Document ID: SEC-2020-1436-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market, LLC
Posted Date: 2020-09-09T04:00Z

[Federal Register Volume 85, Number 175 (Wednesday, September 9, 2020)]
[Notices]
[Pages 55708-55712]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-19841]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89739; File No. SR-NASDAQ-2020-028]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change To Amend IM-5101-1 (Use of Discretionary 
Authority) To Deny Listing or Continued Listing or To Apply Additional 
and More Stringent Criteria to an Applicant or Listed Company Based on 
Considerations Related to the Company's Auditor or When a Company's 
Business Is Principally Administered in a Jurisdiction That Is a 
Restrictive Market

September 2, 2020.

I. Introduction

    On May 19, 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 amend IM-5101-1 (Use of Discretionary 
Authority) to deny listing or continued listing or to apply additional 
and more stringent criteria to an applicant or listed company based on 
considerations related to the company's auditor or when a company's 
business is principally administered in a jurisdiction that has secrecy 
laws, blocking statutes, national security laws,

[[Page 55709]]

or other laws or regulations restricting access to information by 
regulators of U.S.-listed companies in such jurisdiction. The proposed 
rule change was published for comment in the Federal Register on June 
8, 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\ The Commission is publishing this order to 
solicit comments on the proposed rule change from interested persons 
and to institute proceedings pursuant to 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. 88987 (June 2, 
2020), 85 FR 34774. Comments on the proposed rule change can be 
found at: https://www.sec.gov/comments/sr-nasdaq-2020-028/srnasdaq2020028.htm.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 89344, 85 FR 44951 
(July 24, 2020). The Commission designated September 6, 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\ 15 U.S.C. 78s(b)(2)(B).
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II. Exchange's Description of the Proposed Rule Change

    The Exchange states that its listing rules include requirements to 
provide transparent disclosure to investors as well as corporate 
governance requirements for listed companies.\7\ In addition to these 
requirements, the Exchange further states that Rule 5101 describes the 
Exchange's broad discretionary authority over the initial and continued 
listing of securities on the Exchange in order to maintain the quality 
of and public confidence in its market, to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, and to protect investors and the public interest. 
Pursuant to this rule, the Exchange states that it may use such 
discretion to deny initial listing, 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 the Exchange inadvisable or 
unwarranted in the opinion of the Exchange, even though the securities 
meet all enumerated criteria for initial or continued listing on the 
Exchange.\8\
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    \7\ See Notice, supra note 3, at 35134. See also Rule 5000 
Series.
    \8\ See id. See also Rule 5101.
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    The Exchange further states that, under Exchange rules and federal 
securities laws, a company's financial statements included in its 
initial registration statement or annual report must be audited by an 
independent public accountant that is registered with the Public 
Company Accounting Oversight Board (``PCAOB'').\9\ According to the 
Exchange, company management is responsible for preparing the company's 
financial statements and for establishing and maintaining disclosure 
controls and procedures and internal control over financial 
reporting.\10\ The Exchange states that the company's auditor, based on 
its independent audit of the evidence supporting the amounts and 
disclosures in the financial statements, expresses an opinion on 
whether the financial statements present fairly, in all material 
respects, the company's financial position, results of operations, and 
cash flows.\11\ The Exchange further states that the auditor, in turn, 
is normally subject to inspection by the PCAOB, which assesses 
compliance with PCAOB and Commission rules and professional standards 
in connection with the auditor's performance of audits.\12\ According 
to the Exchange, it relies on the work of auditors to provide 
reasonable assurances that the financial statements provided by a 
company are free of material misstatements, and further relies on the 
PCAOB's role in overseeing the quality of the auditor's work.\13\ The 
Exchange believes that accurate financial statement disclosure is 
critical for investors to make informed investment decisions and is 
concerned that constraints on the PCAOB's ability to inspect auditor 
work in countries with national barriers on access to information may 
weaken assurances that the disclosures and financial information of 
companies with operations in such countries are not misleading.\14\
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    \9\ See Notice, supra note 3, at 35134 (citing Rules 5210(b) and 
5250(c)(3), which reference Section 102 of the Sarbanes-Oxley Act of 
2002, Pub. L. 107-204, 116 Stat. 745 (2002)).
    \10\ See id.
    \11\ See id. (quoting PCAOB Auditing Standard 1101.03--Audit 
Risk, available at https://pcaobus.org/Standards/Auditing/Pages/AS1101.aspx (``To form an appropriate basis for expressing an 
opinion on the financial statements, the auditor must plan and 
perform the audit to obtain reasonable assurance about whether the 
financial statements are free of material misstatement due to error 
or fraud.'')).
    \12\ See id.
    \13\ See id. at 35135.
    \14\ See id.
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    In light of the foregoing, the Exchange now proposes to amend IM-
5101-1 to add a new subparagraph (b) to state that the Exchange may 
rely upon Rule 5101 to deny initial or continued listing or to apply 
additional and more stringent criteria to an applicant or listed 
company based on the following factors related to the qualifications of 
the company's auditor:
    (1) Whether the auditor has been subject to a PCAOB inspection, 
such as where the auditor is newly formed and has therefore not yet 
undergone a PCAOB inspection or where the auditor, or an accounting 
firm engaged to assist with the audit, is located in a jurisdiction 
that limits the PCAOB's ability to inspect the auditor;
    (2) if the company's auditor has been inspected by the PCAOB, 
whether the results of that inspection indicate that the auditor has 
failed to respond to any requests by the PCAOB or that the inspection 
has uncovered significant deficiencies in the auditor's conduct in 
other audits or in its system of quality controls;
    (3) whether the auditor can demonstrate that it has adequate 
personnel in the offices participating in the audit with expertise in 
applying U.S. GAAP, GAAS, or IFRS, as applicable, in the company's 
industry;
    (4) whether the auditor's training program for personnel 
participating in the company's audit is adequate;
    (5) for non-U.S. auditors, whether the auditor is part of a global 
network or other affiliation of individual auditors where the auditors 
draw on globally common technologies, tools, methodologies, training, 
and quality assurance monitoring; and
    (6) whether the auditor can demonstrate to the Exchange sufficient 
resources, geographic reach, or experience as it relates to the 
company's audit.\15\
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    \15\ The Exchange also proposes to identify certain existing 
paragraphs within IM-5101-1 as subparagraphs (a), (d), and (e); add 
descriptive headings to the subparagraphs within IM-5101-1; and 
relocate existing text describing the Exchange's review process to 
subparagraph (e). The Exchange also proposes to revise the term 
``listing qualifications panel'' in subparagraph (e) to ``Hearings 
Panel (as defined in Rule 5805(d))'' for consistency within the 
rulebook.
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    The Exchange states that it would consider these factors 
holistically and may be satisfied with an auditor's qualifications 
notwithstanding the fact that the auditor raises concerns with respect 
to some of the factors set forth above.\16\ The proposed rule further

[[Page 55710]]

provides examples of additional and more stringent criteria that the 
Exchange may apply to an applicant or a listed company to obtain 
comfort that the company satisfies the financial listing requirements 
and is suitable for listing.\17\ These criteria may include requiring: 
(i) Higher equity, assets, earnings, or liquidity measures than 
otherwise required under the Rule 5000 Series; (ii) that any offering 
be underwritten on a firm commitment basis, which typically involves 
more due diligence by the broker-dealer than would be done in 
connection with a best-efforts offering; or (iii) companies to impose 
lock-up restrictions on officers and directors to allow market 
mechanisms to determine an appropriate price for the company before 
such insiders can sell shares.\18\ The Exchange states that it may 
impose each of these additional requirements separately or in 
combination, or may determine that listing is not appropriate and deny 
initial or continued listing to a company.\19\
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    \16\ See Notice, supra note 3, at 35135. For example, the 
Exchange states that it may be satisfied that an auditor that is not 
subject to PCAOB inspection has mitigated the risk that it may have 
significant undetected deficiencies in its system of quality 
controls by being a part of a global network where the auditors draw 
on globally common technologies, tools, methodologies, training, and 
quality assurance monitoring. See id.
    \17\ The Exchange states that if a company's auditor does not 
satisfy the proposed criteria in IM-5101-1(b), the Exchange may 
still obtain comfort that the company truly satisfies the financial 
listing criteria by imposing a higher standard on such company. See 
id. at 35136.
    \18\ See proposed IM-5101-1(b). The Exchange states that it may 
also have concerns that a company listing on the Exchange through an 
initial public offering, business combination, direct listing, or 
issuing securities previously trading over-the-counter may not 
develop sufficient public float, investor base, and trading interest 
to provide the depth and liquidity necessary to promote fair and 
orderly trading, resulting in a security that is illiquid. See 
Notice, supra note 3, at 35136. In such cases, the Exchange states 
that it may impose additional liquidity measures on the company, 
such as requiring a higher public float percentage, market value of 
unrestricted publicly held shares, or average over-the-counter 
trading volume. See id. The Exchange further states that it may 
obtain additional comfort regarding the quality of a company's 
financial statements by requiring the offering to be underwritten, 
which the Exchange believes would help to ensure that third parties 
other than the auditor are conducting significant due diligence on 
the company, its registration statement, and its financial 
statements. See id. The Exchange also believes that, if material 
misstatements are detected by the company's auditors and have not 
been disclosed to investors, it may be appropriate to impose lock-up 
restrictions on officers and directors to allow market mechanisms to 
determine an appropriate price for the company before such insiders 
can sell shares. See id.
    \19\ See Notice, supra note 3, at 35136.
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    The Exchange further states that risks to U.S. investors related to 
the accuracy of disclosures, accountability, and access to information 
are heightened when a company's 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 in such 
jurisdiction.\20\ Accordingly, the Exchange also proposes to amend IM-
5101-1 to add a new subparagraph (c) to state that the Exchange may use 
its discretionary authority to impose additional or more stringent 
criteria, including the criteria set forth in proposed IM-5101-1(b), in 
other circumstances, including when a company's business is principally 
administered in a jurisdiction that the Exchange 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''). In 
determining whether a company's business is principally administered in 
a Restrictive Market (``Restrictive Market Company''), proposed IM-
5101-1(c)(4) provides that the Exchange 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.\21\ 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.\22\
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    \20\ See id.
    \21\ See proposed IM-5101-1(c)(4).
    \22\ See Notice, supra note 3, at 35136 n.11. 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, 
the Exchange would consider the company's business to be principally 
administered in Country B, which is a Restrictive Market, and the 
Exchange may use its discretionary authority pursuant to proposed 
IM-5101-1(c) to apply additional or more stringent criteria to the 
company. See id. at 35136.
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    The Exchange represents that, in the event it relies on its 
discretionary authority pursuant to the proposed rule changes and 
determines to deny the initial or continued listing of a company, it 
would issue a denial or delisting letter to the company that will 
inform the company of the factual basis for the Exchange's 
determination and the company's right for review of the decision 
pursuant to the Rule 5800 Series.\23\ The proposed rule changes would 
apply to all companies listed and seeking to list on the Exchange.\24\
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    \23\ See id. See also Rule 5815, which sets forth the review of 
staff determinations by a Hearings Panel, including the procedures 
for requesting and preparing for a hearing and the scope of the 
Hearing Panel's discretion.
    \24\ See id.
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III. Summary of the Comment Letters Received

    One commenter stated that it 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.\25\ Another commenter expressed its support for the proposed 
rule change and agreed with many of the concerns raised by the Exchange 
related to Restrictive Market Companies.\26\ However, this commenter 
also suggested that the Exchange consider modifications to the proposed 
rule change, including narrowing the degree of discretion provided by 
the proposed rule change for situations where the applicant or listed 
company has an auditor or an accounting firm engaged to assist with the 
audit that is located in a jurisdiction that limits the PCAOB's ability 
to inspect the auditor, and where the applicant or listed company is a 
Restrictive Market Company.\27\ Specifically, this commenter 
recommended that the Exchange modify the proposed rule change to 
replace proposed IM-5101-1(b)(1) and (c) with new rules that would 
require that applicants and listed companies from a Restrictive Market 
be prohibited from having an auditor or accounting firm engaged to 
assist with their company audit that is located in a jurisdiction that 
limits the PCAOB's ability to inspect the auditor.\28\ This commenter 
further recommended that the Exchange also amend Rule 5810 to provide a 
Nasdaq Hearings Panel the discretion to grant a listed company an 
exception from such new rules for a period not to exceed 540 days from 
the date of the delisting letter issued by the Exchange.\29\
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    \25\ See Letter from Annemarie Tierney, Founder and Principal, 
Liquid Advisors, Inc. (July 2, 2020), at 5.
    \26\ See Letter from Jeffrey P. Mahoney, General Counsel, 
Council of Institutional Investors (June 18, 2020), at 5.
    \27\ See id. at 6.
    \28\ See id. at 6-7.
    \29\ See id. at 7.
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IV. Proceedings To Determine Whether To Approve or Disapprove SR-
NASDAQ-2020-028 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section

[[Page 55711]]

19(b)(2)(B) of the Act \30\ to determine whether the proposed rule 
change 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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    \30\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\31\ 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.\32\
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    \31\ Id.
    \32\ 15 U.S.C. 78f(b)(5).
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    The Exchange is proposing to adopt new rule text to specifically 
permit it to utilize its broad discretionary authority to deny initial 
or continued listing or to apply additional and more stringent criteria 
to an applicant or listed company based on certain factors, as 
described in more detail above, related to the qualifications of the 
company's auditor. However, the Exchange does not state how these broad 
factors would be considered in its determination of whether an 
applicant or listed company will be denied initial or continued 
listing, or subject to additional and more stringent criteria, other 
than to note that the factors will be considered ``holistically.'' In 
addition, the Exchange states that it may also find a particular 
auditor's qualifications sufficient despite the fact that the auditor 
raises concerns with respect to some of the specified factors. Further, 
the Exchange does not state what specific additional or more stringent 
criteria it would impose, if it decided to impose additional or more 
stringent criteria. Whether an applicant or listed company is denied 
listing or subject to additional criteria and what that additional 
criteria is, however determined, appears to be subject to wide 
discretion under the proposed rule.
    Similarly, under the proposed rule, the Exchange may also use its 
broad discretionary authority to impose similar additional or more 
stringent criteria on a Restrictive Market Company. The Exchange does 
not provide any information in its filing regarding when it generally 
will or will not use its authority to subject a Restrictive Market 
Company to such additional criteria, but rather just provides that a 
Restrictive Market Company ``may'' be subject to additional or more 
stringent criteria. In addition, the Exchange does not state what 
specific additional or more stringent criteria it would impose, if it 
decided to impose additional or more stringent criteria. These 
provisions appear to be subject to wide discretion by the Exchange.
    The Exchange stated that its proposal is not designed to permit 
unfair discrimination between customers, issuers, brokers, or dealers 
because the Exchange has identified additional concerns around 
companies with auditors that do not have sufficient PCAOB inspection 
history, quality controls, resources, geographic reach, and experience 
to adequately perform the company's audit and Restrictive Market 
Companies, and because applying additional and more stringent criteria 
may not be appropriate in all circumstances.\33\ As discussed above, 
however, the Exchange's proposal provides it wide discretion to 
determine: (1) Whether to deny initial or continued listing or to apply 
additional and more stringent criteria to an applicant or listed 
company based on factors related to the qualifications of the company's 
auditor, and what specific additional or more stringent criteria it 
would impose, if it decided to impose additional or more stringent 
criteria; and (2) whether to apply additional or more stringent 
criteria to a Restrictive Market Company, and what specific additional 
or more stringent criteria it would impose, if it decided to impose 
additional or more stringent criteria. 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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    \33\ See Notice, supra note 3, at 35137-38.
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    Under the Commission's Rules of Practice, the ``burden to 
demonstrate that a proposed rule change is consistent with the [Act] 
and the rules and regulations issued thereunder . . . is on the self-
regulatory organization that proposed the rule change.'' \34\ 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,\35\ and any failure of a self-
regulatory organization 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.\36\
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    \34\ 17 CFR 201.700(b)(3).
    \35\ See id.
    \36\ 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 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 is 
consistent with Section 6(b)(5) \37\ 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,\38\ any request for an opportunity to make an oral 
presentation.\39\
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    \37\ 15 U.S.C. 78f(b)(5).
    \38\ 17 CFR 240.19b-4.
    \39\ 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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[[Page 55712]]

    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by September 30, 2020. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
October 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,\40\ in addition to any other 
comments they may wish to submit about the proposed rule change.
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    \40\ 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-2020-028 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-2020-028. 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-2020-028 and should be submitted 
by September 30, 2020. Rebuttal comments should be submitted by October 
14, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\41\
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    \41\ 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-19841 Filed 9-8-20; 8:45 am]
BILLING CODE 8011-01-P