Document ID: SEC-2020-0333-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market, LLC
Posted Date: 2020-03-10T04:00Z

[Federal Register Volume 85, Number 47 (Tuesday, March 10, 2020)]
[Notices]
[Pages 13954-13957]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-04790]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88315; File No. SR-NASDAQ-2019-091]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change To Adopt a New Rule Concerning Nasdaq's Ability To 
Request Information From a Listed Company Regarding the Number of 
Unrestricted Publicly Held Shares in Certain Circumstances and Halt 
Trading in the Company's Security Upon the Request, and in Certain 
Circumstances Request a Plan To Increase the Number of Unrestricted 
Publicly Held Shares to an Amount That Is Higher Than the Applicable 
Publicly Held Shares Requirement

March 4, 2020.

I. Introduction

    On November 22, 2019, The Nasdaq Stock Market LLC (``Nasdaq'' or 
the ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to adopt a rule specifying Nasdaq's ability to 
request information from a listed company regarding the number of 
unrestricted publicly held shares when Nasdaq observes unusual trading 
characteristics in a security or a company announces an event that may 
cause a contracting in the number of unrestricted publicly held shares, 
halt trading in such company's securities upon such a request, and 
potentially request a listed company to increase its number of 
unrestricted publicly held shares. The proposed rule change was 
published for comment in the Federal Register on December 12, 2019.\3\ 
On January 24, 2020, pursuant to Section 19(b(2) of the Act,\4\ the 
Commission designated a longer period within which to either approve 
the proposed rule change, disapprove the proposed rule change, or 
institute proceedings to determine whether to disapprove the proposed 
rule change.\5\ The Commission

[[Page 13955]]

received no comment letters on the proposed rule change. This order 
institutes proceedings under Section 19(b)(2)(B) of the Act \6\ to 
determine whether to approve or disapprove the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 87677 (December 6, 
2019), 84 FR 67974 (December 12, 2019) (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 88028 (January 24, 
2020), 85 FR 5500 (January 30, 2020). The Commission designated 
March 11, 2020, as the date by which it should approve, disapprove, 
or institute proceedings to determine whether to disapprove the 
proposed rule change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposal

    Nasdaq's current continued listing standards require a listed 
company to maintain a minimum number of Publicly Held Shares,\7\ 
without excluding Restricted Securities \8\ from such calculation.\9\ 
In contrast, for initial listing, Nasdaq's current rules, as amended in 
2019,\10\ require that a company seeking to be listed on Nasdaq have, 
among other things, a minimum number of Unrestricted Publicly Held 
Shares.\11\
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    \7\ ``Publicly Held Shares'' is defined as ``shares not held 
directly or indirectly by an officer, director or any person who is 
the beneficial owner of more than 10 percent of the total shares 
outstanding.'' See Rule 5005(a)(35).
    \8\ ``Restricted Securities'' is defined as ``securities that 
are subject to resale restrictions for any reason, including but not 
limited to, securities: (1) Acquired directly or indirectly from the 
issuer or an affiliate of the issuer in unregistered offerings such 
as private placements or Regulation D offerings; (2) acquired 
through an employee stock benefit plan or as compensation for 
professional services; (3) acquired in reliance on Regulation S, 
which cannot be resold within the United States; (4) subject to a 
lockup agreement or a similar contractual restriction; or (5) 
considered `restricted securities' under Rule 144.'' See Rule 
5005(a)(37).
    \9\ See proposed Rule 5120. See also Notice, supra note 3, 84 FR 
at 67974. For the continued listing requirements relating to 
Publicly Held Shares, see Rules 5450(b)(1)(B), (2)(B), and (3)(B), 
5460(a)(1), 5550(a)(4), 5555(a)(3), and 5565(a).
    \10\ See Securities Exchange Act Release No. 86314 (July 5, 
2019), 84 FR 33102 (July 11, 2019) (SR-NASDAQ-2019-009) (approving 
Nasdaq's proposal to, among other things, require that Restricted 
Securities be excluded from Nasdaq's calculation of Publicly Held 
Shares for purposes of meeting initial listing requirements).
    \11\ ``Unrestricted Publicly Held Shares'' is defined as 
``Publicly Held Shares that are Unrestricted Securities.'' See Rule 
5005(a)(45). ``Unrestricted Securities'' is defined as ``securities 
that are not Restricted Securities.'' See Rule 5005(a)(46). For the 
initial listing requirements relating to Unrestricted Publicly Held 
Shares, see Rules 5315(e)(2), 5405(a)(2), 5415(a)(1), 5505(a)(2), 
5510(a)(3), and 5520(g)(3).
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    Nasdaq has proposed to adopt new Rule 5120, which would provide 
that, while Nasdaq would not ordinarily consider the number of 
Unrestricted Publicly Held Shares of a listed company's security, 
Nasdaq may request information from a company regarding the number of 
Unrestricted Publicly Held Shares if (1) Nasdaq observes unusual 
trading characteristics in the security; or (2) the company has 
announced an event that may cause a contraction in the number of 
Unrestricted Publicly Held Shares.\12\ Proposed Rule 5120 also sets 
forth that pursuant to Nasdaq's authority under Rule 4120(a)(5),\13\ 
Nasdaq may halt trading in the security in connection with such a 
request.\14\ When considering whether a security has unusual trading 
characteristics, the proposed rule provides that Nasdaq may review 
volume, price movements, spread, and the presence or absence of any 
news.\15\ Furthermore, the proposed rule specifies the events that may 
cause a contraction in the number of Unrestricted Publicly Held Shares, 
thereby possibly triggering a request for additional information, to 
include reverse stock splits, tender offers, stock buybacks, or 
entering into contractual agreements such as standstills or 
lockups.\16\
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    \12\ See proposed Rule 5120.
    \13\ Rule 4120(a)(5) provides that Nasdaq ``may halt trading in 
a security listed on Nasdaq when Nasdaq requests from the issuer 
information relating to: (A) Material news; (B) the issuer's ability 
to meet Nasdaq listing qualification requirements, as set forth in 
the Listing Rule 5000 Series; or (C) any other information which is 
necessary to protect investors and the public interest.''
    \14\ See proposed Rule 5120.
    \15\ See proposed Rule 5120.
    \16\ See proposed Rule 5120.
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    Further, proposed Rule 5120 provides that if information provided 
by the company or otherwise obtained by Nasdaq indicates that the 
number of Unrestricted Publicly Held Shares for the security is below 
the applicable Publicly Held Shares requirement for continued listing 
of the security, Nasdaq generally would use its authority under Rule 
5101 \17\ to apply more stringent criteria and request a plan to 
increase the number of Unrestricted Publicly Held Shares to an amount 
that is higher than the applicable Publicly Held Shares 
requirement.\18\ Such a plan would generally be required to be provided 
within 45 calendar days of the request, as provided in the Rule 5800 
Series.\19\
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    \17\ Rule 5101 states, in part, that Nasdaq ``has broad 
discretionary authority over the initial and continued listing of 
securities in Nasdaq . . . . [and] may use such discretion to . . . 
apply additional or more stringent criteria for the initial or 
continued listing of particular securities, or suspend or delist 
particular securities based on any event, condition, or circumstance 
that exists or occurs that makes initial or continued listing of the 
securities on Nasdaq inadvisable or unwarranted in the opinion of 
Nasdaq, even though the securities meet all enumerated criteria for 
initial or continued listing on Nasdaq.''
    \18\ See proposed Rule 5120.
    \19\ See proposed Rule 5120. Nasdaq has proposed to make 
conforming changes to Rule 5810(c)(2)(A) to add a deficiency under 
proposed Rule 5120 to the list of deficiencies for which a company 
may submit to the Exchange's Listing Qualifications Department a 
plan to regain compliance. Nasdaq has also proposed to make other 
conforming and non-substantive changes to Rule 5810(c)(2). See 
proposed Rule 5810(c)(2). In addition, Nasdaq has proposed non-
substantive changes to Rule 5810(c)(3)(A) (which deals with a 
company's failure to meet the continued listing requirement for 
minimum bid price) to revise the phrase ``market value of publicly 
held shares'' to utilize the terms ``Market Value'' and ``Publicly 
Held Shares,'' which are defined in Rule 5005(a). See proposed Rule 
5810(c)(3)(A)(i) and (ii).
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    In support of its proposal, Nasdaq stated that it believes that its 
previously revised initial listing standards do not sufficiently 
address listed companies that may have Restricted Securities, which 
could potentially result in a security that is illiquid.\20\ Nasdaq 
noted that illiquid securities may trade infrequently and in a more 
volatile manner, change hands at a price that may not reflect their 
true market value, and may be more susceptible to price 
manipulation.\21\ According to Nasdaq, the proposal would enhance 
transparency \22\ and ensure that securities listed on Nasdaq are 
liquid and have sufficient freely tradeable shares to meet investor 
demand, thereby reducing trading volatility and price manipulation.\23\
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    \20\ See Notice, supra note 3, 84 FR at 67974. For example, 
Nasdaq stated that companies that were not required to meet the 
newer initial listing requirements may still have Restricted 
Securities that are not freely tradeable, and a listed company may 
conduct a transaction that decreases its number of Unrestricted 
Publicly Held Shares. See id.
    \21\ See Notice, supra note 3, 84 FR at 67974. Nasdaq stated 
that it has observed problems with a small number of listed 
companies that have a large number of Restricted Securities, and 
that such companies may not have sufficient liquidity to meet 
investor demand, particularly upon announcement of material news, 
which may result in unusual trading characteristics, such as extreme 
price movements and unusually large bid-ask spreads. See id.
    \22\ According to Nasdaq, its existing rules would currently 
allow it to apply additional criteria to a listed company that 
satisfies all of the continued listing requirements where there are 
indications that there is insufficient liquidity in the security to 
support fair and orderly trading. See Notice, supra note 3, 84 FR at 
67974, n.7 (citing Rule 5101).
    \23\ See Notice, supra note 3, 84 FR at 67975.
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III. Proceedings To Determine Whether To Approve or Disapprove SR-
NASDAQ-2019-091 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act to determine whether the proposal should be 
approved or disapproved.\24\ Institution of such proceedings is 
appropriate at this time in view of the legal and policy issues raised 
by the proposed rule change, as discussed below. Institution of 
disapproval proceedings does not indicate that the Commission has 
reached any conclusions with respect to any of the issues involved.
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    \24\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act, the Commission is 
providing notice

[[Page 13956]]

of the grounds for disapproval under consideration. The Commission is 
instituting proceedings to allow for additional analysis and input 
concerning the proposed rule change's consistency with the Act \25\ 
and, in particular, with Section 6(b)(5) of the Act, which requires, 
among other things, that the rules of a national securities exchange 
not be designed to permit unfair discrimination between customers, 
issuers, brokers, or dealers.\26\
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    \25\ 15 U.S.C. 78f(b)(5).
    \26\ Id.
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    Nasdaq is proposing to adopt a new rule to specifically permit it 
to request additional information from a listed company regarding its 
number of Unrestricted Publicly Held Shares if Nasdaq observes unusual 
trading characteristics in a listed company's security or if the listed 
company has announced an event that may cause a contraction in the 
number of Unrestricted Publicly Held Shares. Nasdaq acknowledges that 
its continued listing standards currently require a minimum number of 
Publicly Held Shares, but not a minimum number of Unrestricted Publicly 
Held Shares. Nasdaq specifies, in the proposed rule, that in 
considering whether there are unusual trading characteristics in a 
security for purposes of requesting additional information on the 
number of Unrestricted Publicly Held Shares, Nasdaq may review volume, 
price movements, spread, and the presence or absence of any news. 
However, Nasdaq does not state how these broad factors would be 
considered in its determination of whether there are unusual trading 
characteristics to trigger a request for additional information, other 
than to note that the ``unusual trading characteristics'' it has 
observed in the past include ``extreme price movements'' and 
``unusually large bid ask spreads.'' \27\ In any case, whether unusual 
trading characteristics, however determined, would cause Nasdaq to 
request additional information from a listed company on the number of 
Unrestricted Publicly Held Shares appears to be subject to wide 
discretion under the proposed rule.
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    \27\ See Notice, supra note 3, 84 FR at 67974.
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    Similarly, under the proposed rule, Nasdaq may also request 
information on the number of Unrestricted Publicly Held Shares if the 
listed company has announced an event that may cause a contraction in 
the number of such unrestricted shares, such as a reverse stock split, 
tender offer, or stock buyback. The Exchange has not provided any 
specific explanation of when such events would or would not trigger a 
request for the number of Unrestricted Publicly Held Shares, but rather 
just provided that such events ``may'' trigger such a request, with the 
result that this provision also appears to be subject to wide 
discretion by Nasdaq.
    Upon Nasdaq requesting additional information on the number of 
Unrestricted Publicly Held Shares, the proposed rule then states that 
if the information indicates the number of such unrestricted shares are 
below the applicable minimum number of Publicly Held Shares continued 
listing standard, Nasdaq generally will use its authority under Rule 
5101 to apply more stringent criteria and request a plan to increase 
the number of Unrestricted Publicly Held Shares to an amount that is 
higher than the applicable minimum number of Publicly Held Shares 
continued listing standard. Nasdaq does not provide any information in 
its filing regarding when it generally will or will not use its 
authority to request such a plan. Moreover, should Nasdaq ask the 
listed company to provide a plan to increase the minimum number of 
Unrestricted Publicly Held Shares, Nasdaq provides no guidance on how 
it would determine such minimum number, with the result that this 
provision appears to be subject to wide discretion by Nasdaq as well.
    Nasdaq stated that its proposal is not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers because, 
while the proposed changes will only apply to securities exhibiting 
unusual trading characteristics and companies that announce an event 
that may cause a contraction in the number of Unrestricted Publicly 
Held Shares, Nasdaq will apply this standard to all such securities 
listed on Nasdaq.\28\ As discussed above, however, the Exchange's 
proposal provides it wide discretion both (1) to determine whether to 
request additional information from a listed company on the number of 
Unrestricted Publicly Held Shares; and (2) if it does so, and that 
number is less than the minimum number of Publicly Held Shares, to 
establish the more stringent requirements with respect to the minimum 
number of Unrestricted Publicly Held Shares. Accordingly, the 
Commission believes there are questions as to whether the proposal is 
consistent with Section 6(b)(5) of the Act and its requirement, among 
other things, that the rules of a national securities exchange not be 
designed to permit unfair discrimination.
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    \28\ See Notice, supra note 3, 84 FR at 67975-76.
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    The Commission notes that under the Commission's Rules of Practice, 
the ``burden to demonstrate that a proposed rule change is consistent 
with the Exchange Act and the rules and regulations issued thereunder . 
. . is on the self-regulatory organization [`SRO'] that proposed the 
rule change.'' \29\ The description of a proposed rule change, its 
purpose and operation, its effect, and a legal analysis of its 
consistency with applicable requirements must all be sufficiently 
detailed and specific to support an affirmative Commission finding,\30\ 
and any failure of an SRO to provide this information may result in the 
Commission not having a sufficient basis to make an affirmative finding 
that a proposed rule change is consistent with the Exchange Act and the 
applicable rules and regulations.\31\
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    \29\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \30\ See id.
    \31\ See id.
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    For these reasons, the Commission believes it is appropriate to 
institute proceedings pursuant to Section 19(b)(2)(B) of the Act to 
determine whether the proposal should be approved or disapproved.

IV. Commission's Solicitation of Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
view of interested persons concerning whether the proposal is 
consistent with Section 6(b)(5) or any other provision of the Act, or 
the rules and regulations thereunder. Although there do not appear to 
be any issues relevant to approval or disapproval that would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\32\
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    \32\ Section 19(b)(2) of the Exchange Act, as amended by the 
Securities Act Amendments of 1975, Public Law 94-29 (June 4, 1975), 
grants the Commission flexibility to determine what type of 
proceeding--either oral or notice and opportunity for written 
comments--is appropriate for consideration of a particular proposal 
by a self-regulatory organization. See Securities Act Amendments of 
1975, Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No. 
75, 94th Cong., 1st Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by March 31, 2020. Any person who wishes to file a rebuttal 
to any other person's submission must file

[[Page 13957]]

that rebuttal by April 14, 2020. The Commission asks that commenters 
address the sufficiency of the Exchange's statements in support of the 
proposal which are set forth in the Notice,\33\ in addition to any 
other comments they may wish to submit about the proposed rule change.
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    \33\ See Notice, supra note 3.
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    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-2019-091 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-2019-091. This 
file number should be included on the 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 such 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-2019-091 and should be submitted 
on or before March 31, 2020. Rebuttal comments should be submitted by 
April 14, 2020.
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    \34\ 17 CFR 200.30-3(a)(57).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\34\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-04790 Filed 3-9-20; 8:45 am]
 BILLING CODE 8011-01-P