Document ID: SEC-2011-0167-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2011-02-04T05:00Z

[Federal Register Volume 76, Number 24 (Friday, February 4, 2011)]
[Notices]
[Pages 6506-6508]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-2447]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63804; File No. SR-NASDAQ-2010-134]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Instituting Proceedings To Determine Whether To Disapprove Proposed 
Rule Change To Adopt Additional Criteria for Listing Commodity 
Stockpiling Companies That Have Indicated Their Business Plan Is To Buy 
and Hold Commodities

 January 31, 2011.

I. Introduction

    On October 15, 2010, The NASDAQ Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to adopt additional criteria for listing companies 
that have indicated that their business plan is to buy and hold 
commodities. The proposed rule change was published for comment in the 
Federal Register on November 3, 2010.\3\ The Commission subsequently 
extended the time period in which to either approve the proposed rule 
change, or to institute proceedings to determine whether to disapprove 
the proposed rule change, to February 1, 2011.\4\ The Commission 
received one comment letter on the proposal.\5\ This order institutes 
proceedings under Section 19(b)(2)(B) of the Act to determine whether 
to 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. 63207 (October 28, 
2010), 75 FR 67788.
    \4\ See Securities Exchange Act Release No. 63508 (December 9, 
2010), 75 FR 78300 (December 15, 2010).
    \5\ See Letter from Edward H. Smith, Jr. to Florence E. Harmon, 
Deputy Secretary, Commission, dated January 18, 2011.
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II. Description of the Proposal

    The Exchange proposes to adopt additional listing standards for 
companies that have indicated that their business plan is to purchase 
and stockpile raw materials or other commodities (``commodity 
stockpiling companies''). Under the proposal, such companies are 
required to meet all other applicable Nasdaq initial listing 
requirements, as well as the following additional listing standards. 
First, within 18 months of the effectiveness of its initial public 
offering registration statement, or such shorter period as the company 
specifies in the registration statement, the company would be required 
to invest at least 85% of the net proceeds of the initial public 
offering in the raw material or commodity identified in the 
registration statement, or return the unused amount pro rata to its 
shareholders.\6\
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    \6\ See proposed Nasdaq IM-5101-3(a).
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    Second, the company would be required to publish, or facilitate 
access to, at no cost and in an easily accessible manner, regular 
pricing information regarding the raw material or other commodity from 
a reliable, independent source, at least as frequently as current 
industry practice but no less than twice per week.\7\
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    \7\ See proposed Nasdaq IM-5101-3(b).
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    Third, the company would be required to publish its net market 
value on a daily basis, or where pricing information for the raw 
material or other commodity is not available on a daily basis, no less 
frequently than twice per week.\8\ If the spot price of the raw 
material or commodity fluctuates by more than 5%, the company shall 
publish the net market value within one business day of the 
fluctuation.
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    \8\ See proposed Nasdaq IM-5101-3(d). Net market value would be 
determined by multiplying the volume of the raw material or 
commodity held in inventory by the last spot price published or 
otherwise relied upon by the company, plus cash and other assets, 
less any liabilities.
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    Fourth, the company would be required to publish the quantity of 
the raw material or other commodity held in inventory, the average 
price paid, and the company's net market value within two business days 
of any change in inventory held.\9\ Where the company contracts to 
purchase or sell a material quantity of the raw material or commodity, 
such information would be required to be disclosed in a Form 8-K filing 
within four business days.
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    \9\ See proposed Nasdaq IM-5101-3(c).
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    Fifth, the company would be required to employ the services of one 
or more independent third party storage facilities to safeguard the 
physical holdings of the raw material or commodity.\10\ Finally, the 
company would be required to create a committee comprised solely of 
independent directors who shall consider, at least quarterly, whether 
the company's purchasing activities have had a measurable impact on the 
market price of the raw material or other commodity and shall report 
such determinations and make subsequent recommendations to the 
company's board of directors.\11\
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    \10\ See proposed Nasdaq IM-5101-3(e). Under the proposed rule 
language, the facility ``should provide services consistent with 
those provided by custodians and these must include: Storage and 
safeguarding; insurance; transfer of the raw material or other 
commodity in and out of the facility; visual inspections, spot 
checks and assays; confirmation of deliveries to supplier packing 
lists; and reporting of transfers and of inventory to the [commodity 
stockpiling company] and its auditors.'' The company must oversee 
the third party storage facility with its committee of independent 
directors.
    \11\ See proposed Nasdaq IM-5101-3(f). The independent directors 
may rely upon and shall have the authority to engage and pay an 
industry expert in conducting this review. If the company's board of 
directors disagrees with or does not accept the recommendations of 
the committee, the company will be required to file a Form 8-K with 
the Commission outlining the relevant events, committee's 
determinations and recommendations, and rationale for the board of 
directors' determination.
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    Nasdaq also is proposing to adopt additional audit committee 
requirements applicable to commodity stockpiling companies. In addition 
to the existing audit committee requirements in Nasdaq rules, audit 
committees for commodity stockpiling companies would be required to 
establish procedures for the identification and management of potential 
conflicts of interest, and would be required to review and approve any 
transactions where such potential conflicts have been identified.\12\
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    \12\ See proposed Nasdaq Rule 5605(c)(3) and IM-5605. Under the 
proposal, the procedures should include any material amendment to 
the management agreement, including any change with respect to the 
compensation of the manager.

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[[Page 6507]]

III. Comment Letter

    The Commission received one comment letter on the proposal.\13\ The 
commenter, a shareholder in SMG Indium Resources Ltd. (``SMG''), 
supported the proposal and stated, among other things, that approval of 
the proposal would ``support making the market for commodities, such as 
Indium, more efficient and transparent by providing investors * * * 
with an easier and more cost-effective alternative for investing in 
such commodities.'' This commenter further noted that, unlike 
commodity-based trust shares, which are designed along the lines of an 
exchange-traded fund (``ETF'') structure and offer exposure to very 
liquid and actively-traded commodities, commodity stockpiling companies 
``provide investment exposure to select strategic and commercial 
commodities which do not have substantial liquid and active trading 
markets nor extensive and well developed derivative and/or spot markets 
and pricing mechanisms.'' The commenter explained his view that the 
proposed listing standards would assure appropriate investor protection 
in connection with the listing of commodity stockpiling companies, and 
cited particular aspects of the proposal, including the frequency and 
source of pricing information, the requirement to calculate and 
disseminate net market value, and the use of third-party storage 
facilities.
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    \13\ See, note 4, supra.
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IV. Proceedings To Determine Whether To Disapprove SR-NASDAQ-2010-134 
and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act to determine whether the proposed rule change 
should be disapproved. Institution of such proceedings appears 
appropriate at this time in view of the legal and policy issues raised 
by the proposal, discussed below. Institution of disapproval 
proceedings does not indicate that the Commission has reached any 
conclusions with respect to any of the issues involved. Rather, as 
described in greater detail below, the Commission seeks and encourages 
interested persons to comment on the proposed rule change.
    Pursuant to Section 19(b)(2)(B), the Commission is providing notice 
of the grounds for disapproval under consideration. In particular, 
Section 6(b)(5) of the Act \14\ requires that the rules of an exchange 
be designed, among other things, 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.
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    \14\ 15 U.S.C. 78f(b)(5).
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    Nasdaq's proposal would authorize a national securities exchange, 
for the first time, to list an operating company that simply plans to 
buy and hold a commodity or other raw material. A liquid market may not 
exist for the commodity or other raw material to be held by the 
commodity stockpiling company. Despite the commenter's view that the 
proposal would provide appropriate investor protections for the listing 
of commodity stockpiling companies such as SMG, the Commission believes 
that the proposal raises issues, among other things, as to (1) whether 
the dissemination of up-to-date pricing information twice per week 
about the sole asset of an operating company would be sufficient to 
support the fair and efficient exchange trading of its equity 
securities; (2) in the absence of a liquid and transparent market for 
the commodity or other raw material held by the company, whether the 
pricing information from the ``independent source'' would in fact have 
sufficient reliability and integrity, or whether there are risks that 
information could be manipulated; (3) whether there would be risks such 
pricing information may be available to some market participants sooner 
than others, thereby giving the former an unfair trading advantage; and 
(4) whether Nasdaq's proposal adequately addresses any special risks to 
investors that might be presented by the exchange trading of an 
operating company in the business solely of stockpiling an illiquid 
commodity. The Commission believes these concerns raise questions as to 
whether Nasdaq's proposal is consistent with the requirements of 
Section 6(b)(5) of the Act, including whether the nature of the 
required pricing information, and the frequency and manner of its 
dissemination, would prevent manipulation, promote just and equitable 
principles of trade, perfect the mechanism of a free and open market 
and the national market system, or protect investors and the public 
interest.

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 
concerns identified above, as well as any others they may have with the 
proposal. In particular, the Commission invites the written views of 
interested persons concerning whether the proposed rule change is 
inconsistent with Section 6(b)(5) or any other provision of the Act, or 
the rules and regulation thereunder. Although there do not appear to be 
any issues relevant to approval or disapproval which would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\15\
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    \15\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views and 
arguments regarding whether the proposed rule change should be 
disapproved by March 21, 2011. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by April 5, 
2011. 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-2010-134 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2010-134. 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

[[Page 6508]]

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 Web site 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 a.m. and 3 
p.m. Copies of such filing also will be available for inspection and 
copying at the principal office of the Exchange. All comments received 
will be posted without change; 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-2010-134 and should be submitted 
on or before March 21, 2011. Rebuttal comments should be submitted by 
April 5, 2011.

    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)(57).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-2447 Filed 2-3-11; 8:45 am]
BILLING CODE 8011-01-P