Document ID: SEC-2008-0811-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The NASDAQ Stock Market LLC
Posted Date: 2008-06-11T04:00Z

[Federal Register: June 11, 2008 (Volume 73, Number 113)]
[Notices]               
[Page 33133-33136]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11jn08-108]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57930; File No. SR-NASDAQ-2008-017]

 
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Amendment No. 1 and Order Granting Accelerated 
Approval to Proposed Rule Change, as Modified by Amendment No. 1, To 
Clarify the Listing of Additional Shares Notification Process

 June 5, 2008.

I. Introduction

    On March 6, 2008, 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 modify Nasdaq's listing of additional

[[Page 33134]]

shares notification process.\3\ The proposed rule change was published 
for comment in the Federal Register on April 10, 2008.\4\ The 
Commission received no comments on the proposal as published. On May 7, 
2008, the Exchange filed Amendment No. 1 to the proposed rule 
change.\5\ This order provides notice of the proposed rule change, as 
modified by Amendment No. 1, and approves the proposed rule change, as 
modified by Amendment No. 1, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ As part of the proposed rule filing, the Exchange submitted 
a revised Listing of Additional Shares Notification Form conforming 
the instructions on the Form to the corresponding proposed rule 
changes.
    \4\ See Securities Exchange Act Release No. 57616 (April 3, 
2008), 73 FR 19540.
    \5\ In Amendment No. 1, the Exchange modified the proposed 
notice requirement in Rules 4310(c)(17)(A) and 4320(e)(15)(A) 
relating to companies relying on the exception to shareholder 
approval for inducement grants to new employees contained in Rule 
4350(i)(1)(A)(iv). In the original filing, Nasdaq proposed that 
notice of such an inducement grant would be required no later than 
five calendar days after entering into the agreement to issue 
securities. In Amendment No. 1, Nasdaq proposed to modify this 
notification requirement so that notice of an inducement grant must 
be provided no later than the earlier of: (1) Five calendar days 
after entering into the agreement to issue securities; or (2) the 
date of the public announcement of the award required by Rule 
4350(i)(1)(A)(iv).
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II. Description of the Proposal

    Pursuant to Nasdaq Rules 4310(c)(17) and 4320(e)(15), a company is 
required to provide 15 days notice to Nasdaq prior to issuing 
securities or entering into transactions that would result in the 
issuance of securities in certain specified situations set forth in the 
rules. These notification requirements are intended to allow Nasdaq to 
make compliance determinations regarding stock issuances that are 
potentially subject to the shareholder approval rules.
    Nasdaq proposes to make certain modifications to its rules 
governing the notification process for the listing of additional 
shares. First, Nasdaq proposes to clarify the timing of the notice 
requirement contained in Rules 4310(c)(17)(D) and 4320(e)(15)(D). 
Currently, the rules provide that notifications under these 
subparagraphs are required prior to ``entering into'' a transaction 
that may result in the potential issuance of common stock (or 
securities convertible into common stock) greater than 10% of either 
the total shares outstanding or the voting power outstanding on a pre-
transaction basis. Nasdaq states that, in practice, it has treated this 
requirement as being satisfied if the company files the required 
notification 15 days before issuing the securities, rather than 15 days 
prior to entering into the transaction. Because such interpretation is 
not transparent from the rule, Nasdaq proposes to revise these 
provisions so that it is clear that notice will instead be required 
prior to ``issuing'' such securities.
    Second, Nasdaq proposes to modify the notice requirement contained 
in Rules 4310(c)(17)(A) and 4320(e)(15)(A) as it relates to companies 
relying on the exception to shareholder approval for inducement grants 
to new employees contained in Rule 4350(i)(1)(A)(iv).\6\ Currently, the 
rule provides that an issuer is required to notify Nasdaq at least 15 
calendar days prior to establishing or materially amending a stock 
option plan, purchase plan or other equity compensation arrangement 
pursuant to which stock may be acquired by officers, directors, 
employees, or consultants without shareholder approval. Nasdaq asserts 
that, because inducement grants can be made at the time the employment 
offer is accepted, companies may not be able to provide 15 days of 
advance notice. Therefore, Nasdaq proposes to modify the notice 
requirement to require notification of such inducement grants no later 
than the earlier of: (1) Five calendar days after entering into the 
agreement to issue the securities; or (2) the date of the public 
announcement of the award required by Rule 4350(i)(l)(A)(iv).\7\
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    \6\ Rule 4350(i)(1)(A)(iv) allows an exception to the 
requirement to obtain shareholder approval for equity compensation 
for certain ``issuances to a person not previously an employee or 
director of the company, or following a bona fide period of non-
employment, as an inducement material to the individual's entering 
into employment with the company.''
    \7\ See Amendment No. 1, supra note 5.
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    Third, Nasdaq proposes to amend Rules 4310(c)(17) and 4320(e)(15) 
to clarify that the notifications required by these rules must be made 
on a Listing of Additional Shares (``LAS'') Notification Form \8\ and 
that Nasdaq encourages companies to file the form as soon as 
practicable. In addition, in an effort to provide transparency to the 
consequences of failing to timely file LAS notifications, Nasdaq 
proposes to amend the rules to specifically state that if a company 
fails to timely file the LAS notification, Nasdaq may issue a Staff 
Determination (pursuant to the Rule 4800 Series) that is a public 
reprimand letter or a delisting determination. Nasdaq notes that, in 
determining whether to issue a Staff Determination, and whether such a 
Staff Determination would be a delisting determination or a public 
reprimand letter, Nasdaq would consider whether the issuer has 
demonstrated a pattern of late filings, the length of such filing 
delays, the reason for the delays, whether the issuer has been 
contacted concerning previous violations, whether the underlying 
transactions were themselves non-compliant, and whether the issuer has 
taken steps to assure that future violations will not occur.
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    \8\ See supra note 3.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange 
and, in particular, with Section 6(b)(5) of the Act,\9\ 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 remove impediments 
to, and perfect the mechanism of, a free and open market and a national 
market system and, in general, to protect investors and the public 
interest.\10\
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    \9\ 15 U.S.C. 78f(b)(5).
    \10\ 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).
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    The Commission believes that amending the timing requirement in 
Rules 4310(c)(17)(D) and 4320(e)(15)(D) to require that notification be 
made 15 days prior to issuing securities, rather than prior to entering 
into the specified transactions, will provide issuers certainty as to 
what point in a transaction the latest notification can be provided 
under Nasdaq's rule, as well as eliminate any ambiguity surrounding the 
application of this rule. Further, this proposed rule change will make 
the timing requirement in subparagraph (D) of Rules 4310(c)(17) and 
4320(e)(15) consistent with the timing requirement for notification of 
other types of issuances of stock under the rules, which require 
notification 15 days prior to the issuance of securities.\11\ At the 
same time, Nasdaq has assured the Commission that 15 days notice prior 
to issuance should continue to give

[[Page 33135]]

Nasdaq enough time to review the LAS notifications to ensure that stock 
issuances comply with the Nasdaq rules and, in particular, Nasdaq's 
shareholder approval requirements. As such, the Commission believes 
that the proposed rule change is consistent with the protection of 
investors and the public interest. The Commission also notes that the 
proposed rule language and the instructions to the LAS Notification 
Form urge issuers to file the form as soon as practicable, even if all 
of the relevant terms of the transaction or required documentation are 
not yet available. The Commission would hope that issuers would provide 
the required LAS Notification Form to Nasdaq as soon as possible to 
ensure timely compliance with any shareholder approval that may be 
required.
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    \11\ In particular, paragraph (B) of Rules 4310(c)(17) and 
4320(e)(15) require issuers to notify Nasdaq 15 calendar days prior 
to issuing securities that may potentially result in a change of 
control of the issuer. Further, paragraph (C) requires issuers to 
notify Nasdaq 15 calendar days prior to issuing any common stock in 
connection with the acquisition of the stock or assets of another 
company, if any officer or director or substantial shareholder of 
the issuer has a 5% or greater interest in the company to be 
acquired or in the consideration to be paid. (emphasis added)
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    The Commission also believes that the modification to the timing 
requirement for companies making an inducement grant is appropriate for 
this narrow category of stock issuances. The Commission notes that 
Nasdaq has represented that, as a practical matter, it often is not 
possible for companies to provide advance notice of inducement grants, 
because such grants are often made at the time the employment offer is 
accepted. Accordingly, modifying the timing requirement to require 
companies to provide notice to Nasdaq no later than the earlier of: 
five calendar days after entering into the agreement to issue the 
securities; or the date of the public announcement of the award,\12\ 
should make it more feasible for companies to timely meet the 
notification requirement. At the same time, the Commission believes 
that the modified timing requirement is consistent with the protection 
of investors and the public interest because such inducement grants are 
permitted without shareholder approval pursuant to Nasdaq Rule 
4350(i)(1)(A)(iv). Therefore, unlike other stock issuances under 
Nasdaq's shareholder approval rules, Nasdaq does not need to make a 
compliance determination as to whether shareholder approval is required 
prior to the issuance. The Commission notes, however, that Nasdaq still 
would need to make a determination that the inducement grant meets the 
requirements of the exception provided in Nasdaq Rule 
4350(i)(1)(A)(iv).\13\ As such, the Commission believes that the 
modified timing requirement for inducement grants is appropriate and 
balances the timing needs of issuers relying on the inducement grant 
exception with Nasdaq's compliance responsibility to ensure that the 
issuer is appropriately relying on the inducement grant exception, and 
has met the Rule 4350(i)(1)(A)(iv) requirements for doing so.
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    \12\ See Nasdaq Rule 4350(i)(1)(A)(iv), which requires that, 
promptly following the issuance of any employment inducement grant 
made in reliance on the exception in such rule, a company must 
disclose in a press release the material terms of the grant.
    \13\ Specifically, Rule 4350(i)(1)(A)(iv) provides that 
shareholder approval is not required for issuances to a person not 
previously an employee or director of the company, or following a 
bona fide period of non-employment, as an inducement material to the 
individual's entering into employment with the company, provided 
such issuances are approved by either the issuer's independent 
compensation committee or a majority of the issuer's independent 
directors. Promptly following an issuance of any employment 
inducement grant in reliance on this exception, a company must 
disclose in a press release the material terms of the grant, 
including the recipient(s) of the grant and the number of shares 
involved.
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    Finally, the Commission believes that the additional proposed 
changes provide clarity and transparency to the operation of the 
notification requirements. In particular, the proposed changes clarify 
that notifications must be made on the LAS Notification Form and that 
Nasdaq encourages companies to file the form as soon as practicable 
even if all of the relevant terms are not yet known. The Commission 
also notes that it reviewed Nasdaq's revised LAS Notification Form and 
believes that the instructions on the form appropriately reflect the 
corresponding proposed rule changes. Further, the proposed changes 
clarify the consequences of failing to timely file the form by 
expressly stating that in such instances, Nasdaq may issue a Staff 
Determination that is either a public reprimand letter or a delisting 
determination. In this regard, the Commission notes that it expects 
Nasdaq to carefully monitor compliance with the notification 
requirements and to take appropriate action as necessary. In 
particular, because of the importance of shareholder approval, the 
Commission expects that in cases where failure to timely file the 
notification form is coupled with a failure to meet the shareholder 
approval requirements, Nasdaq will take action that is suitable for 
violations of such rules.
    The Commission finds good cause for approving the proposed rule 
change, as modified by Amendment No. 1, before the thirtieth day after 
the date of publication of notice of filing thereof in the Federal 
Register. In Amendment No. 1, the Exchange modified the proposed notice 
requirement for companies issuing inducement grants to new employees. 
In the original filing, Nasdaq proposed that notice of such an 
inducement grant would be required no later than five calendar days 
after entering into the agreement to issue securities. In Amendment No. 
1, Nasdaq proposed to modify this notification requirement so that 
notice of an inducement grant must provided no later than the earlier 
of: (1) Five calendar days after entering into the agreement to issue 
securities; or (2) the date of the public announcement of the award 
required by Rule 4350(i)(1)(A)(iv). The Commission believes that the 
changes in Amendment No. 1 ensure that Nasdaq receives appropriate 
notice about an inducement grant no later than the date that the public 
is notified about such issuance pursuant to Rule 4350(i)(1)(A). As 
such, the Commission believes that Amendment No. 1 raises no new or 
novel regulatory issues and is consistent with the protection of 
investors and the public interest. Accordingly, the Commission finds 
good cause, consistent with Section 19(b)(2) of the Act,\14\ to approve 
the proposed rule change, as modified by Amendment No. 1, on an 
accelerated basis.
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    \14\ 15 U.S.C. 78s(b)(2).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as modified by Amendment No. 1, is consistent with the Act. 
Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2008-017 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, Station Place, 100 F Street, NE., Washington, 
DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2008-017. This 
file number should be included on the subject line if e-mail 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 Web site (http://www.sec.gov/
rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements

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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 inspection and copying in the 
Commission's Public Reference Room, on official business days between 
the hours of 10 a.m. and 3 p.m. Copies of such filing also will be 
available for inspection and copying at the principal office of Nasdaq. 
All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-NASDAQ-2008-
017 and should be submitted on or before July 2, 2008.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change (SR-NASDAQ-2008-017), as 
modified by Amendment No. 1, be, and hereby is, approved on an 
accelerated basis.
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    \15\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
 [FR Doc. E8-13067 Filed 6-10-08; 8:45 am]

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