UNITED STATES OF AMERICA
SECURITIES EXCHANGE ACT OF 1934
Admin. Proc. File No. 3-10132
On January 12, 2000, Intelispan, Inc. appealed a determination of the National Association of Securities Dealers, Inc. ("NASD") that Intelispan's securities are no longer eligible for quotation on the OTC Bulletin Board ("OTCBB"). On that same day, we granted Intelispan an interim stay from the NASD decision in order to preserve the status quo ante, allowing it until January 19 to request that the interim stay be continued. 1Intelispan requested that the stay be continued and filed a supporting brief on January 19. The NASD responded to Intelispan's request on January 24. Intelispan filed a reply to the NASD's response on February 1. In addition to the pleadings specifically allowed by our January 12 order, the NASD on January 19 moved that we reconsider our grant of an interim stay, and Intelispan on January 27 responded to the NASD's motion for reconsideration.2 On the basis of the materials before us, we now consider whether Intelispan is entitled to a continued stay to enable us to review its removal by the NASD from the OTCBB. As discussed below, we also order briefing with respect to certain aspects of Intelispan's appeal.
The OTCBB is a computerized quotation service on which any NASD member may post price quotations for any securities not listed elsewhere, as long as the member satisfies certain financial and operational requirements.3 Members, however, are not permitted to post quotations for securities that fail to meet certain minimum eligibility requirements.4
Approximately one year ago, the NASD amended these eligibility rules to prohibit its members from posting on the OTCBB quotations for securities the issuers of which are not current in their reporting requirements under Sections 13(a) or 15(d) of the Securities Exchange Act of 1934.5 Sections 13(a) and 15(d) require certain issuers of registered securities to file periodic reports. 6 At the time of the rule change, Intelispan's securities were not registered, and the company therefore did not file the periodic reports required by Sections 13(a) and 15(d).
The NASD's change to its eligibility rules was phased in to allow Intelispan and other non-reporting issuers time to file the proper forms and reports with us. 7The rule change was scheduled to take effect with respect to Intelispan on January 12, 2000. Intelispan had filed a Form SB-2 to register its shares with us under Section 5 of the Securities Act of 1933, 8 thereby becoming subject to the reporting requirements of Exchange Act Section 15(d), but our staff had not completed its comments on the Form as of the January 12 phase-in. As a result, the NASD informed Intelispan that its securities were ineligible to be quoted on the OTCBB, and NASD members were prohibited from posting price quotations in Intelispan's securities on the OTCBB.
On January 10, Intelispan requested that the NASD conduct a proceeding to review or stay its removal from the OTCBB. The NASD denied this request on January 12, stating that Intelispan "does not have the capacity or the right to further review."
Under Rule of Practice 401(d), we may stay an action of the NASD upon a motion by a person aggrieved by such NASD action. 9 In determining whether to stay Intelispan's removal from the OTCBB under Rule 401(d), we consider (1) whether there is a strong likelihood that Intelispan will succeed on the merits of its appeal, (2) whether, absent a stay, Intelispan will suffer irreparable injury, (3) whether there will be substantial harm to the public if we stay the removal, and (4) whether staying the removal will serve the public interest. 10
Intelispan argues in support of its request for a stay that its removal from the OTCBB by the NASD is reviewable by us, that the NASD was required to accord it some process before removing it from the OTCBB, and that, because the NASD failed to observe even the most cursory procedure, the removal was improper. The NASD responds that (1) this proceeding is not reviewable by us under Rule of Practice 420, 11 (2) Intelispan is not aggrieved by any NASD action and therefore is not entitled to a stay under Rule of Practice 401, (3) Intelispan is not entitled to a hearing under any existing NASD rules, (4) Intelispan has not shown a likelihood of success on the merits, i.e., it has no good reason for failing to register timely its shares, (5) Intelispan has not shown it will be irreparably harmed without a stay, and (6) a stay will harm the investing public and will not serve the public interest.
While any determination must await our review on the merits, it appears, based on the briefs filed by the parties so far, that there is a strong likelihood that Intelispan will prevail on its argument that its removal from the OTCBB is reviewable by us, and that the NASD was required to accord Intelispan some process before removing it from the OTCBB.
Exchange Act Section 19(f) provides that we may review any "prohibition or limitation by [the NASD] of any person with respect to access to services offered by [the NASD] or any member thereof." 12Although the NASD claims that the OTCBB is not a "service offered by the NASD" within the meaning of Section 19(f), the OTCBB is operated by the NASD. 13 The term "OTCBB" is a registered trademark of the NASD, and is referred to as such throughout the NASD's briefs to us. The NASD regulates conduct on the OTCBB. Only NASD members are able to make markets on the OTCBB. In considering those few factors that we were able to glean from the preliminary briefs and publicly available sources, we conclude that the OTCBB appears to be a service offered by the NASD to its members as well as a service offered by NASD members to non-members. As such, there is a strong likelihood that any limitation of access to the OTCBB is reviewable by us under Section 19(f) and Rule of Practice 420. 14
The NASD is required by Exchange Act Section 15A(b)(8) to "provide a fair procedure for . . . the prohibition or limitation by [the NASD] of any person with respect to access to services offered by [the NASD] or a member thereof." The NASD has argued essentially that there is no mechanism at the NASD for Intelispan to challenge the NASD's determination that its securities are ineligible for quotation on the OTCBB. Such a view raises substantial questions with respect to whether the NASD accorded Intelispan the requisite "fair procedure" in limiting Intelispan's access to the OTCBB.
We also believe that staying the removal of Intelispan from the OTCBB will serve the public interest, in that it will prevent Intelispan from being deprived of fair OTCBB removal procedures. In enacting the Exchange Act, Congress expressed its clear intent that persons denied access to the services of self-regulatory organizations or their members be given fair review procedures.
The other factors that we consider in granting a stay, i.e., substantial harm to the public if we stay the removal or irreparable harm to Intelispan if we fail to grant a stay, are not as compelling in this case. 15 We need not find all four factors in equal proportions, however, in order to grant a stay. 16A high probability of success on the merits coupled with a lesser showing of irreparable harm is often enough to grant a stay.17 After weighing the factors, we have determined that a stay of the NASD's action is warranted here.
Because it appears that it may be possible to resolve this matter on relatively narrow grounds, we have determined to ask for briefs on the issues of whether the NASD's action constitutes a denial of access to services, whether the NASD is required to accord Intelispan "fair procedures" in accordance with Exchange Act Section 15A(b)(8), and, if so, what procedures are appropriate.18
Accordingly, it is ORDERED that the determination of the National Association of Securities Dealers, Inc. that Intelispan's securities are no longer eligible for quotation on the OTC Bulletin Board be, and it hereby is, stayed, pending our determination of Intelispan's appeal; and it is further
ORDERED, pursuant to Commission Rule of Practice 450(a), 19that each party shall file a brief addressing the identified issues by May 18, 2000, and any reply brief shall be filed by June 2, 2000. 20 Pursuant to Rule 180(c) of the Rules of Practice, 21 failure to file a brief in support of the petition may result in dismissal of this review proceeding.
By the Commission.
Jonathan G. Katz
-- Intelispan, Inc., Order Granting Interim Stay, File No. 3-10132 (Jan. 12, 2000). -- Rule of Practice 470 permits reconsideration of a "final order of the Commission." Because the interim stay is not a final order, we have determined to treat the NASD's request for reconsideration as a motion to lift the interim stay. -- NASD Rules 6530 and 6540. -- Id. -- Order Granting Approval of Proposed Rule Change, Exchange Act Rel. No. 40878 (Jan. 4, 1999), 68 SEC Docket 2752 (hereinafter, "Approval Order"). -- 15 U.S.C. §§ 78m(a), 78o(d).
Exchange Act Section 13(a) generally requires issuers that have registered securities under Exchange Act Section 12, 15 U.S.C. § 78l, to make periodic reports in accordance with our rules. 15 U.S.C. § 78m(a). Section 12 requires issuers with securities listed on a national securities exchange and issuers of a class of equity securities held by more than 500 persons to register those securities. 15 U.S.C. §§ 78l(b),(g).
Exchange Act Section 15(d) requires certain issuers that have registered transactions in securities under the Securities Act of 1933, 15 U.S.C. § 77a et seq., to make periodic reports under Exchange Act Section 13, if required by our rules. 15 U.S.C. § 78o(d). -- See Approval Order, supra n.3, 68 SEC Docket at 2753. -- 15 U.S.C. § 77e. -- 17 C.F.R. § 201.401(d). -- Rules of Practice, 60 Fed. Reg. 32,738, 32,772 (1995) (comment to Rule of Practice 401). --17 C.F.R. § 201.420. Rule 420 provides that applications for review may be filed by any person aggrieved by NASD action with respect to a final disciplinary sanction, denial of NASD membership, denial of access to services of the NASD or members thereof, or a bar from association with an NASD member. -- 15 U.S.C. § 78s(f). -- See NASD Notice to Members Number 99-15 (no date in original) (stating that "the OTCBB is operated by the NASD"). -- See William J. Higgins, 48 S.E.C. 713, 718-19 (1987) (holding that denial by a securities exchange of member's request to communicate from the exchange floor with non-members located off-floor constituted denial of access to services of a member, reviewable by the Commission under Exchange Act Section 19(f)). --Intelispan argues that it will suffer irreparable injury due to the loss of its procedural rights to have its removal from the OTCBB reviewed. It also argues that there will not be substantial harm to the public if we stay the removal, given that its Form SB-2 has been filed electronically and is available to investors over our EDGAR system. -- "The showings demanded by the four criteria may vary with the equities and circumstances of the particular case." Christian Klein & Cogburn, Order Denying Stay and Granting Interim Stay, Exchange Act Rel. No. 33424 (Jan. 14, 1994), 55 SEC Docket 2622, 2624. -- "Probability of success is inversely proportional to the degree of irreparable injury evidenced. A stay may be granted with either a high probability of success and some injury, or vice versa." Cuomo v. NRC, 772 F.2d 972, 974 (D.C. Cir. 1985) (cited in Christian Klein & Cogburn, 55 SEC Docket at 2625 n.8). -- In the alternative, the NASD may at any time request that this proceeding be remanded to it, for resolution pursuant to appropriate existing NASD procedures. See, e.g., John Kahal, Order Remanding Proceeding to Registered Securities Association, Exchange Act Rel. No. 42265 (Dec. 22, 1999), ___ SEC Docket ___ (remanding proceeding to NASD upon NASD's request). See also Monroe Parker Securities, Inc., Exchange Act Rel. No. 39057 (Sept. 11, 1997), 65 SEC Docket 1030 (remanding to the NASD a denial of access proceeding under Exchange Act Section 19(f)). We do not intend to suggest any view as to the outcome of such a remand. -- 17 C.F.R. § 201.450(a). --The parties should note Rules 150 through 153, with respect to form and service, and Rule 450(b) and (c), with respect to content and length limitations. We disfavor requests for extensions of time to file briefs. --17 C.F.R. § 201.180(c).