[Federal Register Volume 87, Number 36 (Wednesday, February 23, 2022)]
[Notices]
[Pages 10265-10268]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-03760]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94265; File No. SR-NASDAQ-2022-015]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Exempt Non-Convertible 
Bonds Listed Under Rule 5702 From Certain Corporate Governance 
Requirements

February 16, 2022.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 4, 2022, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the Exchange. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to exempt non-convertible bonds listed under 
Rule 5702 from certain corporate governance requirements. The text of 
the proposed rule change is available on the Exchange's website at 
https://listingcenter.nasdaq.com/rulebook/nasdaq/rules, at the 
principal office of the Exchange, and at the Commission's Public 
Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    In November 2018, the Commission approved amendments to the 
Exchange's rules that permit the Exchange to list and trade non-
convertible corporate debt securities (referred to herein as ``bonds'' 
or ``non-convertible bonds'') on the Nasdaq Bond Exchange.\3\ Under the 
Exchange's listing rules then adopted, a non-convertible bond was 
eligible for initial listing on the Exchange only if it had a principal 
amount outstanding or market value of at least $5 million and its 
issuer had at least one class of an equity security listed on Nasdaq, 
the New York Stock Exchange (``NYSE''), or NYSE American.\4\ In 
February 2020, Nasdaq amended Listing Rule 5702 to allow the listing of 
non-convertible bonds issued by certain companies not listed on Nasdaq, 
NYSE American or NYSE (the ``2020 Filing'').\5\
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    \3\ See Securities Exchange Act Release No. 84575 (November 13, 
2018), 83 FR 58309 (November 19, 2018) (approving SR-NASDAQ-2018-
070, as modified by Amendment Nos. 1-3) (``Approval Order'').
    \4\ Rule 5702(a).
    \5\ Specifically, the 2020 Filing expanded the categories of 
non-convertible bonds eligible to be listed under Rule 5702 to 
include non-convertible bonds of affiliates of a listed company 
where: A listed company directly or indirectly owns a majority 
interest in, or is under common control with, the issuer of the non- 
convertible bond; or a listed company has guaranteed the non-
convertible bond. In addition, for un-affiliated companies, the 2020 
Filing allowed listing of non-convertible bonds where a nationally 
recognized securities rating organization (an ``NRSRO'') has 
assigned a current rating to the non-convertible bond that is no 
lower than an S&P Corporation ``B'' rating or equivalent rating by 
another NRSRO; or if no NRSRO has assigned a rating to the issue, an 
NRSRO has currently assigned (i) an investment grade rating to an 
immediately senior issue of the same company, or (ii) a rating that 
is no lower than an S&P Corporation ``B'' rating, or an equivalent 
rating by another NRSRO, to a pari passu or junior issue of the same 
company.
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    In 2018, Nasdaq stated its plan to seek exemptions to certain 
requirements of the Nasdaq Rule 5600 Series, including requirements 
relating to Review of Related Party Transactions (Rule 5630), 
Shareholder Approval (Rule 5635), and Voting Rights (Rule 5640),\6\ but 
later indicated that it would not pursue those exemptions because, at 
the time, the equity of the issuers listing non-convertible bonds under 
Rule 5702 was required to be listed on Nasdaq, NYSE American or NYSE 
and therefore were subject to those Rules or substantially similar 
rules of NYSE American or the NYSE.\7\
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    \6\ See Securities Exchange Act Release No. 84001 (August 30, 
2018), 83 83 FR 45289 (September 6, 2018).
    \7\ See Securities and Exchange Act Release No. 86072 (June 10, 
2019), 84 FR 27816 (June 14, 2020).
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    Given the change made in the 2020 Filing to allow the listing of 
non-convertible bonds by issuers that are not otherwise listed on a 
national securities exchange, Nasdaq now proposes to exempt non-
convertible bonds from the requirements relating to Review of Related 
Party Transactions (Rule 5630), Shareholder Approval (Rule 5635), and 
Voting Rights (Rule 5640).\8\
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    \8\ To increase the clarity of the rule, Nasdaq proposes to 
include in the proposed Listing Rule 5702(d) other exemptions 
applicable to an issuer of a non-convertible bond, as provided by 
Listing Rule 5615(a)(6)(A), which states, in the relevant parts, 
that issuers ``whose only securities listed on Nasdaq are . . . debt 
securities . . . are exempt from the requirements relating to 
Independent Directors (as set forth in Rule 5605(b)), Compensation 
Committees (as set forth in Rule 5605(d)), Director Nominations (as 
set forth in Rule 5605(e)), Codes of Conduct (as set forth in Rule 
5610), and Meetings of Shareholders (as set forth in Rule 5620(a)). 
In addition, these issuers are exempt from the requirements relating 
to Audit Committees (as set forth in Rule 5605(c)), except for the 
applicable requirements of SEC Rule 10A-3. Notwithstanding, if the 
issuer also lists its common stock or voting preferred stock, or 
their equivalent on Nasdaq it will be subject to all the 
requirements of the Nasdaq 5600 Rule Series.'' Nasdaq also proposes 
to include in the proposed Listing Rule 5702(d) exemptions from the 
requirements relating to Diverse Board Representation (as set forth 
in Rule 5605(f)) and Board Diversity Disclosure (as set forth in 
Rule 5606) applicable to an issuer of a non-convertible bond, as 
provided by Listing Rules 5605(f)(4) and 5606(c), respectively.

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[[Page 10266]]

    Nasdaq believes that it is appropriate to exempt non-convertible 
bonds satisfying the requirements of Listing Rule 5702, which are the 
same as the requirements for listing debt on NYSE American,\9\ from the 
requirements relating to Review of Related Party Transactions (Rule 
5630), Shareholder Approval (Rule 5635), and Voting Rights (Rule 5640). 
Nasdaq believes that listing requirements for non-convertible bonds are 
designed so that only companies capable of meeting their financial 
obligations are eligible to have their non-convertible bonds listed on 
Nasdaq. To issue a bond, the issuer hires a third-party trustee, 
typically a bank or trust company, to represent buyers of the bond. The 
agreement entered into by the issuer and the trustee is referred to as 
the trust indenture, which is a binding contract that is created to 
protect the interests of bondholders. Accordingly, holders of non-
convertible bonds do not expect to have governance rights the way that 
equity investors may. The issuance of equity and assignment of voting 
rights does not affect these creditors because their interests are 
protected contractually, as indicated above. Accordingly, bondholders 
are focused on the ability of the issuer to meet their financial 
obligations and the listing rules already have standards in that 
regard. For this reason, non-convertible bonds are already exempt from 
many of the governance requirements.\10\
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    \9\ See Section 104 of the NYSE American Company Guide. In 
addition, NYSE has similar listing conditions, although the NYSE 
rule does not permit listing of debt securities where the issuer has 
equity securities listed on Nasdaq or NYSE American, is directly or 
indirectly owned by, or is under common control with, an issuer 
listed on Nasdaq or NYSE American, or where an issuer listed on 
Nasdaq or NYSE American has guaranteed the debt security. See 
Section 102.03 of the NYSE Listed Company Manual.
    \10\ See Listing Rule 5615(a)(6)(A) and footnote 8 above.
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    Nasdaq believes that it does not need to impose the requirements of 
the Rules in connection with listing of non-convertible bonds on 
issuers that have a class of equity listed on Nasdaq, NYSE or NYSE 
American because these issuers either have equity securities listed on 
Nasdaq, which makes them subject to the requirements of the Rules, or 
NYSE or NYSE American, which makes them subject to substantially 
similar requirements of such exchanges. In cases where listed issuers 
raise debt through entities they directly or indirectly own a majority 
interest in, or entities with which they are under common control, 
Nasdaq believes it is appropriate to exempt these issuers from the 
requirements of the Rules and rely on the company's listing on Nasdaq, 
NYSE American or NYSE as evidence that the issuer of the non-
convertible bond is capable of meeting its financial obligations 
because the issuer is a subsidiary or affiliate of the listed company.
    Similarly, in other cases, where the issuer of the non-convertible 
bond is not a subsidiary or affiliate of a listed company, a listed 
company may nonetheless guarantee the debt and in these cases the 
guarantee by the listed company serves to ensure that if the company 
cannot, then its guarantor is capable of meeting the financial 
obligations of the non-convertible bond, particularly, because that 
debt is a senior security to the listed equity.
    Nasdaq also believes that there are other indications that the 
issuer of a non-convertible bond is capable of meeting its financial 
obligations, besides the ties to a listed company described above. 
Specifically, in the case of these un-affiliated issuers, Nasdaq 
believes that it is appropriate to exempt from the requirements of the 
Rules issuers of listed bonds with a current rating from an NRSRO that 
is no lower than an S&P Corporation ``B'' rating or equivalent rating 
by another NRSRO because this is another third-party evaluation of the 
issuers ability to make interest payments and repay the loan upon 
maturity. Similarly, if a more junior issue of the same company, or an 
issue of the same company at the same priority in liquidation (a ``pari 
passu issue'') has a rating no lower than an S&P Corporation ``B'' 
rating or an equivalent rating by another NRSRO, than it is appropriate 
to presume that the company will also be capable of meeting its 
obligations on the non-convertible bonds to be exempt from the 
requirements of the Rules because those bonds would be repaid in the 
same priority (if a pari passu issue) or sooner (if the other issue is 
more junior) as the ``B'' rated issue. Finally, if no NRSRO has 
assigned a rating to the issue to be listed, Nasdaq believes it is 
appropriate to consider the rating assigned to the next most senior 
issue of the same company. If that rating is an investment grade 
rating, which is higher than the ``B'' rating standard just described, 
then that also provides assurance that the company will be capable of 
meeting its financial obligations on the non-convertible bond.\11\ In 
assigning ratings, an NRSRO considers the ability of the issuer to make 
timely payments of interest and ultimate payment of principal to the 
related securities.\12\
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    \11\ See S&P Global ``Understanding Ratings'' available at 
https://www.spglobal.com/ratings/en/about/understanding-ratings, 
which identifies ratings of ``BBB'' or higher as investment grade, 
at least two levels higher than ``B'' ratings.
    \12\ See, e.g., Exhibit 2, Principles of Credit Ratings, to S&P 
Global Form NRSRO, available at https://www.standardandpoors.com/en_US/delegate/getPDF?articleId=2193671&type=COMMENTS&subType=REGULATORY.
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    Nasdaq notes that it performs real-time surveillance of the bonds 
for the purpose of maintaining a fair and orderly market at all 
times.\13\ An issuer listing non-convertible bonds will continue to be 
subject to the existing continued listing requirement of Listing Rule 
5702(b)(2) that it must be able to meet its obligations on the listed 
non-convertible bonds. These issuers are also subject to the 
requirement in Listing Rule 5702(c) to make prompt public disclosure of 
material information that would reasonably be expected to affect the 
value of its listed bonds or influence investors' decisions regarding 
such bonds, which will allow Nasdaq to timely review for events that 
may cause the issuer to be unable to meet its obligations on the listed 
non-convertible bonds. Thus, for example, an issuer would have to 
disclose if a non-convertible bond that was previously guaranteed is no 
longer guaranteed, or if the issuer or guarantor declares bankruptcy. 
An issuer would also have to disclose if its common stock is delisted, 
and Nasdaq would consider whether it is appropriate to continue the 
listing of the non-convertible bond of an issuer that was majority-
owned, under common control, or guaranteed by a listed company, which 
has since been delisted. Nasdaq also would consider any changes in the 
rating assigned to the bond or other issues of the same company that 
were used to qualify the listed bond.
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    \13\ See Approval Order at 58313.
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    Finally, Nasdaq notes that in approving the bond listing standards 
of other exchanges,\14\ the Commission considered the delisting 
criteria for the bonds and noted that it would have serious concerns 
about any proposal

[[Page 10267]]

that does not provide for the delisting of convertible bonds where a 
company acts to disadvantage its shareholders. That concern was 
addressed by including in a requirement that the NYSE American would 
delist convertible bonds when the issuer's equity security is delisted 
due to a violation of the that exchange's corporate governance listing 
standards. However, in circumstances where the exchange lacked an 
equity listing relationship with the debt issuer the Commission 
concluded that:
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    \14\ See Section 104 of the NYSE American Company Guide; 
Securities Exchange Act Release No. 36594 (December 14, 1995), 60 FR 
66330 (December 21, 1995) (approving SR-Amex-95-29). See also 
Securities Exchange Act Release No. 37878 (October 28, 1996), 61 FR 
56726 (November 4, 1996) (Notice of filing and immediate 
effectiveness of proposed rule change by the Chicago Board Options 
Exchange, Inc., relating to listing and delisting standards for debt 
securities).

the revised standards should enable [NYSE American] to identify 
listed companies that may have insufficient resources to meet their 
financial obligations or whose debt securities may lack adequate 
trading depth and liquidity. This, in turn, will allow [NYSE 
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American] to take appropriate action to protect bondholders.

    In terms of the delisting criteria, the Commission discussed the 
lack a minimum market value for debt securities, elimination of the 
distribution requirement for ``unaffiliated'' \15\ issuers and set 
forth its expectation for the exchange to consider carefully the 
propriety of continued exchange trading of the securities of bankrupt 
or distressed companies, and indicated that it expected debt securities 
with minimal value to be delisted. However, the Commission did not 
discuss or set forth any expectations that an unaffiliated bond issuer 
should be subject to any corporate governance requirements applicable 
to an issuer of an equity security. Nasdaq believes this approach is 
consistent with the creditors' reliance on contractual protections of 
their interests rather than on governance rights, as described above. 
Accordingly, Nasdaq believes that it is appropriate to exempt non-
convertible bonds satisfying the requirements of Listing Rule 5702 from 
the requirements of the Rules and that this approach is consistent with 
the delisting requirements of other exchanges.\16\
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    \15\ The Commission defined an unaffiliated issuer as an issuer 
that has no equity securities listed on the [NYSE American] or NYSE; 
is not, directly or indirectly, majority-owned by, nor under common 
control with, an issuer of [NYSE American] or NYSE-listed equity 
securities; and is not issuing a debt security guaranteed by an 
issuer of equity securities listed on the [NYSE American] or NYSE.
    \16\ See footnote 14 above.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\17\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\18\ in particular, in that it is designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general to protect investors and the public 
interest.
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    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(5).
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    Listing Rule 5702 allows the listing of non-convertible bonds 
issued by companies capable of meeting their financial obligations on 
those bonds. Nasdaq believes that the proposed rule change is designed 
to protect investors and the public interest because issuers that have 
equity securities listed on Nasdaq, are already subject to the 
requirements of the Rules, or such issuers are subject to the rules of 
NYSE or NYSE American, that impose substantially similar requirements.
    Nasdaq also believes that exempting unaffiliated bond issuers is 
designed to remove impediments to and perfect the mechanism of a free 
and open market because issuers of such bonds are capable of meeting 
their financial obligations on those bonds and because Nasdaq lacks an 
equity listing relationship with the debt issuer or such relationship 
is attenuated. The existing alternative conditions for issuers that do 
not have equity securities listed on Nasdaq, NYSE American or NYSE are 
designed to protect investors and the public interest by ensuring that 
the bond is issued or guaranteed by an entity listed on Nasdaq, NYSE 
American or NYSE; is issued by an entity under direct, indirect or 
common control with an issuer listed on Nasdaq, NYSE American or NYSE; 
that the issue to be listed (or an issue that is at the same priority 
or junior to the issue to be listed) is assigned a minimum ``B'' rating 
or its equivalent by an NRSRO; or that the next most senior issue to 
the issue to be listed is assigned an investment grade rating. These 
conditions are appropriate indicia that the issuer, or a guarantor, can 
meet its obligations on the debt. Moreover, this approach is consistent 
with approach of NYSE American and other exchanges for listing 
debt.\19\ As discussed above, Nasdaq believes that the Commission has 
previously considered this approach and approved listing standards that 
assure that an issuer is capable of meeting its financial obligations. 
Finally, Nasdaq notes that it surveils for changes to the conditions of 
listed bonds that may implicate the ability of the issuer to meet its 
obligations on the listed non-convertible bonds.
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    \19\ See Section 104 of the NYSE American Company Guide, Nasdaq 
Listing Rule 5515(b)(4) and Section 102.03 of the NYSE Listed 
Company Manual.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. Rather, the proposed rule 
change will enhance competition among exchanges by conforming Nasdaq's 
listing standards for non-convertible bonds to those of other 
exchanges, as described in details above. In addition, the proposed 
rule change may enhance competition among issuers by allowing more 
issuers to list their non-convertible bonds on Nasdaq, provided they 
meet the requirements of the rule.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

    <bullet> Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#0d7f786168206e6260606863797e4d7e686e236a627b"><span class="__cf_email__" data-cfemail="e092958c85cd838f8d8d858e9493a0938583ce878f96">[email protected]</span></a>. Please include 
File Number SR-NASDAQ-2022-015 on the subject line.

Paper Comments

    <bullet> Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2022-015. This 
file number should be included on the

[[Page 10268]]

subject line if email is used. To help the Commission process and 
review your comments more efficiently, please use only one method. The 
Commission will post all comments on the Commission's internet website 
(http://www.sec.gov/rules/sro.shtml). Copies of the submission, all 
subsequent amendments, all written statements with respect to the 
proposed rule change that are filed with the Commission, and all 
written communications relating to the proposed rule change between the 
Commission and any person, other than those that may be withheld from 
the public in accordance with the provisions of 5 U.S.C. 552, will be 
available for website viewing and printing in the Commission's Public 
Reference Room, 100 F Street NE, Washington, DC 20549, on official 
business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of 
the filing also will be available for inspection and copying at the 
principal office of the Exchange. All comments received will be posted 
without change. Persons submitting comments are cautioned that we do 
not redact or edit personal identifying information from comment 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
NASDAQ-2022-015, and should be submitted on or before March 16, 2022.
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    \20\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-03760 Filed 2-22-22; 8:45 am]
BILLING CODE 8011-01-P


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