Document ID: SEC-2020-1477-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market, LLC
Posted Date: 2020-09-15T04:00Z

[Federal Register Volume 85, Number 179 (Tuesday, September 15, 2020)]
[Notices]
[Pages 57260-57263]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-20254]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89794; File No. SR-NASDAQ-2020-026]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Amendment No. 1 and Order Instituting Proceedings 
To Determine Whether To Approve or Disapprove a Proposed Rule Change, 
as Modified by Amendment No. 1, To Adopt a New Requirement Related to 
the Qualification of Management for Companies From Restrictive Markets

September 9, 2020.

I. Introduction

    On May 29, 2020, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``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 new requirement related to the 
qualification of management for companies whose business is principally 
administered in a jurisdiction that has secrecy laws, blocking 
statutes, national security laws, or other laws or regulations 
restricting access to information by regulators of U.S.-listed 
companies. The proposed rule change was published for comment in the 
Federal Register on June 12, 2020.\3\ On July 20, 2020, pursuant to 
Section 19(b)(2) of the Act,\4\ the Commission designated a longer 
period within which to approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether to 
disapprove the proposed rule change.\5\ On August 21, 2020, the 
Exchange filed Amendment No. 1 to the proposed rule change, which 
replaced and superseded the proposed rule change as originally 
filed.\6\ The Commission is publishing this notice and order to solicit 
comments on the proposed rule change, as modified by Amendment No. 1, 
from interested persons and to institute proceedings pursuant to 
Section 19(b)(2)(B) of the Act \7\ to determine whether to approve or 
disapprove the proposed rule change, as modified by Amendment No. 1.
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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. 89028 (June 8, 
2020), 85 FR 35967 (``Notice''). Comments on the proposed rule 
change can be found at: https://www.sec.gov/comments/sr-nasdaq-2020-026/srnasdaq2020026.htm.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 89342, 85 FR 44951 
(July 24, 2020). The Commission designated September 10, 2020 as the 
date by which the Commission shall approve or disapprove, or 
institute proceedings to determine whether to approve or disapprove, 
the proposed rule change.
    \6\ Amendment No. 1 is available at https://www.sec.gov/comments/sr-nasdaq-2020-026/srnasdaq2020026.htm.
    \7\ 15 U.S.C. 78s(b)(2)(B).
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II. Exchange's Description of the Proposed Rule Change, as Modified by 
Amendment No. 1

    The Exchange states that it has observed instances where it appears 
that a company's management lacked familiarity with the requirements to 
be a Nasdaq-listed public company in the U.S. or was otherwise 
unprepared for the rigors of operating as a public company.\8\ The 
Exchange further states

[[Page 57261]]

that the risks arising from these situations are heightened when a 
company's business is principally administered in a jurisdiction that 
restricts access to information by regulators of U.S.-listed companies. 
As a result, the Exchange is now proposing new requirements that it 
believes will heighten compliance by such companies and enhance 
investor protection.\9\
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    \8\ The Exchange states that, under federal securities laws, a 
company's management is responsible for preparing financial 
statements and for establishing and maintaining disclosure controls 
and procedures and internal control over financial reporting. See 
Amendment 1, supra note 6, at 4-5 (citing Sections 404(b), 302, and 
906 of the Sarbanes-Oxley Act of 2002, Pub. L. 107-204, 116 Stat. 
745 (2002)). In addition, the Exchange states that its listing 
requirements include quantitative criteria based on the company's 
financial statements and market information, impose disclosure 
obligations, and establish minimum corporate governance 
requirements, and that a listed company's management is responsible 
for ensuring compliance with these listing requirements on an 
ongoing basis. See id. (citing Nasdaq Listing Rule 5625 
(Notification of Noncompliance)).
    \9\ See id. at 6.
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    First, the Exchange is proposing to adopt a new initial listing 
standard in Nasdaq Listing Rule 5210(c) to require any Company \10\ 
that principally administers its business in a jurisdiction that Nasdaq 
determines to have secrecy laws, blocking statutes, national security 
laws, or other laws or regulations restricting access to information by 
regulators of U.S.-listed companies in such jurisdiction (a 
``Restrictive Market'') to have, and certify that it will continue to 
have until the third anniversary of its listing date, at least one 
member of senior management or a director who has relevant past 
employment experience at a U.S.-listed public company or other 
experience, training, or background that results in the individual's 
general familiarity with the regulatory and reporting requirements 
applicable to a U.S.-listed public company under Nasdaq rules and 
federal securities laws.\11\ In the absence of such an individual, the 
proposal would require a Company that principally administers its 
business in a Restrictive Market (``Restrictive Market Company'') to 
retain on an ongoing basis an advisor or advisors, acceptable to 
Nasdaq, that will provide such guidance to the Company.\12\ In 
determining whether a Company's business is principally administered in 
a Restrictive Market, the proposed rule provides that Nasdaq may 
consider the geographic locations of the Company's: (a) Principal 
business segments, operations, or assets; (b) board and shareholders' 
meetings; (c) headquarters or principal executive offices; (d) senior 
management and employees; and (e) books and records.\13\ The Exchange 
states that this definition would capture both foreign private issuers 
based in Restrictive Markets and companies based in the U.S. or another 
jurisdiction that principally administer their businesses in 
Restrictive Markets.\14\
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    \10\ Nasdaq Listing Rule 5005(a)(6) defines ``Company'' as the 
issuer of a security listed or applying to list on Nasdaq.
    \11\ The Exchange also proposes to renumber the remaining 
provisions of Nasdaq Listing Rule 5210.
    \12\ See proposed Rule 5210(c).
    \13\ See id.
    \14\ See Amendment No. 1, supra note 6 at 7, n.8. The Exchange 
further provides the following example: A company's headquarters 
could be located in Country A, while the majority of its senior 
management, employees, assets, operations, and books and records are 
located in Country B, which is a Restrictive Market. In this case, 
Nasdaq would consider the company's business to be principally 
administered in Country B, which is a Restrictive Market, and Nasdaq 
would require the company to meet the criteria set forth in proposed 
Rule 5210(c). See id. at 7.
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    In addition, the Exchange is proposing to adopt new Nasdaq Listing 
Rule 5250(g) to require any Company that was subject to proposed Rule 
5210(c) upon initial listing and that continues to be a Restrictive 
Market Company to have, until the third anniversary of its listing 
date,\15\ at least one member of senior management or a director who 
has relevant past employment experience at a U.S.-listed public company 
or other experience, training, or background that results in the 
individual's general familiarity with the regulatory and reporting 
requirements applicable to a U.S.-listed public company under Nasdaq 
rules and federal securities laws or, in the absence of such an 
individual, to retain on an ongoing basis an advisor or advisors, 
acceptable to Nasdaq, that will provide such guidance to the Company. 
The Exchange is also proposing changes to Nasdaq Listing Rule 5810 
(Notification of Deficiency by the Listing Qualifications Department) 
to allow a Restrictive Market Company subject to, but not in compliance 
with, proposed Rule 5250(g) to submit a plan to regain compliance 
pursuant to Nasdaq Listing Rule 5810(c)(2)(iii).\16\
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    \15\ The Exchange states that it believes three years will 
provide a sufficient transition period for Restrictive Market 
Companies because by the third anniversary of a company's listing 
date, the company will have filed at least two annual reports and 
gone through the accompanying reporting processes and procedures, 
and the company's staff will have been subject to federal securities 
laws and Nasdaq's regulatory and reporting requirements for a 
sufficient period of time to gain experience with the requirements 
and how to comply. See id. at 8.
    \16\ The Exchange states that a Restrictive Market Company would 
be required to disclose that it does not meet the requirement set 
forth in proposed Rule 5250(g) pursuant to Nasdaq Listing Rule 
5810(b) and that, based on its review of the company's compliance 
plan, Nasdaq Staff generally would be able to allow the company up 
to 180 days to regain compliance under Nasdaq Listing Rule 
5810(c)(2)(B). See id.
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    The proposed rule changes would apply to Restrictive Market 
Companies that apply to list on Nasdaq after the date of effectiveness 
of the proposed rules and would not apply to companies already listed 
on Nasdaq.\17\ Nasdaq states that it believes this is appropriate 
because currently-listed companies are already subject to Nasdaq's 
requirements and U.S. securities laws and have gained familiarity with 
the reporting processes and procedures and disclosure requirements by 
virtue of being subject to them.\18\
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    \17\ See id. at 9.
    \18\ See id. at 10. Nasdaq further states that, to the extent 
there are future concerns about a currently-listed company that 
arise from an apparent unfamiliarity with the requirements to be a 
U.S.-listed public company, Nasdaq would exercise its regulatory 
authority and could consider that lack of familiarity when 
determining whether to allow the company to remain listed. See id.
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III. Summary of the Comment Letters Received

    One commenter stated that it fully supports the proposed rule 
change inasmuch as it seems reasonably tailored to help ensure full, 
complete, and transparent financial and other disclosure from 
Restrictive Market Companies.\19\ Another commenter expressed its 
support for the proposed requirements relating to management 
qualifications for Restrictive Market Companies, but recommended that 
the proposal be revised to apply to all Restrictive Market Companies 
listed on Nasdaq, rather than just those companies that apply to list 
on Nasdaq after the date of the proposed rule change's 
effectiveness.\20\ This commenter stated that Nasdaq provided no basis 
for this distinction between companies and suggested that such 
distinction may raise issues about whether the proposal unfairly 
discriminates among companies.\21\ In response, Nasdaq amended the 
proposal to apply the proposed requirements to Restrictive Market 
Companies only until the third anniversary of their listing date.\22\ 
Nasdaq stated that it believes it is appropriate to impose the proposed 
requirement only for three years from the date that a Restrictive 
Market Company lists and that after being subject to Nasdaq's 
requirements for that period of time, it would potentially be unfair to 
treat the company differently than other listed companies in the 
absence of a specific identified concern.\23\
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    \19\ See Letter from Annemarie Tierney, Founder and Principal, 
Liquid Advisors, Inc. (July 2, 2020), at 5.
    \20\ See Letter from Jeffrey P. Mahoney, General Counsel, 
Council of Institutional Investors (June 25, 2020), at 6-7.
    \21\ See id. at 7.
    \22\ See Amendment No. 1, supra note 6.
    \23\ See id. at 10, n.13.
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IV. Proceedings To Determine Whether To Approve or Disapprove SR-
NASDAQ-2020-026, as Modified by Amendment No. 1, and Grounds for 
Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section

[[Page 57262]]

19(b)(2)(B) of the Act \24\ to determine whether the proposed rule 
change, as modified by Amendment No. 1, should be approved or 
disapproved. Institution of such proceedings is appropriate at this 
time in view of the legal and policy issues raised by the proposed rule 
change. Institution of proceedings does not indicate that the 
Commission has reached any conclusions with respect to any of the 
issues involved. Rather, as described below, the Commission seeks and 
encourages interested persons to provide additional comment on the 
proposed rule change to inform the Commission's analysis of whether to 
approve or disapprove the proposed rule change.
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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,\25\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 6(b)(5) 
of the Act, which requires, among other things, that the rules of a 
national securities exchange be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and to protect 
investors and the public interest, and not be designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers.\26\
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    \25\ Id.
    \26\ 15 U.S.C. 78f(b)(5).
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    The Exchange's proposed requirements: (1) Only apply to Restrictive 
Market Companies that apply to list on Nasdaq after the date of 
effectiveness of the proposed rules; (2) only apply until the third 
anniversary of a Restrictive Market Company's listing date; and (3) do 
not apply to Restrictive Market Companies already listed on Nasdaq, 
even if such companies have been listed on Nasdaq for less than three 
years. 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.
    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 
[SRO] that proposed the rule change.'' \27\ 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,\28\ 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 Act and the applicable rules and regulations.\29\
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    \27\ 17 CFR 201.700(b)(3).
    \28\ See id.
    \29\ See id.
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    The Commission is instituting proceedings to allow for additional 
consideration and comment on the issues raised herein, including as to 
whether the proposal, as modified by Amendment No. 1, is consistent 
with the Act.

V. Procedure: Request for Written 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 
views of interested persons concerning whether the proposal, as 
modified by Amendment No. 1, is consistent with Section 6(b)(5) \30\ of 
the Act 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 under the Act,\31\ any request for an 
opportunity to make an oral presentation.\32\
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    \30\ 15 U.S.C. 78f(b)(5).
    \31\ 17 CFR 240.19b-4.
    \32\ Section 19(b)(2) of the 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 proposed rule change, as modified by 
Amendment No. 1, should be approved or disapproved by October 6, 2020. 
Any person who wishes to file a rebuttal to any other person's 
submission must file that rebuttal by October 20, 2020. The Commission 
asks that commenters address the sufficiency of the Exchange's 
statements in support of the proposal, which are set forth in Amendment 
No. 1,\33\ in addition to any other comments they may wish to submit 
about the proposed rule change.
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    \33\ See supra note 6.
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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-2020-026 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-2020-026. 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 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-2020-026 and should be submitted 
by October 6, 2020.

[[Page 57263]]

Rebuttal comments should be submitted by October 20, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\34\
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    \34\ 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-20254 Filed 9-14-20; 8:45 am]
BILLING CODE 8011-01-P