Document ID: SEC-2011-1982-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2011-12-21T05:00Z

[Federal Register Volume 76, Number 245 (Wednesday, December 21, 2011)]
[Notices]
[Pages 79262-79267]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-32577]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65963; File No. SR-NASDAQ-2011-122]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Granting Approval of Proposed Rule Change To Describe Complimentary 
Services That Are Offered to Certain New Listings on NASDAQ's Global 
and Global Select Markets

December 15, 2011.

I. Introduction

    On August 30, 2011, 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 describe services offered by NASDAQ to certain 
newly listing companies on NASDAQ's Global and Global Select Markets. 
The proposed rule change was published in the Federal Register on 
September 16, 2011.\3\ The Commission originally received five comment 
letters from three commenters on the proposal.\4\ NASDAQ submitted a 
letter in response to these comments.\5\ The Commission received three 
additional comment letters on November 30, 2011, December 8, 2011, and 
December 13, 2011.\6\ On October 28, 2011, the Commission extended the 
time period in 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, to December 
15, 2011.\7\ This order grants approval of 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. 65324 (September 12, 
2011), 76 FR 57781 (``Notice'').
    \4\ See Letters to Elizabeth M. Murphy, Secretary, Commission, 
from Neil Hershberg, Senior Vice President, Business Wire Inc., 
received September 28, 2011 (``Business Wire Letter 1''); John 
Viglotti, Vice President, PR Newswire Association LLC, received 
October 7, 2011 (``PR Newswire Letter''); Jesse W. Markham, Jr., 
Roger Myers, and Michael R. MacPhail, Holme Roberts & Owen LLP 
(``Holme Roberts'') (writing on behalf of Business Wire, Inc.), 
dated October 7, 2011 (``Business Wire Letter 2''); Patrick Healy, 
CEO, Issuer Advisory Group LLC, dated October 22, 2011 (``Issuer 
Advisory Letter''); and Holme Roberts Letter, dated November 15, 
2011 (``Business Wire Letter 3'').
    \5\ See Letter to Elizabeth M. Murphy, Secretary, Commission, 
from Joan Conley, Senior Vice President and Corporate Secretary, 
NASDAQ OMX, dated November 15, 2011 (``NASDAQ Response Letter'').
    \6\ See Letter to Elizabeth M. Murphy, Secretary, Commission, 
from Janet McGinness, New York Stock Exchange LLC, dated November 
30, 2011 (``NYSE Letter''); Holme Roberts Letter, dated December 8, 
2011 (``Business Wire Letter 4''); and Email from Dominic Jones, IR 
Web Reporting International Inc., dated December 13, 2011 (``IR 
Letter'').
    \7\ See Securities Exchange Act Release No. 65653 (October 28, 
2011), 76 FR 68237 (November 3, 2011).
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II. Description of the Proposal

    In its filing, NASDAQ is proposing to amend its rules to include 
new Section IM-5900-7 to describe products that are offered to certain 
newly listing companies. As discussed in more detail below, NASDAQ 
proposes to offer complimentary products and services to companies 
listing on NASDAQ's Global and Global Select Markets in connection with 
an initial public offering, upon emerging from bankruptcy, or in 
connection with a spin-off or carve-out from another company 
(``Eligible New Listings'').\8\ Additionally, NASDAQ proposes to offer 
such services to companies that switch their listing from the New York 
Stock Exchange (``NYSE'') to NASDAQ's Global or Global Select Markets 
(``Eligible Switches''). In its filing, NASDAQ also noted that all 
NASDAQ-listed companies, including companies listed on the Capital 
Market, receive access to NASDAQ's Market Intelligence Desk and NASDAQ 
Online.
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    \8\ NASDAQ represented that, under the proposal, a company 
transferring from the OTCBB or Pink Sheets or from the Capital 
Market would not be eligible to receive these services. See Notice 
supra note 3.
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    The Exchange is a subsidiary of The NASDAQ OMX Group, Inc. 
(``NASDAQ OMX''). NASDAQ proposes to offer these products and services 
through NASDAQ OMX Corporate Solutions, Inc. (``Corporate Solutions''), 
also a subsidiary of NASDAQ OMX and an affiliate of the Exchange.\9\ 
According to NASDAQ, Corporate Solutions offers products and programs 
to private and public companies, including companies listed on the 
Exchange, designed to enhance transparency, mitigate risk, maximize 
efficiency and facilitate better corporate governance. Pursuant to the 
proposal, Eligible New Listings and Eligible Switches with a market 
capitalization of up to $500 million would receive the following 
services for two years from the date of listing, having a total retail 
value of approximately $93,500 per year,\10\ and would receive a waiver 
of one-time development fees of approximately $4,000 to establish the 
services:
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    \9\ In its filing, NASDAQ stated its belief that Corporate 
Solutions is not a ``facility'' of the Exchange as defined in 15 
U.S.C. 78c(a)(2), and noted that its proposed rule change is being 
filed with the Commission under Section 19(b)(2) of the Act because 
it relates to services offered in connection with a listing on the 
Exchange. See Notice supra note 3. The Commission notes that the 
definition of a ``facility'' of an exchange is broad under the Act, 
and ``includes its premises, tangible or intangible property whether 
on the premises or not, any right to the use of such premises or 
property or any service thereof for the purpose of effecting or 
reporting a transaction on an exchange . . . and any right of the 
exchange to the use of any property or service.'' The Commission 
further notes that any determination as to whether a service or 
other product is a facility of an exchange requires an analysis of 
the particular facts and circumstances.
    \10\ Retail values are based on Corporate Solutions' current 
price list. If a company does not fully use the services offered in 
a year, unused services do not carry forward into future years and 
cannot be used to offset the costs of other services or listing 
fees.
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     Governance Services
    [cir] Board Tools: Use of Directors Desk for up to 10 users, with 
an approximate retail value of $20,000 per year.

[[Page 79263]]

    [cir] Whistleblower Hotline: Use of a financial reporting hotline 
that provides employees and others with fully-automated means of 
reporting incidents and concerns, with an approximate retail value of 
$3,500 per year.
     Communications Services
    [cir] Investor Relations Web site: Use of a Web site with all the 
necessary content and features to communicate with investors, including 
a corporate governance library containing documents such as the Board 
committees' charters and the company's code of ethics, with a retail 
value of approximately $16,000 per year.
    [cir] Press Releases: Companies will be provided $15,000 worth of 
distribution services for earnings or other press releases, including 
photographs, and filing of EDGAR and XBRL reports. The actual number of 
press releases will vary based on their length and the regional 
distribution network chosen by the company.
     Intelligence Services
    [cir] Market Analytic Tools: Use of a market analytic tool, which 
integrates corporate shareholder communications, capital market 
information, investor contact management, and board-level reporting 
into a unified workflow environment for up to four users, including 
information about research and earnings estimates on the company and 
help identifying potential purchasers of the company's stock using 
quantitative targeting and qualitative insights, with an approximate 
retail value of $39,000 per year.
    Under the proposal, Eligible New Listings and Eligible Switches 
with a market capitalization of $500 million or more would receive the 
services described above, including the waiver of one-time development 
fees, and the additional services described below, worth a total retail 
value of approximately $169,000 per year.\11\ Eligible New Listings 
with a market capitalization of $500 million or more would receive all 
services for two years from the date of listing, and Eligible Switches 
with a market capitalization of $500 million or more would receive all 
services for four years from the date of listing:
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    \11\ Id.
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     Governance Services
    [cir] Board Tools: An additional five licenses for Directors Desk, 
with a retail value of approximately $10,000 per year.
     Communications Services
    [cir] Press Releases: An additional $5,000 worth of distribution 
services.
     Intelligence Services
    [cir] Market Surveillance Tools: A stock surveillance package, that 
includes monitoring the daily movement and settlement activity of the 
company's stock, providing alerts on increases in trading volume and 
block trading activity, and offering color to any unusual change in 
stock price, with an approximate retail value of $60,000 per year. To 
fully utilize this service, NASDAQ states that companies will have to 
subscribe to, and separately pay for, certain third party information, 
which is not included.\12\
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    \12\ For example, companies would have to purchase position 
reports from the Depositary Trust Corporation.
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    The Exchange represents that it is proposing to offer four years of 
services to Eligible Switches with a market capitalization of $500 
million or more, as opposed to two years of services as is the case for 
other Eligible Switches and Eligible New Listings, because the Exchange 
believes that the issuers receive comparable services from the NYSE, 
which the issuer would forego by switching their listing to NASDAQ, and 
that those issuers will likely bring greater future value to NASDAQ 
than will other issuers by switching to its market.\13\
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    \13\ See e-mail from Arnold Golub, NASDAQ, to Sharon Lawson, 
Division of Trading and Markets, Commission, dated December 8, 2011 
(``NASDAQ E-Mail'').
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III. Summary of Comments and NASDAQ Response to Comments

    Four commenters raised objections to the proposal,\14\ while one 
commenter supported the proposal.\15\
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    \14\ See supra notes 4 and 6.
    \15\ See IR Letter.
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    The commenter supporting the proposal believed that ``NASDAQ's 
presence in the market has been good for competition. * * *'' \16\ This 
commenter noted that ``NYSE's favored service providers dominate the IR 
services industry'' and that of the ``companies in the Nasdaq-100 
index, only 10 used NASDAQ's PR wire service. * * * The remaining 
companies overwhelmingly used Business Wire or PR Newswire. . . .'' 
\17\
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    \16\ Id.
    \17\ Id.
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    Two commenters generally expressed concern that NASDAQ's proposal 
would harm competing suppliers of information dissemination and 
investor relations (``IR'') services, adversely affect competition, and 
result in economic coercion of and unfair discrimination among 
issuers.\18\ These two commenters dispute NASDAQ's comparison of its 
proposal to the recently approved rule change by the NYSE regarding 
complimentary services provided to issuers.\19\ These commenters argue 
that the proposals are fundamentally different in that NYSE offers IR 
services though a variety of independent service providers, while 
NASDAQ's proposal only offers one affiliated service provider.\20\ 
These commenters argue that NASDAQ's proposal effectively penalizes any 
company eligible for the free services that chooses to use a NASDAQ 
competitor.
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    \18\ See Business Wire Letter 1, Business Wire Letter 2, and PR 
Newswire Letter.
    \19\ See Business Wire Letter 1 and PR Newswire Letter.
    \20\ See Business Wire Letter 4 (noting that this is the first 
time the Commission will be ruling on the permissibility of an 
exchange subsidizing IR services provided by its own providers).
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    These two commenters urge the Commission to reject the proposal 
because it would create an inequitable allocation of listing fees. One 
commenter states that the proposal would create a significant disparity 
between what otherwise indistinguishable companies pay and receive for 
their listing fees.\21\ This commenter alleges that the proposal would 
result in an inequitable allocation with respect to fees paid by 
issuers that are currently listed and that are not being offered the 
free services under the proposal, versus newly listed companies that 
are being offered the free services.\22\ The commenter disputes 
NASDAQ's justification of providing complimentary services to newly 
listing companies to help them adjust to the new responsibilities of 
being a publicly trading company, and conversely believes that NASDAQ 
is attempting to lock in newly listed companies into using Corporate 
Solutions once the free services expire.\23\ Additionally, the 
commenter argues that offering complimentary services to issuers that 
switch their listings from the NYSE to NASDAQ discriminates among 
issuers and inequitably allocates listing fees among more mature 
companies.\24\ The commenter also argues that a company that lists on 
NASDAQ and uses the complimentary IR services provided by Corporate 
Solutions effectively pays a lower listing fee than a similarly 
situated company that opts for IR services provided by another 
vendor.\25\ Accordingly, the commenter believes that by bundling the 
listing fee with the IR services, NASDAQ is distorting the new listing 
fees paid by a company that opts to use a competing IR vendor,

[[Page 79264]]

resulting in an inequitable allocation of fees among issuers.\26\
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    \21\ See Business Wire Letter 1.
    \22\ See Business Wire Letter 2.
    \23\ Id.
    \24\ Id.
    \25\ Id.
    \26\ Id.
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    These two commenters also urge the Commission to reject the 
proposal because it will impose an unnecessary burden on competition in 
the IR services market.\27\ These commenters argue that the proposal to 
bundle the complimentary services with listings is a form of unlawful 
tying.\28\ One of these commenters argues that the proposal creates an 
uneven playing field in the market, distorts competition, and results 
in NASDAQ coercing issuers to use the services simply because they are 
free, even if they may not be the company's choice or meet its buying 
criteria.\29\ One commenter notes that rival service providers could 
not possibly compete because they cannot offer IR services for free 
without the possibility of subsidizing the fees with listing fees.\30\
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    \27\ See Business Wire Letter 2 and PR Newswire Letter.
    \28\ See Business Wire Letter 1 and PR Newswire Letter.
    \29\ See PR Newswire Letter.
    \30\ See Business Wire Letter 1.
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    One of these commenters argues that the proposal will burden 
competition in apparent violation of the antitrust laws.\31\ 
Specifically, the commenter alleges that NASDAQ's bundling of IR 
services with its listing service is an illegal ``tying'' in violation 
of Section 1 of the Sherman Act. According to the commenter, a tying 
arrangement violates Section 1 of the Sherman Act ``if the seller has 
appreciable economic power in the tying product market and if the 
arrangement affects a substantial volume of commerce in the tied 
market.'' \32\ The commenter believes that NASDAQ's free or discounted 
services meets the legal standard of a tying arrangement because 
NASDAQ, by offering complimentary Corporate Solution services to 
listing customers through its subsidiary, is tying the two services 
together, so that Eligible New Listings or Eligible Switches will treat 
NASDAQ's listing service and its free services as a single unit and 
direct their business to Corporate Solutions since they are already 
incurring that cost.\33\
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    \31\ See Business Wire Letter 2 and Business Wire Letter 4. 
According to Business Wire, NASDAQ is seeking approval of its 
ongoing practice of tying free services to listed companies. See 
Business Wire Letter 3 and Business Wire Letter 4.
    \32\ See Business Wire Letter 2.
    \33\ Id.
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    The commenter also believes that NASDAQ has sufficient market power 
to coerce at least a substantial number of newly listing companies to 
use the tied product because ``NASDAQ, in its regulatory role, will, on 
the one hand, be informing new public companies of their public 
disclosure obligations while, on the other, be offering to provide them 
those very disclosure services for free.'' \34\ The commenter further 
argues that competition for IR services will not remain robust if 
NASDAQ is allowed to use its market power with respect to NASDAQ 
listings to eliminate meaningful competition.\35\ Further, the 
commenter believes that the amount of commerce affected in the IR 
services market is far above the ``not insubstantial'' requirement of 
the Sherman Act, noting that the threshold requirement is so modest it 
is always conceded.\36\
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    \34\ Id.
    \35\ See Business Wire Letter 4.
    \36\ See Business Wire Letter 2.
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    Separately, the commenter alleges that, by offering the Corporate 
Solutions services for two to four years, NASDAQ has demonstrated an 
attempt to monopolize in violation of Section 2 of the Sherman Act.\37\ 
According to the commenter, offering the services for free--clearly 
below marginal cost--is predatory/anti-competitive conduct.\38\ 
Additionally, the commenter believes that NASDAQ's intent to monopolize 
can be inferred by the fact that NASDAQ OMX, as owner of both a 
national securities exchange and a subsidiary that provides information 
dissemination services (``IDS'') and IR services, has an advantage and 
that by offering free IR services to listed companies through its 
subsidiary, NASDAQ OMX is acting to drive out competing IDS and IR 
vendors for new listings and ultimately for all NASDAQ-listed 
companies.\39\ Finally, the commenter claims that once competitors are 
shut out of the IDS and IR market, Corporate Solutions would have an 
unfettered ability to raise prices and/or compromise service levels to 
the detriment of listed companies and the investing public--achieving 
monopoly power.\40\
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    \37\ Id.
    \38\ Id.
    \39\ Id.
    \40\ Id.
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    The commenter also is concerned that the proposal could reduce 
pricing transparency, stating that historically, listed companies have 
paid separate, transparent fees for listing services and ancillary IR 
services, but that NASDAQ's proposal, by combining both services, 
``blurs the line between the core mandatory and auxiliary services'' 
and makes it unclear, for example, the extent to which listing fee 
increases are cross-subsidizing IR services.\41\
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    \41\ Id.
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    Two commenters state that NASDAQ's offering of IR services creates 
a conflict of interest with respect to its role as a self-regulatory 
organization (``SRO'').\42\ One commenter believes that NASDAQ's 
authority in determining the adequacy of public disclosures by listed 
companies makes it inappropriate for NASDAQ's sister company to be the 
``preferred provider'' for such disclosure services.\43\ In addition, 
this commenter believes that because NASDAQ is in a position to 
determine how much disclosure is required, it could manipulate the 
quantity of disclosures, such as reducing the amount of disclosures 
required to save costs during the period when such services are being 
offered for free and increasing the amount of disclosure required once 
such services are being paid for.\44\ In addition, this commenter 
argues that because NASDAQ has taken on this ancillary business of 
providing IR services, it may have an incentive to fund this services 
business to the detriment of its regulatory obligations.\45\ The 
commenter argues that these conflicts are particularly high given that 
NASDAQ's IR services providers do not have an independent sales force 
and that NASDAQ's sales representatives market these IR services in 
addition to selling listings.\46\ Accordingly, the commenter believes 
that not only should NASDAQ's proposal be rejected, but that the 
Commission should review NASDAQ's role in providing IR services and 
consider requiring NASDAQ OMX to divest its Corporate Solutions 
business or require Corporate Solutions to sell its IR service 
providers to an independent third party, or, alternatively, order 
NASDAQ to operate its Corporate Solutions business on a strict arms-
length basis.\47\
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    \42\ See Business Wire Letter 2 and PR Newswire Letter 
(expressing concern that this could effectively coerce an issuer 
into using the SRO's services).
    \43\ See Business Wire Letter 2.
    \44\ Id.
    \45\ Id.
    \46\ Id.
    \47\ Id.
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    Another commenter recommends that the Commission disapprove the 
proposed rule change and request that the listing exchanges consider 
the idea of offering free listings or, alternatively, that the 
Commission appoint an independent task force comprised of issuers to 
recommend a model that would permit the exchanges to provide unlimited 
value-added services.\48\ This commenter believes that NASDAQ's 
proposal inhibits competition for listings, would result in the 
equivalent of a maximum service cap and would be

[[Page 79265]]

used by exchange as a justification for limiting their service 
offerings.\49\
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    \48\ See Issuer Advisory Letter.
    \49\ Id.
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    One commenter objects to the provision by NASDAQ of free IR 
services to Eligible Switches with a market capitalization of $500 
million for four years, while New Listings with the same market 
capitalization would only receive such services for two years under the 
proposal.\50\ This commenter argues that treating Eligible Switches 
differently from Eligible New Listings and existing NASDAQ listed 
issuers unfairly discriminates between issuers in violation of Section 
6 of the Act.\51\ This commenter states that issuers transferring their 
listing from NYSE to NASDAQ are not a separate class of issuer, and 
giving Eligible Switches preferential treatment results in unfair 
discrimination.\52\ The commenter further argues that the proposed fee 
structure is not an equitable allocation of reasonable fees among 
issuers, and therefore violates Section 6(b)(4) of the Act, because for 
four years an Eligible Switch would be paying substantially lower fees 
than any company of the same capitalization already listed on NASDAQ 
or, for the final two years, any Eligible New Listing.\53\ The 
commenter does not believe that it is equitable to treat issuers 
differently simply because one transferred from another exchange.\54\ 
This commenter requests that if the proposed rule is approved by the 
Commission, that the Commission clarify that the rule encompasses the 
complete set of products and services that NASDAQ is allowed to provide 
Eligible New Listings and Eligible Switches, and that after the two or 
four year periods covered by the rule have expired, companies may only 
be provided with services that are applicable to all other listed 
companies as set forth in NASDAQ's rules.\55\ In addition, to the 
extent that NASDAQ is currently in discussions with companies to list 
on NASDAQ, the commenter requests that the Commission direct NASDAQ to 
treat such issuers in accordance with the proposed rule, and prohibit 
NASDAQ from offering additional or different products or services, even 
if an issuer lists prior to the proposed rule being approved.\56\ 
Finally, the commenter requests the Commission to clarify that 
companies listed on NASDAQ within the two or four years (as applicable) 
prior to the rule's passage will be subject to the new rule, and to 
require NASDAQ to amend any agreements relating to services that such 
issuers may currently have in order to conform services to the proposed 
rule.\57\
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    \50\ See NYSE Letter.
    \51\ Id. See also Business Wire Letter 4.
    \52\ See NYSE Letter.
    \53\ Id.
    \54\ Id.
    \55\ Id.
    \56\ Id.
    \57\ Id.
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    In the NASDAQ Response Letter, the Exchange responded to many of 
the issues raised by the commenters.\58\ In response to commenter 
concerns that the proposal limits issuer choice regarding service 
providers and is unlawfully tying IR services to a company's listing, 
NASDAQ reiterates that no issuer is required to use the offered 
services, and to the extent that a company chooses to use the services, 
such services are provided only for a limited time.\59\ Further, the 
Exchange argues that the NASDAQ proposal is similar to the Commission-
approved NYSE proposal,\60\ because the NYSE proposed rule change does 
not allow issuers unlimited choice as to which service providers they 
can choose, as NYSE issuers must use those providers selected by the 
exchange, with no transparency as to the selection process or the 
financial arrangement between the NYSE and the service provider.\61\ 
NASDAQ also states that by relying on services provided by an 
affiliated entity, rather than third parties, NASDAQ gains greater 
control to assure it can provide the products most valued by companies 
in a high quality manner.\62\
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    \58\ See supra note 5 and accompanying text noting that NASDAQ's 
Response Letter responds to only those comments cited in note 4, 
supra.
    \59\ See NASDAQ Response Letter.
    \60\ See Securities Exchange Act Release No. 65127 (August 12, 
2011), 76 FR 51449 (August 18, 2011) (SR-NYSE-2011-22) (``NYSE 
Order'').
    \61\ See NASDAQ Response Letter.
    \62\ Id.
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    In response to claims that the proposal creates an inequitable 
allocation of listing fees, the Exchange states that its proposal is 
consistent with Section 6(b)(4) of the Act, because offering different 
services based on a company's market capitalization is appropriate 
given that larger companies generally will need more and different 
governance, communication and intelligence services. NASDAQ 
additionally believes that the distinction based on market 
capitalization is clear and transparent. NASDAQ also states that 
offering the complimentary services to newly listing companies and not 
to companies already listed on NASDAQ is appropriate given that the 
services offered will help ease the transition of becoming a public 
company and will help these companies fulfill their new 
responsibilities as public companies.\63\ NASDAQ counters the concern 
that the proposal results in unfair discrimination in violation of 
Section 6(b)(5) of the Act, stating that it offers its program only to 
companies switching from the NYSE, and not from other exchanges or 
unlisted markets or to companies already listed on NASDAQ, because the 
companies listed on the NYSE receive comparable services from the NYSE 
(and not from other exchanges), which they would forego by switching 
their listing to NASDAQ,\64\ and because NASDAQ believes attracting 
NYSE listed companies will bring greater future value to NASDAQ.
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    \63\ Id.
    \64\ Id.
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    NASDAQ also disputes allegations that it illegally ties its 
Corporate Solutions services to a company's listing on NASDAQ, 
asserting that companies wishing to list on NASDAQ are not forced to 
use services provided by NASDAQ, since neither the receipt of such 
services nor a NASDAQ listing are conditioned on the other.\65\ NASDAQ 
attached a prior response letter from its outside counsel on an earlier 
filing that addresses the antitrust claims and notes that antitrust 
laws ``were enacted for the protection of competition not 
competitors.'' \66\
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    \65\ Id.
    \66\ Id.
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    Finally, NASDAQ represents that it achieves separation between its 
business and regulatory conflicts by appropriately distinguishing the 
regulatory functions from the influence of business considerations.\67\ 
According to the Exchange, it houses its regulatory functions, 
including the Listing and Market Watch Departments, in a regulatory 
group that is organizationally and institutionally separate from its 
business lines.\68\ NASDAQ also notes that this structure, its 
effectiveness in managing conflicts, and the effectiveness of the 
regulatory program in practice, are subject to periodic Commission 
examination, and any NASDAQ rule change to increase or decrease the 
amount of information that a company must publicly disclose would 
require Commission approval.\69\
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    \67\ Id.
    \68\ Id.
    \69\ Id.
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IV. Discussion and Commission's Findings

    The Commission has carefully reviewed the proposed rule change and 
finds that it is consistent with the

[[Page 79266]]

requirements of Section 6 of the Act.\70\ Specifically, as discussed in 
more detail below, the Commission finds that the proposal is consistent 
with Sections 6(b)(4),\71\ 6(b)(5),\72\ and 6(b)(8) \73\ in that the 
proposal is designed, among other things, to provide for the equitable 
allocation of reasonable dues, fees, and other charges among Exchange 
members and issuers and other persons using its facilities and to 
promote just and equitable principles of trade, and is not designed to 
permit unfair discrimination between issuers, and that the rules of the 
Exchange do not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.
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    \70\ 15 U.S.C. 78f. In approving this proposed rule change, the 
Commission has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \71\ 15 U.S.C. 78f(b)(4).
    \72\ 15 U.S.C. 78f(b)(5).
    \73\ 15 U.S.C. 78f(b)(8).
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    The Commission notes that while all issuers will receive some 
services from NASDAQ, such as NASDAQ Online and the Market Intelligence 
Desk, some issuers will receive additional products and services based 
on their status as either an Eligible New Listing or Eligible Switch 
and their market capitalization.\74\ NASDAQ has represented that 
offering additional services only to companies listing on the Global 
and Global Select Markets and offering different services based on a 
company's market capitalization reflects the higher demand for these 
services by larger companies.\75\ Moreover, according to NASDAQ, 
offering such services to newly listed companies should ease the 
transition of becoming a public company. As to only offering services 
to transfers from the NYSE to NASDAQ rather than all transfers, NASDAQ 
notes that this should make up for services that issuers would 
otherwise forego by switching their listing from NYSE to NASDAQ, and 
that issuers listed on NYSE are better known and therefore have more 
value to NASDAQ when they switch to its market.\76\
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    \74\ See Notice supra note 3
    \75\ See Notice supra note 3 and NASDAQ Response Letter supra 
note 5.
    \76\ See NASDAQ Response Letter supra note 5 and NASDAQ Email. 
Specifically, NASDAQ states that ``when companies switch to NASDAQ, 
it helps in our efforts to attract other new listings *&*&* and to 
retain companies' listings. This benefit is more pronounced when the 
company switches from the NYSE because NYSE-listed companies tend to 
be larger and better known than companies listed on NYSE Amex, NYSE 
Arca or regional exchanges. Having these companies as clients is 
also valuable to NASDAQ OMX Corporate Solutions (NOCS), which 
benefits from having well-known companies use its products.'' NASDAQ 
Email; see also NYSE Order supra note 60.
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    As noted above, NASDAQ's proposal will provide complimentary 
products and services to Eligible New Listings and Eligible Switches 
based on market capitalization. The Commission has previously approved 
an NYSE proposal providing different tiers of complimentary services to 
certain NYSE issuers based on shares of common stock issued and 
outstanding or total global market value based on a public offering 
price and has found this consistent with Sections 6(b)(4) and Sections 
6(b)(5) of the Act.\77\ For similar reasons, we also find that it is 
reasonable for NASDAQ to provide different services to tiers based on 
market capitalization since larger capitalized companies generally will 
need and use more services. Further, the Commission believes that by 
describing in NASDAQ's rules the products and services available to 
Eligible New Listings and Eligible Switches and the values of the 
products and services, the Exchange is adding greater transparency to 
its rules and the fees applicable to issuers.
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    \77\ See NYSE Order supra note 60.
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    The Commission recognizes, however, that there are two main 
differences between the NYSE and NASDAQ proposals. First, the NYSE 
believes that NASDAQ's treatment of Eligible Switches is not comparable 
to NYSE Rule 907 since NYSE does not provide different services to an 
issuer because it is transferring from another exchange; rather, such 
issuers would be entitled to the same services as issuers currently 
listed on the NYSE. As noted above, NASDAQ states that it makes this 
distinction to compensate issuers for services they would forego from 
switching their listing to NASDAQ from the NYSE, as well as to provide 
its listing market broader benefits from attracting the larger, better 
known companies that are listed on NYSE.\78\ Specifically, NASDAQ 
asserts that larger Eligible Switches receive four years of 
complimentary services because ``having larger companies switch to 
NASDAQ is more valuable in attracting other potential listings and 
NOCS' customers than having smaller companies, which are generally not 
as well known, switch. Finally, these larger companies generally will 
pay higher listings fees and purchase more NOCS services * * * thereby 
making their listing more valuable to NASDAQ and NOCS.'' \79\
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    \78\ See supra note 76.
    \79\ See NASDAQ Email.
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    The Commission notes that Section 6(b)(5) of the Act does not 
require that all issuers be treated the same; rather, the Act requires 
that the rules of an exchange not unfairly discriminate between 
issuers. The Commission believes that NASDAQ has provided a sufficient 
basis for its different treatment of Eligible Switches and that this 
portion of NASDAQ's proposal meets the requirements of the Act in that 
it reflects competition between exchanges, with NASDAQ offering 
discounts for transfers of listings from a competing exchange. In 
making this determination, we note that the provision of services under 
the proposal is for a limited duration and that NASDAQ has provided a 
reasonable basis for deciding to treat NYSE transfers different from 
other types of transfers. Among other things, NASDAQ has stated that 
offering services to issuers that must forego similar services provided 
by the NYSE if they switch their listing to NASDAQ, and that add 
greater future value to NASDAQ through their listing than do other 
issuers justify such differential treatment.
    Second, the NASDAQ proposal also differs from the NYSE proposal in 
that NASDAQ will provide services through an affiliated service 
provider. The Commission notes, however, that under NYSE's approved 
proposal, issuers are offered services only from certain third party 
vendors selected by the NYSE. We note that NASDAQ's use of its 
affiliate to provide services to date does not appear to have adversely 
affected the nature of competition among suppliers in the market for 
these services.\80\
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    \80\ One commenter noted that NASDAQ has been engaged, on an 
ongoing basis, in the practice of offering free services to issuers 
in connection with a listing on NASDAQ. See Business Wire Letter 3 
and infra note 87 and accompanying text. The Commission notes that 
any such offer of free or discounted services in connection with an 
initial or continued exchange listing requires the filing by the 
exchange of an appropriate proposed rule change with the Commission, 
and approval or effectiveness thereof, before such offer of services 
can be made, and that a failure to do so would constitute a 
violation of Section 19(b) of the Act and Rule 19b-4 thereunder.
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    The NASDAQ Response Letter responded to issues relating to 
competition in markets served by Corporate Services. Specifically, 
NASDAQ reiterated that issuers are not required to use the offered 
services as a condition of listing. Furthermore, to the extent an 
issuer chooses to use the services, such services are provided only for 
a very limited time--between two to four years. Further, it has been 
NASDAQ's experience that some companies choose not to use its services, 
even though they are offered free.\81\
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    \81\ See NASDAQ Response Letter supra note 5.

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[[Page 79267]]

    The Commission recognizes, however, that the proposed rule change 
may affect the purchase decisions of some listed issuers. The effect of 
offering Corporate Solutions' services on a complimentary basis is to 
provide issuers with the services of Corporate Solutions at a price 
that is lower in relative terms than what other vendors charge. As the 
Commission has previously discussed, a reduction in a vendor's relative 
price will generally cause some issuers to substitute their business 
toward that vendor.\82\ Accordingly, the Commission believes that 
NASDAQ's offering of Corporate Solutions' products and services on a 
complimentary basis will, by lowering its relative price, likely cause 
some listed issuers to substitute their business away from other 
vendors and toward Corporate Solutions. The Commission believes, 
however, that the impact of this substitution would be limited for the 
reasons discussed below.
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    \82\ See NYSE Order supra note 60.
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    As asserted in the Notice, the number of companies eligible for the 
free services will be small in comparison to the total number of 
companies that comprise the target market for such services, so that we 
anticipate there is not likely to be competitively meaningful 
foreclosure of similar services offered by third parties.\83\ NASDAQ 
represents that only 34 companies in 2009, 77 companies in 2010, and 62 
companies through June 30, 2011 would have qualified for free services 
as Eligible New Listings by virtue of listing in connection with an IPO 
or a spin-off or a carve out from another company had the proposed rule 
been in effect.\84\ Additionally, NASDAQ states that only 10 companies 
in 2009, three companies in 2010 and no companies through June 30, 2011 
would have qualified for free services as Eligible Switches had the 
proposal been in place. According to NASDAQ, this represents no more 
than approximately 3 percent of listed companies.\85\
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    \83\ See Notice supra note 3.
    \84\ Id. The Commission notes that Business Wire believes these 
figures are low because IPOs were depressed by the worldwide 
financial crises.
    \85\ We note that these numbers may be different had the 
proposal been in place at that time.
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    Further, NASDAQ notes that there are multiple third party services 
vendors and that those vendors appear to operate in highly competitive 
markets. In addition, one commenter believed that approving NASDAQ's 
proposal was necessary to preserve competition.\86\ Further, another 
commenter--a competing services firm--stated that despite ``NASDAQ's 
current practice of offering `free' or significantly discounted 
services[,]'' its business continues to grow and to compete for 
business from NASDAQ issuers based on the quality of its services.\87\
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    \86\ See IR Letter.
    \87\ See PR Newswire Letter; see also supra note 80.
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    The Commission also believes that NASDAQ is responding to 
competitive pressures in the market for listings in making this 
proposal.\88\ Specifically, NASDAQ is offering complimentary products 
and services to attract new listings. The Commission understands that 
NASDAQ faces competition in the market for listing services, and that 
it competes in part by providing complimentary services to its listed 
companies through its affiliate versus third party vendors like NYSE. 
The ability to select from a choice of vendors and the use of a 
specific affiliate vendor are among the different ways that NASDAQ and 
NYSE may compete for listings and provide services for listed 
companies. In fact, NASDAQ notes that, by relying on services provided 
by an affiliate company rather than third parties, NASDAQ gains greater 
control to assure it can provide the services most valued by companies 
in a high quality manner.\89\ Accordingly, the Commission believes that 
NASDAQ's proposal reflects the current competitive environment for 
exchange listings among national securities exchanges, and is 
appropriate and consistent with Section 6(b)(8) in furtherance of the 
purposes of the Act.\90\
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    \88\ See NYSE Letter (stating ``NASDAQ's proposed rule is not 
based on concepts of fairness, but on what it needs to induce 
issuers to transfer to NASDAQ from NYSE'').
    \89\ See NASDAQ Response Letter supra note 5.
    \90\ 15 U.S.C. 78f(b)(8).
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    With respect to concerns raised by commenters that NASDAQ's 
offering of IR services creates a conflict of interest with respect to 
its role as an SRO, NASDAQ has represented that it has effectively 
separated its regulatory functions from its business functions. The 
Commission notes that its oversight of NASDAQ as a registered national 
securities exchange is designed, among other things, to assure NASDAQ 
performs its regulatory functions in a manner consistent with the Act. 
Finally, the Commission notes that any change to NASDAQ's rules to 
increase or decrease the amount of information that a company must 
publicly disclose, or the manner of doing so, would require Commission 
approval.
    The Commission has carefully considered the comment letters. 
Although some of the alternative proposals by the Investor Advisory 
Group might also satisfy the standards under Sections 6(b) and 19(b) of 
the Act \91\ depending on the facts and circumstances, those proposals 
are not before us, and the Commission believes that NASDAQ's proposal 
is consistent with these standards and, therefore, should be 
approved.\92\
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    \91\ 15 U.S.C. 78f(b) and 15 U.S.C. 78s(b).
    \92\ The Commission notes that Business Wire and PR Newswire 
raised concerns that NASDAQ would subsequently file a proposed rule 
change attempting to lock all NASDAQ listed issuers into using 
Corporate Solutions' services. The Commission notes that prior to 
any such change being implemented, it would have to be filed with, 
and approved, by the Commission pursuant to Section 19(b) of the 
Act.
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\93\ that the proposed rule change (SR-NASDAQ-2011-122) be, and it 
hereby is, approved.
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    \93\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\94\
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    \94\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-32577 Filed 12-20-11; 8:45 am]
BILLING CODE 8011-01-P