Document ID: SEC-2020-1142-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market, LLC
Posted Date: 2020-07-20T04:00Z

[Federal Register Volume 85, Number 139 (Monday, July 20, 2020)]
[Notices]
[Pages 43900-43904]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-15552]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89309; File No. SR-NASDAQ-2020-002]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Amend the Procedures 
Governing the Introduction of Legal Arguments and Material Information 
by Companies in a Proceeding Before a Hearings Panel

July 14, 2020.
    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 July 2, 2020, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``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 amend the procedures governing the 
introduction of legal arguments and material information by companies 
in a proceeding before a Hearings Panel.
    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

[[Page 43901]]

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
    A company may, within seven calendar days of the date of a staff 
delisting determination notification, public reprimand letter, or 
written denial of a listing application, request a written or oral 
hearing before a Hearings Panel to review the staff delisting 
determination, public reprimand letter, or written denial of a listing 
application.\3\ The Hearings Department will then schedule a hearing to 
take place before a Hearings Panel, generally within 45 days of the 
request for a hearing.\4\ The Hearings Department will send written 
acknowledgment of the company's hearing request and inform the company 
of the date, time, and location of the hearing, and the deadlines for 
written submissions to the Hearings Panel.\5\ A company may waive its 
right to an oral hearing and instead seek a decision by the Hearings 
Panel based solely on its written submissions. To improve the hearings 
process, the Exchange is proposing to revise the procedures governing 
the introduction of legal arguments and material information by 
companies in a written or oral hearing before a Hearings Panel.
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    \3\ See Listing Rule 5815(a)(1)(A).
    \4\ See Listing Rule 5815(a)(4). Under that rule, the company 
will be provided at least ten calendar days' notice of the hearing 
unless the company waives such notice.
    \5\ Id.
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    Specifically, the Exchange is proposing to revise, as discussed 
below, Listing Rule 5815(a)(5), which currently provides that a company 
may submit to the Hearings Department a written plan of compliance and 
request that the Hearings Panel grant an exception to the listing 
standards for a limited time period, or may set forth specific grounds 
for the company's contention that the issuance of a staff delisting 
determination, public reprimand letter, or denial of a listing 
application, was in error, and may also submit public documents or 
other written material in support of its position, including any 
information not available at the time of the staff determination. The 
Exchange is also proposing to revise Listing Rule 5815(a)(6), which 
currently provides that at an oral hearing, the company may make such 
presentation as it deems appropriate, and the Hearings Panel may 
question any representative appearing at the hearing. To improve the 
efficient and effective functioning of the hearings process in 
connection with the company's appeal of a delisting determination, 
public reprimand letter, or denial of a listing application, the 
Exchange proposes amending Listing Rule 5815(a)(5) and (a)(6) to: (1) 
Establish a requirement, and set forth the process, for a company to 
provide a written submission and written update in connection with 
either a written or oral hearing; (2) prohibit a company from 
introducing in a written update or during an oral hearing before a 
Hearings Panel any legal arguments that were not previously raised; and 
(3) prohibit a company from introducing during an oral hearing before a 
Hearings Panel any material information unless the material information 
was previously raised by the company in writing or was solicited by the 
Hearings Panel, or the company can show that the material information 
did not earlier exist or exceptional or unusual circumstances are 
present.
    The proposed revisions to Listing Rule 5815 would contain an 
express requirement that for both oral and written hearings a company 
must state in writing with specificity the grounds upon which it is 
seeking review in advance of a hearing (the ``Written Submission'').\6\ 
This requirement will ensure that a company makes a Written Submission. 
In addition, the requirement that a company state ``with specificity'' 
the grounds on which is it seeking review will ensure that the Written 
Submission includes sufficient detail to be useful in the Hearings 
Panel's review of the record before the hearing.
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    \6\ As noted above, the Hearings Department generally calendars 
a hearing within 45 days of the request for a hearing and will 
establish deadlines for written submissions to the Hearings Panel. 
See Listing Rule 5815(a)(4). As determined by the Hearings 
Department, both oral and written hearing matters are generally 
considered on Thursdays, and the company's written submission is 
typically due on the third Friday before the hearing. The Hearings 
Department will generally establish the Thursday before the Hearing 
as the deadline for Nasdaq staff to respond in writing.
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    The proposed revisions to Listing Rule 5815 will clarify the 
ability of Nasdaq staff to respond in writing to a company's Written 
Submission. The proposed revisions to Listing Rule 5815 would also 
provide a company with the option to supplement the company's Written 
Submission by providing a written update to the Hearings Department no 
later than two business days in advance of the hearing, briefing the 
Hearings Panel on any new material information that has transpired 
since its Written Submission (the ``Written Update'').\7\ The Exchange 
believes that allowing for a Written Update will improve the hearings 
process by allowing a company to provide updated information about 
fast-moving transactions, thereby enabling the Hearings Panel to 
prepare for the hearing with the most current data available on the 
company's steps toward achieving or maintaining compliance.
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    \7\ Because one of the purposes of the Written Update is to 
allow a company to supplement its Written Submission, a company 
would be permitted to submit a Written Update even if Nasdaq staff 
does not respond in writing to the company's Written Submission.
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    To ensure that companies provide the requisite information in a 
Written Submission or a Written Update, the Exchange proposes including 
certain evidentiary standards in proposed Listing Rule 5815. Under the 
proposed revisions to Listing Rule 5815, legal arguments are only 
permitted in the Written Submission, and the company must include in 
the Written Submission all legal arguments on which it intends to rely. 
A company that does not raise with specificity a legal argument in its 
Written Submission will be prohibited from introducing a new legal 
argument in the Written Update or during the hearing before the 
Hearings Panel.\8\ The Hearings Panel will determine that a company has 
raised a legal argument with specificity if the legal argument includes 
sufficient detail to be useful in the Hearings Panel's review of the 
record before the hearing.
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    \8\ There is precedent for the requirement that an appellant 
include all legal arguments in an opening brief, such as the Written 
Submission, in the SEC Rules of Practice and by the Federal Rules of 
Appellate Procedure. See, e.g., SEC Rules of Practice 420, 17 CFR 
201.420(c) (governing appeals to the Commission of determinations by 
Self-Regulatory Organizations, which requires that an application 
for review ``set forth in summary form a brief statement of alleged 
errors in the determination and supporting reasons therefor'' and 
that any exception to a determination ``not supported in an opening 
brief'' may ``be deemed to have been waived''). See also SEC Rules 
of Practice Rule 222, 17 CFR 201.222(a) (governing prehearing 
submissions, which allows a hearing officer, on his or her own 
motion, or at the request of a party or other participant, to order 
any party to furnish information including ``an outline or narrative 
summary of its case or defense'' and ``the legal theories upon which 
it will rely''). See, e.g., Barna v. Bd. of Sch. Dirs. of the 
Panther Valley Sch. Dist., 877 F.3d 136, 145-46 (3d Cir. 2017) 
(noting that Fed. R. App. P. 28 requires an appellant's opening 
brief to set forth and address each argument the appellant wishes to 
pursue in an appeal and that the court will not ``reach arguments 
raised for the first time in a reply brief or at oral argument'').
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    Otherwise, when a company raises a legal argument during a hearing 
or right before the hearing that was not

[[Page 43902]]

contained in its Written Submission, it deprives Nasdaq staff of the 
opportunity to provide a thorough response to the legal argument and it 
deprives the Hearings Panel the benefit of Nasdaq staff's views and 
perspective. As a result, the Hearings Panel would not be able to 
properly adjudicate the legal issue. While new legal arguments are not 
permitted in the Written Update, the Exchange does not believe that any 
prejudice will result to a company from this requirement because the 
Exchange believes a company would have developed its legal arguments 
early in the hearings process as part of formulating its Written 
Submission. The Written Update is solely intended to give a company the 
additional opportunity to provide an update on any new material 
information that has transpired since its Written Submission and to 
reply to Nasdaq staff's response.\9\
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    \9\ Nasdaq has observed that companies are primarily seeking to 
introduce material information such as a new equity offering or 
merger, as opposed to legal arguments, at the hearing; thus, the 
Written Update will provide companies with an opportunity to update 
the Hearings Panel with material information closer in time to the 
hearing, but far enough in advance that the Hearings Panel has 
adequate time to consider such information.
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    In addition, under the proposed revisions to Listing Rule 5815, a 
company that fails to raise with specificity any material information 
relating to its appeal of a delisting determination, public reprimand 
letter, or denial of a listing application in either its Written 
Submission or Written Update (``New Material Information''), with 
certain exceptions, will be prohibited from introducing such 
information during the oral hearing before the Hearings Panel. 
Information would not be considered New Material Information if, in the 
Hearings Panel's opinion, the company had previously included 
information with sufficient detail to be useful in the Hearings Panel's 
review of the record before the hearing. This revision is intended to 
improve the Hearings Panel's timely access to material information, and 
the proposed Listing Rule 5815 includes certain safeguards to ensure 
such access.
    New Material Information would be permitted in three situations. 
First, the prohibition on introducing New Material Information during 
the hearing only applies absent solicitation from the Hearings Panel. 
This is to ensure that the Hearings Panel is not restricted or limited 
in its ability to ask questions of a company and has the latitude 
needed to receive answers to its inquiries during the oral hearing.
    Second, if the Hearings Panel determines that the company has shown 
that the New Material Information did not exist at the time the company 
was permitted to submit a Written Update, i.e., the information is 
truly new, then the company will be permitted to introduce such 
evidence at the hearing. For example, where a key component of a 
company's compliance plan is a merger, and the company obtains a fully 
executed version of the merger agreement the day before the hearing, 
the executed merger agreement would constitute information that did not 
exist at the time the company was permitted to submit a Written Update. 
However, the fact that the company was pursuing a merger, the potential 
merger parties, and the material terms of the contemplated merger, 
should have been previously disclosed by the company, as some or all of 
such information likely existed at the time the company was permitted 
to submit a Written Update.
    Third, if the Hearings Panel determines that the company has shown 
that ``exceptional or unusual circumstances'' exist that warrant 
consideration of the New Material Information, then the company will be 
permitted to introduce such evidence at the oral hearing. As stated in 
the proposed revisions to Listing Rule 5815, ``exceptional or unusual 
circumstances'' would include, but are not necessarily limited to, 
material information that was not earlier discoverable by the listed 
company despite all reasonable measures having been taken.\10\ This is 
intended to provide a prudent safety valve for companies that have 
otherwise exercised due diligence in providing timely information to 
the Hearings Panel, yet it is circumscribed to the degree necessary to 
avoid becoming an exception that swallows the general standard.
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    \10\ Cf. SEC Rules of Practice 452, 17 CFR 201.452 (a party may 
file a motion for leave to adduce additional evidence prior to the 
issuance of a decision by the Commission upon a ``show[ing] with 
particularity that such additional evidence is material and that 
there were reasonable grounds for failure to adduce such evidence 
previously'').
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    Where a Hearings Panel permits a company to introduce New Material 
Information, the proposed revisions to Listing Rule 5815 also provides 
Nasdaq staff an opportunity to respond in writing to the New Material 
Information within up to three business days, or such shorter time as 
the Hearings Panel requests, following the oral hearing. Because the 
company had the opportunity to present its view on the New Material 
Information at the oral hearing, the company may respond to the staff's 
submission only if the Hearings Panel requests it do so. This approach 
balances the company's need to introduce new information during a 
hearing; the Nasdaq staff's ability to provide a fulsome review of such 
information to benefit the Hearings Panel's ultimate consideration of 
an issue; and the interest in timely resolving a matter after a 
hearing.
    The proposed changes to Listing Rule 5815 will be operative for any 
company that requests a hearing to review a staff delisting 
determination, public reprimand letter, or written denial of a listing 
application after the date of an SEC approval of the proposed rule 
change.\11\
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    \11\ Companies that have requested a written or oral hearing 
before a Hearings Panel to review the staff delisting determination, 
public reprimand letter, or written denial of a listing application 
prior to the date of SEC approval of the proposed rule change will 
be subject to the rule text in Listing Rule 5815(a)(5)-(6) that was 
effective prior to the date of such SEC approval. For such 
companies, the online rulebook will contain a hyperlink to the older 
version of the rule.
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    The Exchange believes that the above-mentioned revisions to Listing 
Rule 5815 will enhance the hearings process by providing the Hearings 
Panel with the most developed record in as timely a manner as possible. 
The Exchange further believes that the proposed revisions will avoid 
situations that Nasdaq staff has observed where, in advance of a 
hearing, companies provide little information about their plan to 
achieve or regain compliance or regarding their appeal of a public 
reprimand letter or denial of an initial listing application, and 
instead present such information for the first time during the hearing. 
When companies belatedly provide information to the Hearings Panel, 
Nasdaq staff has observed that it does not provide the Hearings Panel 
with adequate time to prepare for and consider the information in 
advance of the hearing. Similarly, where companies belatedly provide 
legal arguments to the Hearings Panel, Nasdaq staff is unable to 
adequately brief the Hearings Panel concerning its response to the 
legal argument and, as a result, the Hearings Panel does not have 
adequate time to prepare for and consider the legal argument in advance 
of the hearing and thus cannot properly adjudicate the issue.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\12\ in general, and furthers the objectives of 
Sections 6(b)(5) and 6(b)(7) of the Act,\13\ in particular, in that it 
is designed to promote just and equitable principles of trade, to 
remove

[[Page 43903]]

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, by preventing companies from engaging in gamesmanship 
in the hearings process while affording companies a fair process and 
reasonable opportunity to present material arguments and evidence to 
the Hearings Panel at an appropriate time in the hearings process.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5) and (7).
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    Specifically, this proposal will prevent companies from providing 
substantive information for the first time during a hearing, after 
having provided the Hearings Panel either no written compliance plan 
before the hearing or little detail regarding their compliance plan or 
appeal of a public reprimand letter or denial of an initial listing 
application before the hearing. In such circumstances, a Hearings Panel 
has little or no opportunity to review material information regarding a 
company's compliance plan or a company's appellate position, or to 
formulate questions to ask the company, in advance of the hearing. As a 
result, the Hearings Panel may need more time or information to fully 
consider the matter following the hearing. In the Exchange's view, 
these current practices effectively reward a company that withholds 
information by extending the time it remains listed pending a Hearings 
Panel decision.\14\
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    \14\ Generally, a timely request for a hearing stays the 
suspension and delisting action pending the issuance of a written 
Panel Decision. Listing Rule 5815(a)(1)(B).
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    Likewise, when companies withhold legal arguments from their 
Written Submissions regarding a compliance plan or their appellate 
position, Nasdaq staff may be unable to fully develop legal arguments 
or advise the Hearings Panel effectively regarding a company's request 
for relief. As a result, the Hearings Panel would not be able to 
properly adjudicate the legal issue during the hearing. While legal 
arguments are not permitted in the Written Update, the Exchange does 
not believe that any prejudice will result to a company because the 
Exchange believes a company would have developed its legal arguments 
early in the hearings process as part of formulating its Written 
Submission.
    The Exchange believes that this proposal is in keeping with the 
principles described in Sections 6(b)(5) and 6(b)(7) because it will 
ensure that the hearings process operates effectively and efficiently, 
allowing companies the opportunity to present information and legal 
arguments about their appellate position or ability to achieve and 
maintain compliance, while also affording the Hearings Panel an 
opportunity to review that information or legal argument and benefit 
from Nasdaq staff's views about the information presented. As such, the 
Exchange believes that this proposal will strengthen the integrity and 
transparency of the hearings process. Furthermore, the Exchange 
believes that the proposed changes to the hearings process 
appropriately balance the potential harm of a delisting decision or a 
denial of initial listing to the company and its current investors with 
the expectations of prospective investors, who are entitled to believe 
that a company listed on Nasdaq satisfies all of Nasdaq's listing 
requirements.\15\ Likewise, the Exchange believes that the proposed 
changes to the hearings process appropriately balance the potential 
harm to companies issued a public reprimand letter with an improved 
opportunity to adequately develop the record in advance of the oral 
hearing.
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    \15\ See In re Tassaway, Securities Exchange Act Release No. 
11291, 45 S.E.C. 706, 709, 1975 SEC LEXIS 2057, at *6 (Mar. 13, 
1975) (``[P]rimary emphasis must be placed on the interests of 
prospective future investors . . . [who are] entitled to assume that 
the securities in [Nasdaq] meet [Nasdaq's] standards. Hence the 
presence in [Nasdaq] of non-complying securities could have a 
serious deceptive effect.'').
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    The Exchange believes that the proposed process is fair because 
companies retain the ability to introduce all relevant information 
before a Hearings Panel, and the proposed changes require that they do 
so in a more efficient way that helps to minimize the length of time a 
Hearings Panel needs to make a decision. The Exchange further believes 
that the proposed process limiting legal arguments to the Written 
Submission is fair because the Exchange believes a company would have 
developed its legal arguments early in the hearings process as part of 
formulating its Written Submission. In addition, building in time for 
Nasdaq staff to provide a thorough response to the legal argument in 
advance of the hearing allows the Hearings Panel to properly adjudicate 
a legal issue with the benefit of having fully considered the company's 
and Nasdaq staff's views in advance of the hearing.

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. All companies seeking review of 
a delisting determination, public reprimand letter, or denial of an 
initial listing application before a Hearings Panel would be affected 
in the same manner by this change. Moreover, as described above, Nasdaq 
believes that the proposed rule change is necessary to enhance investor 
protection from companies that withhold material information or legal 
arguments from the Hearings Panel until the day of the hearing. This 
conduct may result in the Hearings Panel's need for additional time to 
review the information and, thus, potentially unqualified companies 
remaining listed longer pending a Hearings Panel decision.

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 Exchange consents, the Commission will: (a) By order approve 
or disapprove such 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

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2020-002 on the subject line.

Paper Comments

     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-2020-002. This 
file number should be included on the

[[Page 43904]]

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-2020-002 and should be submitted on or before August 10, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.

[FR Doc. 2020-15552 Filed 7-17-20; 8:45 am]
BILLING CODE 8011-01-P