THE
PROMISEOF MARKETREFORM
Reigniting America’s
Economic Engine

2

ADENA FRIEDMANPRESIDENT AND CHIEF EXECUTIVE OFFICERThe U.S. equities markets exist to facilitate job creation and wealth creation
for millions of people, ultimately driving economic growth for our country.
Main Street investors can access thousands of public companies’ stocks
and funds safely, quickly and at low cost. Issuers can tap the deepest poolof public capital available anywhere in the world. Broker-dealers canefficiently and effectively source liquidity from multiple venues andchannels. Exceptional market returns in recent years reflect the growing
strength of the U.S. and global economy and continued confidence in thehealth of U.S. markets.
There is no question that our markets and our economy are fundamentally
healthier than they were a decade ago. But even amidst steadily risingindexes and market tranquility, there is a growing need to address
fundamental structural concerns.
To maintain healthy markets, we need to understand these concerns andtake action now. The markets have become more complex and costly for
issuers, particularly for publicly-listed small and medium growth companies
and for private companies that might consider public offerings. If the volumeof IPOs continues to fall and more companies choose to stay or go private,
job creation and economic growth could suffer, and income inequality could
worsen as average investors become increasingly shut out of the most
attractive offerings.
The challenges impeding the success of public markets may be complex, butthey are entirely fixable—and we can do so in a way that benefits all market
participants. Historically, Nasdaq has positioned itself as a neutral market
provider, principally interested in bringing buyers and sellers together
on equal footing. We take the responsibility for ensuring fairness for allparticipants extremely seriously. We believe that U.S. equites markets arebuilt on timeless principles, but our views of the market are not static or
rigid, they are driven by modern and evolving practices. During my tenureas CEO, we will not shy away from advocating for the reforms that reflect
this view in order to keep U.S. markets the envy of the world.
What follows is our blueprint for these critically-needed reforms. We hopethat what follows sparks a dialogue—and action—among investors, public
and private companies, industry groups, and policymakers.
Sincerely,
Adena Friedman
President and Chief Executive Officer

3

EXECUTIVE SUMMARY
Robust public markets are the fuel that ignites America’s economic
engine and wealth creation. Companies list on U.S. exchanges to access

Number of U.S. Listed Companies
7,000

a steady, dependable stream of capital to grow and create jobs, andinvestors choose our markets because they are the world’s most trusted
venues for long-term wealth creation.
6,000

Built on the shoulders of entrepreneurs with great ideas, publiccompanies drive innovation, job creation, growth and opportunity
across the global economy. A central reason for the success of U.S.
capital markets is that American public companies are among the

5,000

most innovative and transparent in the world. Additionally, theU.S. has continued to add layer after layer of obligation, we have reached

350

a point where companies increasingly question whether the benefits

300

complex. They range from concerns about: a) activists, b) frivolous
shareholder litigation, c) pressure to prioritize short term returns overthe distributed nature of trading across markets and trading venues
today. Therefore, they seek private sources of capital, and in today’s

Private Capital Assets Under Management 2002–2015**
4,500
4,000
3,500
3,000

environment, many dynamic companies are finding an abundant supply

2,500

of that capital available.

2,000

While the risk of a diminishing public capital market may not yet be

1,000

fully realized, it is not difficult to anticipate what may lie ahead: since500

not everyone has the opportunity to invest in private companies, main

0

1,500

street investors may lose the chance to share in wealth creation, which
could foster a greater divide between the wealthiest and everyone else.
Additionally, American companies could increasingly consider foreign
public markets; and top international companies might opt not to list in
the United States.
4

2017

Source: Ritter, Jay R. “Initial Public Offerings: Updated Statistics.” University of Florida.
https://site.warrington.ufl.edu/ritter/files/2018/01/IPOs2017Statistics-1.pdf January 3, 2018.

few. Once public, particularly smaller issuers sometimes find that thecost of accessing equity capital to fund growth can be expensive given

2016*Excludes Closed-end Funds and Special Purpose Acquisition Companies

long-term strategic growth, d) burdensome costs and headaches of theproxy process as well as irrelevant but required disclosures, to name a

2015

2014

2013

2012

2011

2010

The dynamics catalyzing the turn away from public markets are

2009

0
2008

going private.

2007

50

2000

100

remain private—and some public companies are reversing course and

2006

150

recent years, a growing number of companies have been choosing to2005

ultimately represent an existential threat to our markets. In fact, in

250
200

2003

of public ownership are worth the burdens. If not addressed, this could

2017

450
400

2004

Regulations are needed to maintain these “rules of the road.” But as the

500

2002

greater obligation for transparency and responsible corporate practices.

U.S. Initial Public Offerings*

2001

equities markets and make their shares available to the public take on a2016

Source: WFE

our capital markets.
There is no question that companies that choose to participate in

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

of investing perspectives, participants and strategies represented in

2004

4,000

2002

fair and equal access—providing a solid foundation for the diversity

2003

mechanisms that govern our markets ensure opportunity throughDry Powder ($bn)

Unrealized value ($bn)**Direct lending is excluded prior to 2006
Source: Preqin: 2016 Preqin Global Private Equity & Venture Capital ReportFIVE TOP TECH COMPANIES BY MARKET CAP AND GROWTH SINCE IPO* Combined market capitalization of GOOG and GOOGL.
** Current Market Cap as of 4/27/2017
Source: Nasdaq

The case for strong public markets is overwhelming. Since 1970,

funds that exist on behalf of American workers, and that is indeed

92% of job creation has occurred after IPO.1 The vast majority oftrue. However, today, pension funds are slowly shrinking andAmericans are invested in and count on public markets, either

being replaced with defined contribution retirement plans as the

directly through stock ownership or through pension funds,

core savings vehicles for average American workers. Additionallymutual funds, and retirement accounts.

pension plans allocate only a small percentage of their overall

Additionally, with more investors choosing index strategies to meettheir investment needs, funds and ETP providers are relying upona deep and healthy selection of public companies across industries
and at various stages of maturity and growth to provide investors
a wide range of index strategies with strong return profiles. Investor
access to vibrant and growing public capital markets is a
critical driver of wealth creation and financial security for theAmerican people.
Private investment firms (a.k.a. alternative asset managers) state

portfolios to private alternative funds because the underlying
investments are very illiquid and difficult to value. Defined
contribution plans are even more limited in their ability to invest in
private securities and private equity funds today due to the lack ofliquidity and valuation transparency. Therefore, for the foreseeable
future, pension funds and most mutual funds that serve average
investors will continue to rely heavily on the public markets to
supply investment opportunities that will help them reach theirreturn thresholds. That will get harder and harder if there are fewer
growth-oriented companies coming into the public markets.

that they represent average investors indirectly by serving pension

1“Rebuilding the IPO On-Ramp,” https://www.sec.gov/info/smallbus/acsec/rebuilding_the_ipo_on-ramp.pdf.

5Nasdaq believes that private markets do serve an important role in our economy. Our goal is
to apply the best aspects of private markets—including the ability for companies to manage
themselves to the longer-term—to the public markets. At the same time, we are advocates forprivate markets that also adapt to feature the best aspects of public markets—including theopportunity for more frequent liquidity events with price discovery—to open up the private

Nasdaq believes thatprivate markets do serve
an important role in ourmarkets to a broader client base, most notably defined contribution plans.

economy. Our goal is to

Our concerns over the state of our public markets fall into three categories:

apply the best aspects ofFirst, a complex patchwork of regulation that disincentivizes market participation.
Second, a one-size-fits-all market structure that deprives companies of the benefits they

private markets—including
the ability for companies

need to participate and succeed in public markets, particularly for small and medium

to manage themselves togrowth companies;

the longer-term—to the

And third, a culture in the investment community and in the mainstream media thatpublic markets.

increasingly values short-term returns at the cost of long-term growth.
We focus on concrete solutions across three topic areas:
1. Reconstructing the Regulatory Framework
Nasdaq strongly believes that safe markets need guardrails. The regulations enacted
during and immediately after the credit crisis accomplished some important goals in key
areas of systemic risk. However, for issuers much-needed improvements to the capital
markets have been largely ignored while regulators shoulder the burden of shoring up themost critical components of the financial system. Therefore, during this period of relative
market calm, now is the time to address those burdens on public companies that create an
unwelcome capital market environment.
One crucial area of regulatory reform is in the proxy process. While proxy voting
can be an important tool to raise legitimate concerns, it is far too often used forunhelpful purposes that cause a nuisance and significant financial strain on companies,
particularly smaller ones. A number of simple, common-sense reforms can protect theshareholder voice while filtering out needless and costly headaches.
Nasdaq believes it is long past time to move away from a one-size-fits-all approach tocorporate disclosure. Transparency is critical to healthy markets, but technology andmarkets have evolved to a point where a reasonable degree of flexibility can allow fordisclosure requirements that are shareholder-friendly while reducing the burden on
companies. For example, if companies report all key financial and business details inquarterly press releases, we should consider eliminating the archaic 10-Q form, whichis duplicative and bureaucratic. We should also study options that allow for greater
flexibility in reporting schedules, so that as long as companies are transparent withshareholders, they have the flexibility to report on a less-rigid structure. This would
also promote our third goal of promoting long-termism.
We also believe that companies of all sizes will benefit from comprehensive
litigation and tax reform, two topics that are debated endlessly but have yet to see
comprehensive action.

6

We are seeing a record rate of securities class action lawsuits

3. Promoting Long-Termism

and a record number of dismissals. In fact, filing these cases

A variety of factors in recent years have made it more difficult

has become its own cottage industry. But companies andfor companies to focus on the long-term goals of innovation,

shareholders are paying a steep price for these frivolous cases,

expansion and job creation, which are critical to healthy markets

which also discourage private companies from going public.

and a strong U.S. economy. In addition to harming companies,

Nasdaq supports the current administration’s efforts to lower
tax rates for U.S. companies, as well as a territorial taxation

the trend away from long-termism also harms the vast
majority of investors.

system for foreign corporate earnings. We also advocate

While the term “activist investing” is complex and some forms

for lower taxes for individuals, specifically related to theirof activism achieve worthy goals, the trend toward exerting

investments in public securities. Appropriate tax reform willpressure for short-term gains at the expense of long-term

encourage companies and investors to put more of theirhealth is concerning. Nasdaq especially believes that the goals,

dollars to work to grow and/or gain financial security. We

tactics and financial arrangements of activist investors should

are particularly intrigued by the concept of creating a tax

be examined by policy makers and made transparent to thestructure for individual investors that ties a low-level of taxes

companies and their other shareholders.

on investments to the overall value of the account, rather thana higher dividends and capital gains tax on earnings within theaccount. This could result in a dramatic rise in the number ofindividual investors and more of the dollars staying with theinvestors to shore up their longer-term financial security.
2. Modernizing Market Structure
The last ten years have seen extraordinary technologicaladvances and regulatory changes to the way markets
function. As a result, just as bridges built for pedestrians
required rebuilding for the age of automobiles, the regulatory
infrastructure upon which yesterday’s markets were built must
be modernized to support the complex markets of today.

We also support dual class structures in appropriate situations.
America is a breeding ground and magnet for entrepreneurshipand innovation, and in order to maintain this strength, we must
offer entrepreneurs multiple paths to participate in publicmarkets. Dual class structures allow investors to invest side-byside with innovators and high-growth companies, enjoying thefinancial benefits of these companies’ success.
In the following pages, we offer a broad range of policy
recommendations that we believe will accomplish these criticalgoals. Some of these proposals are straightforward and ready to be
implemented today. Others are more conceptual and require further
study. Some have long been debated, while others are newer. For

One of the unintended consequences of current market

these reasons, we consider this document a blueprint to engage

structure is that small and medium growth companies (andstakeholders and move the conversation toward concrete action.

investors in them) are not receiving a proportional share of
the benefits. The relatively high volatility and low transaction
volume of smaller issues is exacerbated by an inflexible onesize-fits-all construct that spreads already-thin trading acrossIf investors, industry groups and policymakers come together,
we can construct healthier U.S. equities markets and a durable
economy that works for all Americans.

too many venues. In fact, thoughtful market reforms will
broadly benefit companies of all sizes. Modern markets canand must be flexible markets. We need to move past the rigid,
one-size-fits-all thinking of the past and leverage technology
to solve emerging problems and benefit all market participants.

7

SECTION ONE:RECONSTRUCTING THE
REGULATORY FRAMEWORKThe flurry of regulation following the financial crisis accomplishedrepresenting the views of a meaningful percentage

some important goals, but we have also seen many unintendedof the companies’ long-term owners are considered

consequences and corners of the market that are still desperately

at shareholder meetings.3

in need of modernization. The result is an inconsistent regulatory
patchwork that under-regulates some areas and overregulates others.
Public companies—and those contemplating an entrance into publicmarkets—are increasingly hamstrung by the complexity and costof navigating this regulatory maze, and investors are harmed bothby the impact of these costs on companies that do go public andthe shrinking investment options as more companies avoid going
public. Establishing a modern framework that can adapt to different
industries and types of companies will unleash economic productivity
across our economy by reducing costs and complexity and allowing
companies to focus on growing and innovating, to the benefit of bothissuers and investors.
• Reform the proxy proposal process.
Nasdaq supports shareholder-friendly regulations that provide
healthy interactions between public companies and shareholders.
However, current regulations governing the way shareholders
access a company’s proxy statement can poison the companyshareholder relationship by amplifying the voice of a tinyminority over the best interests of the vast majority. The cost to
public companies in legal expense, let alone the time and attentionof management and boards, is real and significant.2 Therefore, thefollowing reforms are crucial:++ Raise the minimum ownership amount and holding period

proposal to significantly increase the shareholder support thata proxy proposal must receive before the same proposal canbe reintroduced at future meetings. The SEC should study thecategories of topics suitable for shareholder proxies and modify
its rules accordingly to ensure that proposals considered atannual meetings are properly placed before shareholders, aremeaningful to the business of the company, and are not related
to ordinary business matters.
++ Create transparency and fairness in the proxy advisory industry.
Due to the large number of proposals they must consider
within a concentrated time period, institutional investors havecome to rely on proxy advisory firms to analyze corporateproxy votes and provide insight into how to vote. While thisservice is valuable in theory, in practice the industry is a largely
unregulated black box, rife with opacity, lack of accountability
and conflicts of interest. Absent requirements to explain theircriteria or to provide companies a means to question analysis oreven correct factual errors, the outcome of critical decisions isoften at the whim of unpredictable and impenetrable advisory
firms. Additionally, these firms are not even required to disclose
whether they have a financial relationship or ownership stake inthe companies on which they report. The SEC took preliminary

SEC rules allow any shareholder holding $2,000 or more

steps to address these concerns with the proxy advisory industry

of company stock for one year or longer the ability to

several years ago, but these efforts are far from sufficient. Proxy

include an issue on the company proxy for a shareholder

advisors must have a line of communication with the companies

vote, even if the issue is not material or relevant to thethey analyze and clear transparency around ownership of, orcompany’s business. A study sponsored by the Manhattan

short interest in, covered companies.

proposals in 2016 were driven by six small investors andtheir families. The current process is costly, time-consuming
and frustrating for companies, which in aggregate must
address thousands of such proposals each year. Deleting
this meaningless dollar threshold and instead requiring thata proposing shareholder hold at least 1% of the issuer’s
securities entitled to vote and increasing the holding period
to three years, would ensure that shareholder proposals

8

proposals from proxies. Congress should adopt the Choice Act

to ensure proposals have meaningful shareholder backing.

Institute reported that one-third of shareholder-led proxy2
3++ Update the SEC process for removing repetitive, unsuccessful• Reduce the burden of corporate disclosure.
Investors demand and deserve clear, consistent reporting of key
company information on a regular basis. Nasdaq fully supports thetransparent and robust disclosure, which is one of the reasons why
U.S. markets are the world’s most trusted. However, this necessary
disclosure must be re-evaluated to reduce the cost and burden forsmaller companies while maintaining the level of access and detailthat investors need.

Stephen Davidoff Solomon, “Grappling with the cost of corporate gadflies,” The New York Times, August 19, 2014.
Nasdaq’s proposed thresholds mirror Section 844 of the recently introduced Financial CHOICE Act of 2017 (“Choice Act”) that, in addition to adopting the standards
we propose, would give the SEC discretion to set the ownership threshold even higher than 1%. This would enable the Commission to utilize data and input frominvestors to determine what is in the best interests of long-term shareholders.

++ Offer flexibility on quarterly reporting. For many large

to navigate; as a result, fewer companies benefit from thecompanies, quarterly reporting remains the ideal vehicle

spirit of these carve-outs. They should be expanded andfor regular disclosure. However, some companies looking

simplified by: expanding the JOBS Act’s “test-the-waters”

to encourage long-termism and reduce costs would benefit

provisions, allowing emerging growth companies tofrom the flexibility to provide full reports semiannually, as

communicate with certain potential investors, and file theirhas been done in the United Kingdom. Companies would

registration statement confidentially to all companies andbe able to update key metrics for any material changes

all capital raising transactions.

between mandated reports using the tools readily available
to communicate directly with shareholders.
++ Streamline quarterly reporting obligations for small andmedium growth companies. In today’s market, between
detailed, annual Form 10K disclosures, companies provide
key data via an earnings press release each quarter. For
virtually all investors, the press release is the quarterly
report. Yet companies are then required to file a formal
Form 10-Q document with the SEC, which is complex,–– Raising the revenue cap to qualify as emerging growthcompany from the current $1 billion (subject to inflation
adjustment every five years) to $1.5 billion and deletingthe current phase-out five years after the IPO.
–– Harmonizing the definitions for smaller reporting
company and non-accelerated filer with those of
emerging growth company to avoid a patch workof inconsistent and illogical exemptions.

time-consuming, and provides little additional actionable

On a broader level, the SEC should complete its 2016

information that cannot be found in the press release. By“Disclosure Effectiveness Initiative” to strip out unnecessary

establishing simple guidelines, the press release can replaceand duplicative requirements to simplify requirements so

the 10-Q entirely for issuers that prefer to report informationthat disclosure is less onerous for companies and morequarterly, aligning regulatory and shareholder interests andmeaningful to investors. In a similar vein, the Commission

significantly decreasing corporate reporting red tape without

should consider ways to streamline the offering process

reducing the key disclosure that investors rely upon. Detailed

by giving all public companies the opportunity to raise

disclosures would continue to be available through the annual

capital using simplified and faster “shelf registrations” andForm 10-K process.

reducing the requirements for supplemental forms andAlong the same lines, advancing technology has created
new alternatives that many feel reduce the usefulness ofother bureaucracy associated with capital raising that serveno meaningful purpose.

extensible Business Reporting Language (XBRL), the XML• Roll back politically-motivated disclosure requirements.

standard language that public companies are required to

We can and should make a clearer distinction between

use in order to tag data in their financial statements anddisclosure of material information that investors require to

related footnote disclosures. With many analysts deploying

evaluate a company’s financial performance and economic

their own sophisticated research tools, XBRL shouldprospects and those that are motivated by social and politicalbe reconsidered to ensure that the benefit to investorscauses or otherwise aren’t relevant to a company’s bottom

outweighs the complexity and burden of implementation.

line. For example, we support the elimination of the currently-++ Expand classifications for disclosure relief. Current
regulations permit certain types of companies, including
small growth companies, to submit disclosure reports thatare robust and transparent but far less burdensome thanthose required for more mature companies. This important
exemption makes being public far more appealing for privatecompanies contemplating the regulatory requirements

required reporting of conflicts minerals and executive pay
ratio, along with a comprehensive review of all disclosure
requirements and the elimination of those that do not havea clear connection with a company’s financial performance,
practices and outlook. These disclosures impose costs andburdens on public companies that their private competitors
do not face, without a concomitant benefit to their investors.

of going public, and significantly decreases the resources
necessary to file until the company has become mature.
However, the definitions of classes like “smaller reporting
company,” “emerging growth company” and “non-accelerated
filer” are narrow, sometimes limited in duration, and difficult

9

Number of Resolved Cases: Dismissed or Settled

2002 – 2016

2002–2016

350

7,000
6,015

6,000
5,187

Number of federal filings

300

5,000

250
4,000
200
3,000

150
100

2,000

50

1,000

0

0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Filing Year

Cases, Excluding IPO Laddering

275
250
225

Number of Federal Cases

400

Number of companies listed in United States

Federal Filings and Number of Companies Listed in the United States

215

200
175

92

206

202

200

93

93

84

89

197

121

196

196

98

93

198
181

120

74

125

149

89
80

100
75
50

123

131

113

144

116

150

123

2002

2003

2004

2005

2006

2007

2008

118

132

128

98

103

101

109

113

2009

2010

2011

2012

2013

2014

2015

2016

25
0

Resolution Year

Listings

262
248

231

113

75

150

253

243

237

Settled

Dismissed

Note: Analysis excludes IPO laddering cases. Dismissals may include dismissals without

Note: The source for number of companies listed in US is the WFE

prejudice and dismissals under appeal.

Source: Boettrich and Starykh, “Recent Trends in Securities Class Action Litigation: 2016 Full-Year Review” (2017).

• Litigation reform.

Nasdaq supports reforms that reduce the burden of meritless

Defending meritless class action lawsuits is more than a “cost ofclass actions, recognizing that it can be difficult to distinguishdoing business” for public companies. 2016 saw a record number

legitimate from frivolous cases. Litigation rules can raise theof securities class actions—and a record number of dismissals.

bar for filing class actions by, for example, making it easier to4Class actions target public companies more than private ones;
the broader public disclosures and the greater number ofshareholders offer class action mills greater leverage to extract
settlements and legal fees.5 Class action settlements also tend

impose sanctions for frivolous suits. Steps to promote conclusive
resolution of cases at an earlier stage would reduce the amountand duration of leverage enjoyed by class action profiteers.
++ Support Congressional action. Nasdaq supports the enactment

to benefit one set of stockholders (investors at the timeof legislation currently before Congress that addressesof the alleged fraud) at the expense of another set

litigation reform.8 The legislation would, among other things:(more recent investors).6
Nuisance cases that result in dismissal are not costless. The mere
filing of a securities class action has been estimated to wipeout an average of 3.5% of the equity value of a company, andcompanies must bear the cost of defense, estimated to exceed$1 billion per year in aggregate. As the rate of these cases rises,–– Ease the standard for imposing sanctions on lawyers
bringing frivolous lawsuits.
–– Tighten the requirements for granting class certification.
–– Facilitate interlocutory appeal of decisions to grantclass certification.

it has become a major reason cited by private companies forstaying out of the public markets. Given the trend of third-party–– Require disclosure of third-party financing of litigation.

investors financing these cases,7 there is every reason to–– Limit plaintiff legal fees.

expect that the number of cases filed will only increase—alongwith the burden placed on public companies—unless litigation
reform is prioritized.

4
5
6
7
8

10

Boettrich and Starykh, “Recent Trends in Securities Class Action Litigation: 2016 Full-Year Review” (2017).
Ibid.
U.S. Chamber Institute for Legal Reform, “What’s Wrong with Securities Class Action Lawsuits? The Cost to Investors of Today’s Private Securities Class Action System Far Outweighs
Any Benefits” (2014).
http://www.instituteforlegalreform.com/issues/third-party-litigation-funding.
HR 720, HR 725, and HR 985.

++ Expand scope of provisions under Congressional consideration. Congress should also
consider enhancing this legislation with additional similar provisions that would:–– Allow interlocutory appeals from the denial of a motion to dismiss.
–– Allow a plaintiff to amend its complaint only once.
–– Further codify the standards for pleading with respect to scienter andloss causation, and clarify the exclusive nature of federal jurisdiction
over securities claims.

The personal savings rate in
the U.S. is half what it wasin the 1950s and 1960s, andin 2015 the U.S. savings rateis near the bottom of theOECD member countries.

–– Require proof of actual knowledge of material misstatements or omissions(as opposed to mere recklessness).
–– Make SEC findings in enforcement consent decrees inadmissible in private litigation.
++ Study longer-term comprehensive reform. Given the significant costs of the current
system and questions about whom the system actually benefits, long-term consideration
should also be given to more comprehensive changes. These might include:–– For securities class action suits, adopt the English system of requiring the loser
to pay legal fees of the winner, and ensure that plaintiffs have adequate resources
to cover such fees by requiring them to post a bond or demonstrate financing.
–– Allow companies to adopt charter/by-law provisions that require stockholders
to pursue claims against the company, directors, and officers through arbitration.
• Tax reform.
The federal government has repeatedly failed to enact meaningful tax reform for morethan thirty years. As a result, public companies and investors are left with a tax systemthat is complex, burdensome, inefficient, and does not properly incentivize longterm investing. It is long past time to reform U.S. tax policies to promote, rather than
discourage, saving and investment in the U.S. economy. The personal savings rate in the
U.S. is half what it was in the 1950s and 1960s,9 and in 2015 the U.S. savings rate wasnear the bottom of the OECD member countries.10 Nasdaq supports strong considerationof modern, forward-looking solutions.
++ Offer “investment savings accounts” for investors. In 2012, Sweden introduced acompelling new structure that ties taxes on investment to the value of a Swedish
investment savings account (or “ISK account”), rather than earnings (known as capitalgains) within the account.11 The ISK account is available to individual investors and there
is no maximum amount which an investor may contribute to an ISK account.
The individual investor manages the ISK account and can freely move funds within theaccount. Funds in the ISK account may be invested in cash (including foreign currency),
financial instruments which are traded on a regulated market, or financial instruments
traded on a multilateral trading facility. The investments may be made in either the
Swedish or global marketplace.

9 http://www.tradingeconomics.com/united-states/personal-savings
10 https://data.oecd.org/natincome/saving-rate.htm
11 Swedish law enacting investment accounts: lag (2011:1268) om investeringssparkonto

11

In a relatively short time, this investor-friendly concept

We also recommend considering shortening the ownershiphas attracted approximately 1.6 million Swedish individual

tenure requirement from five years to three years, andinvestors (approximately 16% of the total Swedish population)

increasing the maximum asset threshold from $50 million toto the ISK accounts as of 2015, and the number of ISK accounts$100 million. This shareholder-friendly move would enable

held by Swedish citizens has more than doubled in 2014-

these smaller companies to access the public markets.

2015. Based on other information made available by the12

Swedish Tax Agency (or “STA”),13 the value in such accounts
increased 68% in 2014-2015, as compared to a decrease in
the OMX Stockholm 30 Index of 1% over the same period.
We can also ascertain from the information published by the
STA that the value of the ISK accounts have been taxed at a
rate of approximately 0.3% to 0.6% for the years 2012-2015.
Using the S&P 500 index as a benchmark to track the valueof a U.S. equity investment account, if the ISK account model
had been adopted in the U.S. over the past ten years, investors
would have benefited from considerably lower taxes on theirinvestments, allowing for increased longer-term savings.
Over the same period of time, from 2014-16, the number of
IPOs in Sweden has almost doubled, with two-thirds of the
new companies listing on the First North market, a market
dedicated to smaller growth companies. It is early days forstatistical gathering of ISK’s impact on the market. That said,
after four years, the data indicates a correlation between ISK
and the Swedish IPO Market.
Nasdaq supports the creation of this optional type ofinvestment account in which U.S. investors may invest in the
global markets. Alternatively, investments solely in the U.S.
markets are also acceptable.
++ Expand tax exemption on sale of small business stock to++ Enact 100% dividends received deduction for holders ofcorporate stock. One of the most irrational elements of ourcurrent tax code is the double taxation of corporate profits.
The company pays taxes on profits, and then the shareholder
is taxed on distributions derived from those profits. For
individuals, the rate of taxation on dividends can be as highas the tax rate applied to ordinary income. Nasdaq strongly
supports complete elimination of the double taxationof corporate profits through a 100% dividends received
deduction for holders of qualified domestic corporate stock.
++ Eliminate net investment income tax. Enacted in 2013,individual investors currently pay a surcharge tax—aboveand beyond the tax applied to dividends and capital gains—of 3.8%.16 This tax increases the over-taxation of corporate
profits and penalizes individuals from participating inmarkets. It should be repealed.
++ Exclude dividends and capital gains from income for purposesof determining the phase-out of itemized deductions. Enacted
in 1991, individual taxpayers’ itemized deductions are limited
if their gross income exceeds certain levels. Nasdaq supports
continuation of the phase-out of itemized deductions forhigher earners, however investment income should be
excluded in determining this phase-out as a means toencourage greater investment.

the secondary market. The tax code currently includes an
exemption from tax on the sale of the stock of small startup
businesses;14 however, the exemption is narrowly defined.
Because in practice it will be difficult to apply this exemption
to shares of public companies, the benefits accrue only toventure capitalists and high net worth individuals—not to thepotential broader class of smaller shareholders of companies
seeking public funding. Furthermore, due to the complexityof these rules, this provision of the tax code is rarely used bytaxpayers.15 This exemption should be expanded to include
all qualified domestic corporations.

12
13
14
15
16

12

https://www.skatteverket.se/omoss/varverksamhet/statistik/skattpakapital/beskattningavvinsterochforluster. 4.3152d9ac158968eb8fd296c.html
http://www.skatteverket.se/privat/skatter/vardepapper/investeringssparkonto.
Internal Revenue Code § 1202
https://www.pehub.com/2016/07/heres-how-to-make-qsbs-work-for-the-entrepreneurial-ecosystem/
Internal Revenue Code § 1411

SECTION TWO:
MODERNIZING MARKET STRUCTURE
In many ways, today’s markets bear little resemblance to thoseThis liquidity dilemma stems from a long-term trend towardsof just a decade ago. The old images of brokers fielding telephone

fragmentation, where liquidity has spread across an increasing

calls and floor traders hollering orders has long since given way tonumber of trading venues. As recently as 15 years ago, more thana profoundly interconnected, technology-driven marketplace that

90% of liquidity was often concentrated in a single exchange withtransacts across an astonishing array of exchanges and trading

the small remainder spread over an additional eight to tenvenues. As the founder of electronic trading, Nasdaq views market

other exchanges and electronic communications networks.

innovation as a tremendous force for good, unlocking competition

Today, liquidity is spread thinly across fifty or more venues

and unleashing the flow of capital to catalyze economic activity.

(there are 12 exchanges alone), and no single market controls

Yet, as markets have advanced, the fundamental structure thateven 25% of trading.

underpins them has not evolved to benefit all market segments
equally. While efficient markets benefit both issuers and investors,
inefficient markets can choke the flow of capital, become a drainon growth, and block companies—particularly small and medium
growth companies—from reaching their fullest potential. We sit ina unique position to observe both the areas of excellence and ofchallenge in our markets, and to recommend solutions that improveconditions for issuers, investors, and our economy.
Many of the regulations that form the foundation of today’s
markets—including Reg NMS and Reg ATS—were developed andimplemented more than a decade ago.17 Now is the time to write
new rules of the road that ensure U.S. equities markets continue
to enable efficient capital flow and formation to support the U.S.
economic engine. We can accomplish this with new and improved
market constructs that account for the different needs amongst
market participants and the fluid nature of our markets. It’s time

Source: Nasdaq

to address the one-size-fits-all regulatory regime.
• Strengthen markets for smaller companies. Despite incremental
improvements to markets in recent years, liquidity and the
trading experience for small and medium growth companies andinvestors in these companies still lag far behind that of larger
issuers. For small and medium growth companies—those witha market capitalization below $1 billion, particularly when the

As a result, every venue has a very thin crust of liquidity
for small and medium growth companies, a crust that can be
broken by a single large order. When the liquidity crust is
broken, the order can quickly impact the market’s ability toefficiently absorb it, resulting in a poor experience for theinvestor who placed the order.

lower market cap is accompanied by low daily trading volume—

Compounding that trend, liquidity has also moved off exchanges

relatively small orders can create dramatic price movements.

and onto alternative trading venues, making it more difficult

This increases costs for both the companies and their investors.

to find latent liquidity. Nearly half of U.S. publicly traded small

For example, regardless of the listing market that a company

and medium growth companies have more than 50% of their

may choose, small and medium growth companies have shown

trading occurring off-exchange, away from the benefits of pricea worsening incidence of high-volatility days, which increases

formation and transparency of U.S. exchanges.19

investor confusion and undermines confidence in our markets.18

17 Securities Exchange Act Release No. 51808 (June 9, 2005) 70 FR 37496, 37500 & n.21, 37501 (June 29, 2005); Securities Exchange Act Release No. 40760 (December 8, 1998), 63
FR 70844 (December 22, 1998).
18 For the purposes of this paper, small and medium growth companies are defined as non-exchange traded product, market capitalization of less than $1 billion, and volume average
weighted price of more than $1. The percent of trading days where individual small and medium growth stocks listed in the U.S. experienced volatility of 5% or more increased
from 21% of trading days to 35% of trading days from 2013 to 2016, respectively.
19 729 out of 2,227 companies exceeded 50% over the past twelve months ending April 25, 2017, or 33%. Nasdaq Economic Research..

13

Nasdaq believes concentrating that disaggregated liquidity onto a single exchange, withlimited exceptions, will allow investors to better source liquidity. In addition, investors will
enjoy a higher level of transparency because exchanges are required to display their bestquotes to the public, and most exchanges choose also to publish full supply and demand
information (i.e. order book depth information) within their markets.
The introduction of Unlisted Trading Privileges (UTP) gave rise to fragmentation, combinedwith a proliferation of alternative trading systems. In 1975, Congress determined thatinvestors would benefit from greater competition if securities listed on one exchange
were available for trading on all other exchanges and in over-the-counter trading venues.
In 1998, determining that further steps were necessary to foster competition, theSecurities and Exchange Commission enacted Regulation ATS, which lowered the bar forthe launch of alternative trading systems. Advances in technology and further regulatorychanges, most notably Regulation NMS, enacted in 2006, then led to an explosion of ATSsand exchanges, culminating in the current environment in which we have 50-plus active
trading venues. While these changes have spurred competition that has brought benefits
to larger issuers, they have proven extremely challenging for less liquid companies.
When it comes to UTP, the law of diminishing marginal returns applies—and we have far
exceeded the point at which the benefit outweighs the costs.
With creativity and flexibility, this liquidity challenge can be solved, making capital
markets far more cost-effective and attractive for small and medium growth companies:• Give issuers choice to consolidate liquidity and improve trading quality.
Nasdaq recommends permitting issuers to choose to trade in an environment withconsolidated liquidity. By creating a market for smaller issuers that is voluntary for
issuers to join and that is largely exempt from the UTP obligations—subject to key
exclusions—we can concentrate liquidity to reduce volatility and improve the trading
experience. Eliminating UTP for small and medium growth companies would reduce
the number of exchanges authorized to trade them; most importantly, it would allow
liquidity to develop, and for supply and demand to find one another. Without the rigidityof Regulation NMS which was enacted to cater to a UTP market model, the new markets
would also create natural opportunities for other market structures to develop and thrive– for example, intraday auctions to bring together supply and demand for the benefit ofall. Further requirements for off-exchange trading, described below, would likely further
concentrate liquidity and limit fragmentation. The net effect would be a substantial“thickening” of the liquidity crust on the exchange that lists the security.
Off-exchange trading represents 38.4% of small and medium growth company trading
volume today.20 While there are great benefits to consolidating on-exchange trading,there is also important value provided by off-exchange trading that merit consideration,
especially block trades and price-improved trades. The network of off-exchange brokers
also supports systemic resiliency for the trading of these securities. We want to work with
the industry towards constructive solutions that balance on- and off- exchange activities.
Nasdaq has learned from experience that for small and medium sized issuers,
consolidation offers significant benefits to investors. Nasdaq operates the First North
market in Sweden, containing small and medium low liquidity stocks in an even less liquid
Swedish market. Unlike in the U.S., the limited liquidity is concentrated on a single market
20 Nasdaq Economic Research.

14

Nasdaq recommends
permitting issuers to choose
to trade in an environment
with consolidated liquidity.

rather than distributed over many markets. When comparing thechoose to list in a non-UTP structure, much of that complex

trading characteristics of the securities on the unfragmented First

functionality will no longer be necessary to trade theseNorth market with the corresponding stocks in the fragmented

companies. In addition, with the consolidation of liquidity,

U.S. markets, spreads are 37% better and volatility is also betterthe listing exchange is appropriately incented to develop

on First North, even though the stocks listed are smaller thaninnovative solutions designed to cultivate liquidity andthose listed in the U.S.

improve the trading experience for investors in small and21

Some may wonder—separate from the impact to specific issuers
and their investors—whether consolidation creates more systemicrisk than we have today. Consolidation for this segment of themarket will reduce the level of unnecessary complexity related
to the many interconnections of exchanges. Furthermore,order types designed specifically to accommodate market
fragmentation can be removed also increasing simplicity anddecreasing risk. Reducing fragmentation does not have to comeat the cost of reduced resilience. The listing exchange should

medium growth companies. In a world where liquidity is more
effectively nurtured, we will be able to address the uniqueneeds of small and medium growth companies. We recognize
the cost of adopting new technology across the industry inconsidering such innovations and believe that any such cost
would be outweighed by the benefit to the market. We haveseveral key ideas we’ve been working on and look forward to
discussing in further detail with the industry.
++ Implement an intelligent rebate/fee structure that promotes

ensure that a robust “hot-hot” backup system is in place—as wellliquidity and avoids market distortions. Nasdaq is committed

as a named backup exchange—to ensure resiliency for the trading

to balancing the privileges and obligations for market makersof these securities. For example, Nasdaq has a proud history

in small and medium growth securities to help incentivize

of maintaining resiliency in markets, including robust testing,tight spreads and a high-quality trading environment for

geographically diverse systems, primary/backup systems

all participants in these less liquid stocks. The opportunity

operating simultaneously which could be replicated here. In

for market making reforms and the impact of these changes

sum, these changes would work to bring additional benefits towould be magnified in a world where liquidity is concentrated

small and medium growth companies and their investors.

as Nasdaq proposes. We do need to be very careful about++ Deploy intelligent tick sizes for small and medium growthcompanies. Every company listed on U.S. markets tradeswith the same standard tick sizes, but technology makes
this standardization unnecessary. Nasdaq’s experience andpolicies that would eliminate or significantly reduce rebatesin the context of less liquid stocks where incentivization ofmarket making is most impactful.
++ Ensure fair and reasonable pricing for participants in the

research demonstrates that a one-size-fits-all approachcontext of limiting exchange competition. If UTP were to be

to tick size is suboptimal for many, particularly small andrevoked for small and medium growth companies, flexible

medium growth companies, which should trade in a suitable

tick sizes and liquidity incentivization must occur withintick regime determined by their listing exchange. Nasdaq

a construct that preserves competition amongst market

believes that these companies should have the ability toparticipants and does not inappropriately advantage

trade on sub-penny, penny, nickel, or dime increments.

the market operator itself.22 The SEC plays an important

Transparent and standardized methodologies can and shouldrole for efficient and well-operating markets, and to help

be used to accurately determine the optimal tick size toestablish appropriate pricing policies to address the goals of

increase liquidity and reduce trading costs.

stakeholders. We are committed to working with the industry++ Cultivate innovative market-level solutions that improve thetrading of small and medium growth companies. Much of theto ensure that a consolidated ecosystem operates effectively
for investors, issuers and all other market participants.

trading and routing functionality in use today was designed
in response to UTP and Regulation NMS. For issuers that

21 Ibid.
22 It is notable that both listing market and trading market competition would provide competitive discipline on exchanges operating in a UTP-revoked environment. Since 2005, anaverage of 33 Issuers per year have switched their listing exchange. OTC trading of blocks and customer internalized orders would also serve to provide competitive discipline tothe exchanges operating in a UTP-revoked environment. Lastly, the SEC approval process for pricing actions could be bolstered to ensure that all participants have a fair ability toprovide feedback on all pricing proposals. Additionally, the SEC could choose still to include best bid and offer and last sale trading data for these non-UTP-eligible market in the
consolidated data plans.

15

Nasdaq is focused here on the elements of market structure andenergetically on the critical topics already being discussed, including

regulation that directly impact small and medium growth companies.

protection of investors’ orders, measures of market performance,

While many of our targeted proposals would change Regulation

market maker incentive structures (including rebate structures),

NMS as it currently applies to these companies, we view our current

availability and uses of market data, and systemic risk and resiliency.

analysis as separate from the broader, more comprehensive review

That broad review of Regulation NMS is important, but that review

of Regulation NMS that the SEC has undertaken through the Equity

should not delay or defer changes that Nasdaq proposes that are vitalMarket Structure Advisory Committee. Nasdaq will continue to engage

to small and medium growth companies.

SECTION THREE:PROMOTING LONG-TERMISM
Nasdaq understands and respects that there are many investingthat ultimately act as an overall detriment to the public markets,

strategies, and we believe that this mix of approaches help ensure

especially with respect to long-termism. It is possible to begin tovibrant markets. However, in recent years, a variety of market

separate the first category of activist investing from the second

dynamics have started to disfavor long-term investors and long-with the following commonsense steps:

term corporate strategies. Market participants and the investing
community have become less patient with corporate management,
boards of directors and their overarching strategies to deliver
shareholder returns.

++ Call to action for industry dialogue. There are many
dimensions to this issue and Nasdaq is a strong believer inthe capital markets ecosystem, exchanges, issuers, investors,coming together to develop a comprehensive solution to

Against this backdrop, private companies are forced to weigh thethis topic. For instance, Nasdaq strongly supports, and has

capital raising benefits of public markets with the risks that they willbuilt into its rule book, the need for greater transparency

be unable to pursue productive long-term strategies. The trend away

around arrangements by which activist investors tie director

from long-term thinking is also harmful to investors with long-termcompensation to share price, which creates the potential

outlooks and to the broader American economy, because sustainedfor conflicts between the activist’s and the company’s best

job creation and economic output depends on a company’s ability tointerest. This dialogue can and should focus on several key

measure performance not in quarters or fiscal years, but in decades.

issues that promote transparency so that investors andNasdaq advocates for reforms that help public companies plan andexecute for long-term growth, job creation and innovation, andensure that long-term investors are able to participate in wealthactivists are on a level playing field when engaging withthe company.
++ Equalize short interest transparency. Currently, securities

creation on a level playing field with those who focus on speed andlaws require certain investors to disclose their longmarket timing.

positions 45 days after the end of each quarter and require• Address concerns regarding activist investors“Activist investing” is a complex term. Over the last five years,
shareholder activism has become less taboo and has dramatically
evolved into its own distinct investment style. Accordingly, thisapproach now includes a broad assortment of perspectives,
motivations and strategies. Consequently, this swift development
and unique classification has also placed a higher degree ofcomplexity and confusion within the space. The investmentcommunity continues to think of activism on par with “value,”“growth” or “GARP,” however it has proven itself far harder todefine. Regardless, while some activism has proven to be benign
and beneficial, there exist some particular aspects of the style16

institutions to make disclosure within ten days after theirposition reaches or exceeds 5% of a company’s outstanding
shares. There are no corresponding disclosure requirements
applicable to short positions. Legitimate short selling
contributes to efficient price formation, enhances liquidity,
and facilitates risk management, and short sellers may
benefit the market and investors in other important ways,
including by identifying and ferreting out instances of fraud
and other misconduct at public companies.

However, the asymmetry of information between long investors and those with shortpositions deprives companies of insights into trading activity and limits their ability
to engage with investors and it deprives investors of information necessary to make

Asymmetry of information
between long investors andmeaningful investment decisions.

those with short positions

Several European countries require disclosure of short positions. Within the U.S., thedeprives companies ofpolicies that underlie the Section 13 disclosure requirements applicable to investors
with long positions—transparency, fairness and efficiency—apply equally to investors

insights into trading activity

with significant short positions. Moreover, investors with short positions can pursue

and limits their ability tostrategies designed to invisibly drive down share prices or rely on regulatory
processes to inexpensively challenge key intellectual property of a company, intending

engage with investors andto profit from the uncertainty created. To provide transparency to other investors

it deprives investors ofand the affected companies, we therefore support extending existing disclosure
requirements for long investors, such as on Form 13F, Schedule 13D and Schedule

information necessary

13G, to persons with short positions, including any agreements and understandings

to make meaningfulthat allow an investor to profit from a loss in value of the subject security.

investment decisions.

++ Continue to support dual class structure. One of America’s greatest strengths is that
we are a magnet for entrepreneurship and innovation. Central to cultivating thisstrength is establishing multiple paths entrepreneurs can take to public markets. Eachpublicly-traded company should have flexibility to determine a class structure thatis most appropriate and beneficial for them, so long as this structure is transparent
and disclosed up-front so that investors have complete visibility into the company.
Dual class structures allow investors to invest side-by-side with innovators and highgrowth companies, enjoying the financial benefits of these companies’ success.
++ Encourage, rather than mandate, ESG disclosure. According to CSRHub research, asmuch as 84% of all Nasdaq-listed companies make some Environmental, Social andGovernance disclosures. They do this not just because they believe in responsible
business practices and because they understand that investors are increasingly
expecting to analyze ESG metrics in their decision-making process. Many ESG
disclosures and policies are intrinsically long-term in their focus. By being proactivein ESG disclosure, companies can set the tone in their long-term focus. Further, many
companies find that the lack of ESG disclosure gives rise to activist concerns. As aresult, companies end up needing to deploy an immediate, short term response to
their challenge. By addressing ESG proactively, and on their terms, companies cankeep their focus on more orderly long-term business planning and execution. In
keeping with our support of custom solutions for complex markets, we generally
support the principle that ESG reporting shouldn’t become so prescriptive that it
loses its value. Many companies are already doing a great job identifying the properand appropriate ways to report material ESG metrics for their business practices andindustry. This should be encouraged, rather than mandated.

17

IMMEDIATE ACTION
AND FURTHER STUDY
Comprehensive market reform is extraordinarily complex. Nasdaq

Further Study:

recognizes that it would be unrealistic and imprudent to enact all++ Investment Accounts

the reforms we recommend at once. Some are “shovel-ready” and++ Expand tax exemption on sale of small business stock

could be implemented immediately with great benefits and little tono disruptions, while other reforms we support require additional
study and fine-tuning.

++ Study longer-term comprehensive litigation reform(loser pays)++ Mandatory arbitration

Because this report is meant to be a blueprint that catalyzes
dialogue and action, the summary below clarifies our view onModernizing Market Structure

which reforms are ready for immediate action and which are

Immediate Action:

part of a longer-term strategy.

• Allow issuer choice to revoke UTP for small and medium
companies with select exemptions

Reconstructing the Regulatory Framework
Immediate Action:• Reform the proxy process++ Raise minimum ownership amount and holding period++ Streamline the SEC process for removing nuisance proxy
proposals from the docket++ Create transparency and fairness in the proxyadvisory industry• Reduce the burden of corporate disclosure++ Offer flexibility on quarterly reporting++ Eliminate 10-Qs and reconsider XBRL tagging requirement
while keeping annual 10-Ks.
++ Expand and harmonize classifications for disclosure relief++ Roll back politically-motivated disclosure requirements• Deploy intelligent tick sizes for small and medium
growth companies• Cultivate innovative market level solutions that improve
the trading of small and medium growth• Incentivize quality market making
Further Study:• Broader market structure review
Promoting Long-Termism
Immediate Action:++ Continue to provide choice on share class structure++ Equalize short interest transparency
Further Study:• Address concerns regarding activist investors specific to tactics
that coerce companies into short-term actions to the detriment• Litigation reformof long-term planning and actions++ Reduce the burden of litigation++ Support Congressional action++ Expand scope of provisions under Congressional consideration• Tax Reform++ Enact 100% dividends received deduction++ Eliminate net investment income tax++ Exclude dividends and capital gains from income for purposesof determining the phase-out of itemized deductions

18© 2018 Nasdaq, Inc. | Last updated February 2018