify the issuer, the issuer's predecessor in the event of a merger or reorganization within the previous 12 months, the type of non-Nasdaq security to be quoted (e.g., ADR, warrant, unit, or common stock), the quotation medium to be used, the member's initial or resumed quotation, and the particular subsection of Rule 15c2-11 with which the member is demonstrating compliance. Additionally, if a member is initiating or resuming quotation of a non-Nasdaq security with a priced entry, the member's filing must specify the basis upon which that priced entry was determined and the factors considered in making that determination.

ATTACHMENT B—FORM 211

Please download Form 211 in PDF format.


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