SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 34-37919A \ November 6, 1996 Admin. Proc. File No. 3-8868 _________________________________________________ : In the Matter of the Application of : : PRAIRIE PACIFIC ENERGY CORPORATION : Suite 302 : 1168 Hamilton Street : Vancouver, British Columbia : Canada V6B 2S2 : : For Review of Action Taken by the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. : _________________________________________________: OPINION OF THE COMMISSION REGISTERED SECURITIES ASSOCIATION -- REMOVAL OF SECURITY FROM THE NASDAQ SMALLCAP MARKET Failure to Satisfy Requirements for Continued Inclusion Where registered securities association removed a security from its automated quotation system because the security failed to maintain the required minimum bid price, held, review proceeding dismissed. APPEARANCES: Ray A. Mantle, of Piper & Marbury, for Prairie Pacific Energy Corporation. T. Grant Callery and Shirley H. Weiss, for the National Association of Securities Dealers, Inc. Appeal filed: October 18, 1995 Last brief received: February 1, 1996 I. Prairie Pacific Energy Corporation ("Prairie" or the "Company") appeals the decision of the National Association of Securities Dealers, Inc. ("NASD") to remove the Company's securities from the Nasdaq SmallCap Market ("Nasdaq SmallCap"). The NASD found that those securities failed to maintain the ==========================================START OF PAGE 2====== required minimum bid price. -[1]- Our findings are based on an independent review of the record. II. Prairie is a Canadian corporation engaged in oil and gas exploration and production in Canada and the United States. The Company's shares were included on Nasdaq SmallCap beginning in 1981. By letter dated December 20, 1994, the NASD informed Prairie that, based upon review of both price data from the previous ten consecutive trading days and "the latest information" filed by the Company, the NASD had concluded that Prairie's shares had failed to maintain a $1 minimum bid price. The letter also informed Prairie that the Company did not qualify for a waiver of the minimum bid price requirement because it had not maintained a public float market value of $1 million, and $2 million in capital and surplus (the "Alternative Listing Criteria"). The NASD gave Prairie ninety days in which to demonstrate the eligibility of its shares for continued inclusion. -[2]- The letter specified that Prairie could do this in one of two ways: by demonstrating that its shares could maintain at least a $1 bid price for ten consecutive trading days, or by satisfying the Alternative Listing Criteria for ten consecutive trading days. During the following ninety days, the bid price for Prairie's shares remained below $1. Consequently, on March 21, 1995, the NASD informed Prairie that its shares would be removed ---------FOOTNOTES---------- -[1]- The NASD recently revised and renumbered its Rules of Practice; no substantive changes were made to the particular rules at issue here. For continued inclusion of a security on Nasdaq SmallCap, Section 1(c)(4) of Part II of Schedule D to the NASD's By-Laws [new Rule 4310(c)(4)] requires that the security maintain a minimum bid price of $1. This requirement is waived if the issuer maintains a public float market value of $1 million and $2 million in capital and surplus. -[2]- Section 1(c)(8)(b) of Part II of Schedule D to the NASD's By-Laws [new Rule 4310(c)(8)(B)] provides that, once the NASD determines that an issuer's securities have failed to maintain the minimum bid price required for continued inclusion, the NASD must notify the issuer promptly and give the issuer 90 calendar days in which to "achieve compliance with the applicable continued inclusion standard." ==========================================START OF PAGE 3====== from Nasdaq SmallCap on April 3, 1995. The NASD told Prairie that the Company could avoid removal of its shares only if it applied for, and the NASD granted, a temporary exception to the minimum bid price requirement. -[3]- Prairie thereafter advised the NASD that a March 29, 1995 purchase and sale agreement between the Company and Briggs Farms Incorporated ("Briggs") would generate sufficient capital to bring Prairie into compliance with the Alternative Listing Criteria. -[4]- The Nasdaq Listing Qualifications Committee (the "Qualifications Committee") accordingly agreed to consider the Company's plan for compliance with the Alternative Listing Criteria. At a hearing on May 2, 1995, Prairie's auditors testified that the expected gain on the sale to Briggs had been calculated consistent with Canadian accounting principles. The auditors further testified that, if calculated consistent with United States Generally Accepted Accounting Principles ("U.S. GAAP"), the gain might not be sufficient to raise the Company's capital and surplus to the level required by the Alternative Listing Criteria. During the hearing, the Qualifications Committee indicated that it would need certain documentation in order to determine whether Prairie had satisfied the Alternative Listing Criteria. Accordingly, on May 10, 1995, the Qualifications Committee granted Prairie a temporary exception through May 31, 1995. The temporary exception instructed Prairie to obtain, by May 15, a letter from an international accounting firm stating that the firm could provide an audit opinion by the May 31 deadline. The temporary exception further specified that the audit opinion should be based upon Prairie's balance sheet and statement of operations as of March 31, 1995, which would reflect the gain realized on the Briggs transaction. The temporary exception also required Prairie to file certain documentation with this Commission and the NASD -- including an audited balance sheet and statement of operations with a U.S. GAAP reconciliation -- ---------FOOTNOTES---------- -[3]- Section 3(d) of Part II of Schedule D to the NASD's By-Laws [new Rule 4330(d)] permits the NASD to grant exceptions to certain inclusion requirements "where [the NASD] deems it appropriate." -[4]- The agreement provided that Prairie would sell Briggs more than 5,700,000 shares of Inspan Investments Limited, a Canadian oil and gas development company, as well as Prairie's interest in an oil and gas processing facility. Upon consummation of the sale, Prairie intended to lease back the processing facility from Briggs at an initial cost of $17,500 per month. ==========================================START OF PAGE 4====== evidencing the Company's compliance with the requirements for continued inclusion of its shares on Nasdaq SmallCap. By letter dated May 17, 1995, Prairie advised the NASD regarding its efforts to secure the required audit opinion. Prairie's letter also requested that the NASD "note that since the May 2nd hearing, the bid price of the [Company's] stock ha[d] achieved the $1 level." Prairie subsequently learned from its accounting firm that the gain realized on the Briggs transaction, if calculated consistent with U.S. GAAP, would not raise the Company's capital and surplus to the level required for continued inclusion of its shares on Nasdaq SmallCap. Following this news, the Company abandoned its efforts to demonstrate compliance with the Alternative Listing Criteria. By letter dated June 2, 1995, sent by facsimile transmission, Prairie notified the NASD that one of its market makers had been offered 15,000 shares of what the Company described as "restricted" Prairie stock -[5]- by another broker-dealer. -[6]- The letter cautioned that "the actions of [the broker-dealer] in offering these securities may disrupt the normal market conditions" and expressed concern that such disruption could affect adversely the bid price for Prairie's shares. On June 7, 1995, the Qualifications Committee reviewed Prairie's submission regarding its compliance with the listing requirements. The Qualifications Committee determined that the Briggs transaction had not brought Prairie into compliance with the Alternative Listing Criteria. The Qualifications Committee then reviewed the bid price for the Company's shares, which again had fallen below $1. The Qualifications Committee concluded that the May rise in the shares' bid price had been temporary. It further found that, during the fifteen trading days that the shares' bid price was $1, Prairie's shares did not trade on twelve of those days. Nevertheless, the Qualifications Committee gave Prairie until June 28, 1995 to demonstrate that (1) its ---------FOOTNOTES---------- -[5]- Prairie asserts that, at sometime prior to late 1993, 500,000 shares of Prairie stock were placed in escrow in anticipation of a private placement and that those shares improperly were released from escrow without the Company's authorization. -[6]- Prairie subsequently told the NASD that the market maker actually had purchased 2,000 so-called "restricted" shares from the broker-dealer on June 2, 1995 and that the offer of 15,000 "restricted" shares was not made until June 5, 1995. ==========================================START OF PAGE 5====== shares could maintain, for ten consecutive trading days, a minimum bid price of at least $1, with daily trading at that price or (2) the Company could comply with the Alternative Listing Criteria for ten consecutive trading days. -[7]- Prairie thereafter failed to demonstrate compliance with the Qualifications Committee's order. The bid price for Prairie's shares remained below $1 from June 7, 1995 through July 14, 1995, and the Company had made no further attempt to satisfy the Alternative Listing Criteria. Accordingly, Prairie's shares were removed from Nasdaq SmallCap effective July 17, 1995. This decision was affirmed by the Nasdaq Hearing Review Committee (the "Review Committee") on September 22, 1995. III. Prairie seeks reversal of the NASD's action and an order directing the NASD again to include the Company's shares on Nasdaq SmallCap. In general, on review of action of this nature, we determine whether the specific grounds on which the NASD's action is based exist in fact, whether such action is in accordance with applicable NASD rules, and whether those rules are, and were applied, consistent with the purposes of the federal securities laws. -[8]- We find that the NASD acted properly in removing Prairie's shares from Nasdaq SmallCap, thus warranting dismissal of this appeal proceeding. The NASD had notified Prairie that the bid price for the Company's shares was below the $1 level required for continued inclusion. Thereafter, the NASD twice monitored ---------FOOTNOTES---------- -[7]- During this second monitoring period, Prairie objected by letter to the Qualifications Committee's decision to condition its shares' continued inclusion on daily trading of those shares. The letter asserted that the market for Prairie's shares had been disrupted, as evidenced by a decline in both the shares' bid price and trading volume, and that the disruption had occurred after one of the Company's market makers pulled its bid so as to avoid involvement with the broker-dealer selling "restricted" Prairie stock. The letter contended that the NASD, having failed to discipline this broker-dealer for its misconduct, could not rely on the effects of that misconduct -- namely, the low bid price and trading volume of Prairie's shares --to justify the shares' removal from Nasdaq SmallCap. -[8]- Section 19(f) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C.  78s(f). ==========================================START OF PAGE 6====== the bid price of Prairie's shares to determine whether the Company had regained compliance with the minimum bid price requirement. At all times during both monitoring periods, however, the shares' bid price remained below $1. Moreover, while the bid price temporarily rose to $1 for fifteen consecutive days between the monitoring periods, Prairie's shares did not trade on twelve of those days. Following this temporary rise, the shares' bid price again fell to below $1. -[9]- Prairie's shares thus failed to meet the minimum bid price requirement. Prairie was not eligible for a waiver of that requirement because the Company had failed to demonstrate compliance with the Alternative Listing Criteria. Accordingly, the NASD removed Prairie's shares from Nasdaq SmallCap because the Company was unable to satisfy the stated requirements for continued inclusion. -[10]- Prairie nonetheless claims that the NASD imposed upon the Company inclusion criteria not contained in the NASD's By-Laws and that the NASD abused its discretion in doing so. -[11]- ---------FOOTNOTES---------- -[9]- We reject Prairie's claims that this temporary rise in its shares' bid price was sufficient to satisfy the minimum bid price requirement and that any subsequent attempt by the NASD to remove the Company's shares required a new 90-day notice period. See supra note 2. -[10]- As the Review Committee summarized, "The Company failed to achieve [a] $1 bid, and its shares were delisted from Nasdaq SmallCap." -[11]- While we do not view the NASD's actions here as imposing additional criteria not specified in the NASD's By-Laws, we note that the NASD has broad discretionary authority to determine whether a particular security should continue to be included on the Nasdaq Stock Market ("Nasdaq"). Section 1 of Part II of Schedule D to the NASD's By-Laws [new Rule 4300]. In addition to applying stated qualification requirements, the NASD may impose additional or more stringent criteria for the continued inclusion of a security if the NASD believes that such inclusion may be inadvisable or unwarranted. Id. The By-Laws thus reflect the broad nature of the NASD's mandate to maintain Nasdaq market quality and protect investors, as well as the impossibility of enumerating every factor that could make continued inclusion of a security inadvisable or unwarranted. (continued...) ==========================================START OF PAGE 7====== We conclude that the NASD did not abuse its discretion when, upon consideration of Prairie's continuing failure to comply with the minimum bid price requirement, the NASD advised Prairie in June 1995 that its shares would remain on Nasdaq SmallCap only if the Company could demonstrate that their bid price had been determined through some level of trading. The Company's shares previously had been thinly-traded, and their bid price had remained below $1 from at least mid-December 1994 until mid-May 1995. Although the shares' bid price reached $1 on May 12, 1995 and remained at that level for fifteen days, the shares did not trade on twelve of those days. Moreover, Prairie's counsel had informed the NASD on June 2, 1995 that an offer of so-called "restricted" Prairie stock could disrupt the market for the Company's Nasdaq-listed shares. Taken together, these circumstances raised legitimate NASD concerns about the degree of market interest in and the liquidity of Prairie's shares -- factors that could affect adversely both prospective future investors and the quality of Nasdaq SmallCap. Accordingly, the NASD appropriately required the Company to dispel those concerns. -[12]- In any event, as we already have noted, the NASD's decision to remove Prairie's shares from Nasdaq SmallCap ultimately was based solely upon the failure to maintain the required minimum bid price. We further conclude that the NASD did not deny Prairie due process. Once the bid price for Prairie's shares fell below the required minimum, the NASD gave the Company three opportunities ---------FOOTNOTES---------- -[11]-(...continued) The NASD's authority to make a broad-based inquiry into a security's fitness for continued inclusion is especially important given the expectations of investors and the imprimatur of a Nasdaq listing. The Commission long has recognized that prospective investors should be able to assume that Nasdaq-listed securities meet the market's standards. Gunther International Ltd., Exchange Act Release No. 37073 (April 5, 1996), 61 SEC Docket 2081, 2087 and cases therein cited. In addition, Nasdaq-listed securities often qualify for margin loans and are exempt from certain penny stock rules as well as many state securities laws. Exchange Act Release No. 34151 (June 3, 1994), 59 Fed. Reg. 29,843, 29,845-46. -[12]- Cf. Rule 499.10, New York Stock Exchange Guide, 2499 (Exchange may consider "abnormally low selling price or volume of trading" in determining the suitability of a security for continued inclusion). ==========================================START OF PAGE 8====== to regain compliance -- two more than the By-Laws require. -[13]- Each time, the NASD gave Prairie specific notice of what the Company had to demonstrate so that its securities could continue to be included on Nasdaq SmallCap, as well as the time frame within which the Company had to make the required showing. Prairie further contends that its inability to maintain a $1 bid price is due in part to the NASD's failure to maintain an orderly market for the Company's shares. -[14]- On this basis, Prairie asserts that the NASD should be estopped from removing the Company's shares from Nasdaq SmallCap. However, Prairie cannot avoid removal of its shares by pointing to alleged shortcomings in the NASD's regulatory activities. -[15]- The material issue is Prairie's inability, for whatever reason, to meet the standards required of Nasdaq-listed companies. ---------FOOTNOTES---------- -[13]- See supra note 2. See also Biorelease Corporation, Exchange Act Release No. 35575 (April 6, 1995), 59 SEC Docket 84, 92 (NASD did not act arbitrarily in removing shares of issuer where, among other things, issuer was given series of opportunities to resolve non-compliance with Nasdaq SmallCap requirements for continued inclusion). -[14]- Prairie makes three claims in this regard. First, Prairie claims that the NASD failed, despite the Company's entreaties, to take action against the broker-dealer that allegedly sold "restricted" Prairie stock. See supra notes 5-6 and accompanying text. Second, Prairie claims that low trading volume occurred at the $1 bid price because "the bid price [wa]s too low and needed to be higher to induce sellers." Prairie asserts that the NASD should have looked into whether the Company's market makers had acted in accordance with Part VI of Schedule D to the NASD's By-Laws when setting that bid price. We note that Prairie did not raise this argument before the NASD. Finally, Prairie claims that the NASD should have investigated what the Company asserts was a discrepancy between the price for Prairie's shares on Nasdaq SmallCap and their price on the Alberta Stock Exchange. -[15]- Cf. Richard R. Perkins, 51 S.E.C. 380, 384 n.20 (1993) (in disciplinary context, regulatory authority's failure to take early action against a securities law violator neither operates as estoppel of later action against that wrongdoer nor cures the violation) and cases therein cited. ==========================================START OF PAGE 9====== In a submission to the Review Committee challenging the removal of its shares, Prairie argued that its management "has sought to build shareholder value in the Company, in the expectation that the market would respond accordingly." Allowing Prairie's shares to remain on Nasdaq SmallCap might well benefit the Company and its existing shareholders. However, we have made clear that the NASD's primary consideration in determining whether to remove a security must be the interests of prospective investors. -[16]- In any event, Prairie's shares are traded on the Alberta Stock Exchange, and the Company also may trade its shares on the OTC Bulletin Board. ---------FOOTNOTES---------- -[16]- DHB Capital Group, Inc., Exchange Act Release No. 37069 (April 5, 1996), 61 SEC Docket 2049, 2056 and cases therein cited. ==========================================START OF PAGE 10====== IV. We find that a sufficient factual basis existed to remove Prairie's securities from Nasdaq SmallCap, that the NASD acted fairly and in accordance with its rules and that those rules are, and were applied, consistent with the purposes of the federal securities laws. Accordingly, we have determined to dismiss this review proceeding. An appropriate order will issue. 17/ By the Commission (Chairman LEVITT and Commissioners WALLMAN and HUNT); Commissioner JOHNSON not participating. Jonathan G. Katz Secretary 17/ All of the contentions advanced by the parties have been considered. The contentions are rejected or sustained to the extent that they are inconsistent or in accord with the views expressed herein. UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Rel. No. 34-37919A \ November 6, 1996 Admin. Proc. File No. 3-8868 _________________________________________________ : In the Matter of the Application of : : PRAIRIE PACIFIC ENERGY CORPORATION : Suite 302 : 1168 Hamilton Street : Vancouver, British Columbia : Canada V6B 2S2 : : For Review of Action Taken by the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. : _________________________________________________: ORDER DISMISSING REVIEW PROCEEDING On the basis of the Commission's opinion issued this day, it is ORDERED that the application for review filed by Prairie Pacific Energy Corporation be, and it hereby is, dismissed. By the Commission. Jonathan G. Katz Secretary