Document ID: SEC-2022-0725-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market, LLC
Posted Date: 2022-05-24T04:00Z

[Federal Register Volume 87, Number 100 (Tuesday, May 24, 2022)]
[Notices]
[Pages 31594-31596]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-11066]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94941; File No. SR-NASDAQ-2022-015]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change To Exempt Non-Convertible Bonds Listed Under Rule 
5702 From Certain Corporate Governance Requirements

May 18, 2022.

I. Introduction

    On February 4, 2022, 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 exempt non-convertible bonds listed under Rule 
5702 from certain corporate governance requirements.\3\ The proposed 
rule change was published for comment in the Federal Register on 
February 23, 2022.\4\ On March 18, 2022, pursuant to Section 19(b)(2) 
of the Act,\5\ 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.\6\ The Commission received no comment letters 
regarding the proposed rule change. This order institutes proceedings 
under Section 19(b)(2)(B) of the Act to determine whether to approve or 
disapprove the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 94265 (February 16, 
2022), 87 FR 10265 (February 23, 2022) (``Notice'').
    \4\ Id.
    \5\ 15 U.S.C. 78s(b)(2).
    \6\ See Securities Exchange Act Release No. 94471 (March 18, 
2022), 87 FR 16778 (March 24, 2022). The Commission designated May 
24, 2022, as the date by which the Commission shall approve or 
disapprove, or institute proceedings to determine whether to 
disapprove, the proposed rule change.
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

    Generally, Nasdaq proposes to exempt issuers listing non-
convertible bonds under Rule 5702 from certain corporate governance 
requirements.\7\ Specifically, Nasdaq proposes to amend Nasdaq Rule 
5702 \8\ to exempt these issuers from the requirements relating to 
Review of Related Party Transactions (Nasdaq Rule 5630),\9\ Shareholder 
Approval (Nasdaq Rule 5635),\10\ and Voting Rights (Nasdaq Rule 
5640).\11\ According to Nasdaq, it is appropriate to exempt these 
issuers from governance requirements because the interests of bond 
holders are protected contractually through the trust indenture, and 
therefore, ``holders of non-convertible bonds do not expect to have 
governance rights the way equity investors may.'' \12\
---------------------------------------------------------------------------

    \7\ Under proposed Rule 5702(d), if an issuer also lists its 
common stock, voting preferred stock, or their equivalent on Nasdaq, 
the corporate governance requirements under the Nasdaq 5600 Rule 
Series would apply. See Notice, supra note 3, n. 8.
    \8\ Rule 5702 contains the initial and continued listing 
standards for non-convertible bonds, as well as disclosure 
requirements for companies that list non-convertible bonds.
    \9\ Rule 5630 requires certain companies to conduct an 
appropriate review and oversight of all related party transactions 
for potential conflict of interest situations on an ongoing basis.
    \10\ Rule 5635 sets forth the circumstances under which 
shareholder approval is required prior to an issuance of securities 
in connection with: (i) The acquisition of the stock or assets of 
another company; (ii) equity-based compensation of officers, 
directors, employees, or consultants; (iii) a change of control; and 
(iv) transactions other than public offerings.
    \11\ Rule 5640 states that voting rights of existing 
shareholders of publicly traded common stock registered under 
Section 12 of the Act cannot be disparately reduced or restricted 
through any corporate action or issuance.
    \12\ See Notice, supra note 3, at 10266.

---------------------------------------------------------------------------

[[Page 31595]]

    In addition, Nasdaq proposes to consolidate under Nasdaq Rule 5702 
other exemptions currently applicable to such issuers pursuant to 
Nasdaq Rules 5605(f)(4), 5606(c), and 5616(a)(6)(A).\13\
---------------------------------------------------------------------------

    \13\ Rule 5615(a)(6)(A) exempts certain non-convertible bond 
issuers from the requirements relating to Independent Directors (as 
set forth in Rule 5605(b)), Compensation Committees (as set forth in 
Rule 5605(d)), Director Nominations (as set forth in Rule 5605(e)), 
Codes of Conduct (as set forth in Rule 5610), Meetings of 
Shareholders (as set forth in Rule 5620(a)), and Audit Committees 
(as set forth in Rule 5605(c), except for the applicable 
requirements Commission Rule 10A-3). Rules 5605(f)(4) and Rule 
5606(c) exempts certain non-convertible bond issuers from the 
requirements related to Diverse Board Representation (as set forth 
in Rule 5605(f)) and Board Diversity Disclosure (as set forth in 
Rule 5606), respectively.
---------------------------------------------------------------------------

III. Proceedings To Determine Whether To Approve or Disapprove SR-
NASDAQ-2022-015 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \14\ 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 stated below, the 
Commission seeks and encourages interested persons to provide 
additional comment on the proposed rule change.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2)(B) of the Act,\15\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of, and input from commenters with respect to, the consistency 
of the proposal 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, 
in general, to protect investors and the public interest.\16\ 
Specifically, the Commission solicits comments on the sufficiency of 
the Exchange's justification for exempting non-convertible bonds listed 
under Rule 5702 from certain corporate governance requirements 
enumerated above. As stated above, the Exchange justifies the proposed 
rule change on the assertion that ``holders of non-convertible bonds do 
not expect to have governance rights the way equity investors may.'' Do 
commenters agree that holders of non-convertible bonds do not expect 
that Nasdaq Rules pertaining to Review of Related Party Transactions, 
Shareholder Approval, and Voting Rights to apply to their bond 
holdings? And even if there is no such expectations, would non-
convertible bond holders benefit from any of these provisions?
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78s(b)(2)(B).
    \16\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    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.'' \17\ 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,\18\ 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.\19\
---------------------------------------------------------------------------

    \17\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \18\ See id.
    \19\ See id.
---------------------------------------------------------------------------

    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.

IV. 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 Sections 6(b)(5), 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,\20\ any 
request for an opportunity to make an oral presentation.\21\
---------------------------------------------------------------------------

    \20\ 17 CFR 240.19b-4.
    \21\ 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).
---------------------------------------------------------------------------

    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by June 14, 2022. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by June 28, 
2022. Commission 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 [email protected]. Please include 
File Number SR-NASDAQ-2022-015 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-2022-015. 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

[[Page 31596]]

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-2022-
015, and should be submitted on or before June 14, 2022. Rebuttal 
comments should be submitted by June 28, 2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
---------------------------------------------------------------------------

    \22\ 17 CFR 200.30-3(a)(57).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-11066 Filed 5-23-22; 8:45 am]
BILLING CODE 8011-01-P