Document ID: SEC-2019-1122-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market LLC
Posted Date: 2019-08-06T04:00Z

[Federal Register Volume 84, Number 151 (Tuesday, August 6, 2019)]
[Notices]
[Pages 38321-38323]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-16722]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86537; File No. SR-NASDAQ-2019-060]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Amend Rules 4120 and 4753

July 31, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on July 18, 2019, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the Exchange. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rules 4120 and 4753 to permit the 
Exchange to declare a regulatory halt in a security that traded in the 
over-the-counter market prior to the initial pricing on the Exchange 
and to allow for the initial pricing of such securities through the IPO 
Cross.
    The text of the proposed rule change is available on the Exchange's 
website at http://nasdaq.cchwallstreet.com, at the principal office of 
the Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Nasdaq proposes to amend Rule 4120 to permit the Exchange to 
declare a regulatory halt in a security that traded in the over-the-
counter market (the ``OTC market'') prior to the initial pricing on the 
Exchange. Nasdaq also proposes to amend Rule 4753 to allow for the 
initial pricing on the Exchange of such securities through the IPO 
Cross where a broker-dealer is willing to serve in the role of 
financial advisor to the issuer and perform the functions under Rule 
4120(c)(8) that are ordinarily performed by an underwriter with respect 
to an initial public offering. Finally, the proposed change would state 
that where a security previously traded in the OTC market pursuant to 
FINRA Form 211 is initially priced using the IPO Cross, the fourth tie-
breaker for each of the Current Reference Price disseminated in the 
Nasdaq Order Imbalance Indicator and the price at which the Nasdaq Halt 
Cross will occur shall be the most recent transaction price in the 
over-the-counter market.
Background
    In 2014, Nasdaq first adopted rules to allow the use of the Nasdaq 
IPO Cross to initiate trading in securities that have not been listed 
on a national securities exchange or traded in the over-the-counter 
market pursuant to FINRA Form 211 (the ``OTC market'') immediately 
prior to the initial pricing and described the role of financial 
advisors in that process.\3\ At that time, the Exchange added new Rule 
4120(c)(9) \4\ to set forth the process by which trading commences in 
such securities. Under that rule, securities of companies that have not 
previously been listed on a national securities exchange or traded in 
the OTC market pursuant to FINRA Form 211 immediately prior to listing 
on Nasdaq can be launched for trading using the same crossing mechanism

[[Page 38322]]

available for IPOs outlined in Rule 4120(c)(8) and Rule 4753 (the ``IPO 
Cross''). Prior to that rule change, securities of companies that were 
not conducting IPOs were released using the Halt Cross outlined in Rule 
4120(c)(7), which differed from the IPO Cross.\5\
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    \3\ Securities Exchange Act Release No. 71931 (April 11, 2014), 
79 FR 21829 (April 17, 2014) (SR-NASDAQ-2014-032) (the ``2014 Rule 
Change'').
    \4\ In 2014, Nasdaq filed SR-NASDAQ-2014-081 modifying the 
functions that are performed by an underwriter with respect to an 
initial public offering and renumbered certain paragraphs of Rule 
4120. Securities Exchange Act Release No. 73399 (October 21, 2014), 
79 FR 63981 (October 27, 2014) (approving SR-NASDAQ-2014-81). All 
references in this filing are to the renumbered rules, as currently 
in effect.
    \5\ The Halt Cross process has a shorter quoting period (five 
minutes) and provides no ability to extend the quoting period in the 
event trading interest or volatility in the market appears likely to 
have a material impact on the security, unless there is an order 
imbalance as defined in the rule. See the 2014 Rule Change for 
additional details on the differences between the Halt Cross and the 
IPO Cross.
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    The 2014 Rule Change extended the safeguards contained in the IPO 
Cross to securities that have not been listed on a national securities 
exchange or traded in the OTC market immediately prior to the initial 
pricing and established that a broker-dealer serving in the role of 
financial advisor to the issuer could serve in the same capacity for 
such securities as the underwriter does for IPOs. Specifically, Rule 
4120(c)(9) provides that the IPO Cross process described in Rules 4120 
and 4753 is available to securities that have not been listed on a 
national securities exchange or traded in the OTC market immediately 
prior to the initial pricing where ``a broker-dealer serving in the 
role of financial advisor to the issuer of the securities being listed 
is willing to perform the functions under Rule 4120(c)(8) that are 
performed by an underwriter with respect to an initial public 
offering.'' \6\ Rule 4753 provides the definition of Current Reference 
Price and a description of the calculation of the price at which the 
Nasdaq Halt Cross will occur.\7\
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    \6\ Subsequent to the 2014 Rule Change Nasdaq expanded and 
elaborated the functions that are performed by an underwriter with 
respect to an initial public offering. See footnote 4, above. Rule 
4120(c)(9) requires a broker-dealer serving in the role of a 
financial advisor to the issuer of the securities being listed to 
perform all such functions in order for the issuer to utilize the 
IPO Cross for the initial pricing of the security.
    \7\ Rules 4753(a)(3)(A) and 4753(b)(2)(D).
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    When Nasdaq added Rule 4120(c)(9) in 2014, it cross-referenced Rule 
4753 but did not modify it. In 2019, Nasdaq amended Rule 4753 to 
elaborate the role of a financial advisor to the issuer of a security 
that has not been listed on a national securities exchange or traded in 
the OTC market immediately prior to the initial pricing.\8\ Nasdaq has 
successfully employed the IPO Cross for securities that have not been 
listed on a national securities exchange or traded in the OTC market 
pursuant to FINRA Form 211 immediately prior to the initial pricing 
since 2014 and continues to believe that financial advisors to issuers 
seeking to utilize that process are well placed to perform the 
functions that are currently performed by underwriters with respect to 
an initial public offering.
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    \8\ Securities Exchange Act Release No. 85156 (February 15, 
2019), 84 FR 5787 (February 22, 2019) (SR-NASDAQ-2019-001).
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Proposed Rule Change
    Nasdaq now proposes to amend Rules 4120 and 4753, based on the same 
rationale that supported the 2014 Rule Change, to permit the Exchange 
to declare a regulatory halt in a security that traded in the over-the-
counter market prior to the initial pricing on the Exchange.
    The Exchange proposes to delete the clause ``or traded in the over-
the-counter market pursuant to FINRA Form 211'' in Rule 4120 before 
``immediately prior to the initial pricing.'' The proposed amendment 
would thus enable the Exchange to declare a regulatory halt for a 
security that is having its initial listing on the Exchange that was 
traded in the OTC market immediately prior to its initial pricing on 
the Exchange.
    Nasdaq believes that it would be consistent with the protection of 
investors and the public interest for the Exchange, as a primary 
listing exchange, to have to authority to declare a regulatory halt for 
a security that was previously traded in the OTC market prior to its 
initial pricing on Nasdaq. An OTC market security that will be listed 
on a primary listing exchange will be removed from the OTC trading list 
on the day prior to its initial pricing on the Exchange. However, on 
the day of its initial listing, such security can trade on an unlisted 
trading permit (``UTP'') basis before the first transaction on the 
primary listing exchange. The Exchange believes that permitting the 
Exchange to declare a regulatory halt in such securities before trading 
on the Exchange begins would avoid potential price disparities or 
anomalies that may occur during any UTP trading before the first 
transaction on the primary listing exchange.
    More specifically, the Exchange believes that quoting and trading 
in the pre-market of an OTC transfer can be erratic and investors may 
be harmed if their securities trade during this period. The Exchange 
believes that the proposed limited authority to declare a regulatory 
halt in the hours prior to the OTC transfer pricing on the Exchange 
would mitigate any potential price disparities and contribute to a fair 
and orderly market once the security opens on the Exchange. The 
Exchange believes that such authority would be consistent with the 
protection of investors and the public interest.
    In addition, Nasdaq proposes to allow for the initial pricing of 
such securities through the IPO Cross where a broker-dealer is willing 
to serve in the role of financial advisor to the issuer and perform the 
functions under Rule 4120(c)(8) that are ordinarily performed by an 
underwriter with respect to an initial public offering. To that end, 
Nasdaq proposed to add Rules 4753(a)(3)(A)(iv)(e) and 4753(b)(2)(D)(v) 
to state that in the case of the initial pricing of a security that 
traded in the over-the-counter market pursuant to FINRA Form 211 
immediately prior to the initial pricing, the fourth tie-breaker in 
calculating each of the Current Reference Price disseminated in the 
Nasdaq Order Imbalance Indicator and the price at which the Nasdaq Halt 
Cross will occur, respectively, shall be the most recent transaction 
price in that market. Nasdaq believes that such price is predictive of 
the price in the market for the common stock that will develop upon 
listing of the securities on Nasdaq and that it is therefore 
appropriate to use the price from such trading to determine the Current 
Reference Price and the price at which the Nasdaq Halt Cross will 
occur. Nasdaq also believes that the IPO Cross will be a better 
mechanism to open trading in these cases, given that these companies 
may attract significant interest upon listing on the Exchange from 
investors who previously could not invest in a security that was traded 
in the OTC market. In that way, the initial interest in the security 
upon its listing on the Exchange is similar to the interest in an 
initial public offering.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\9\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\10\ in particular, in that it is designed 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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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed amendment to Rules 4120 and 
4753 to provide authority to declare a regulatory halt in a security 
that is an OTC transfer would remove impediments to and perfect the 
mechanism of a free and open market and a national market system by 
providing the Exchange with authority to halt trading across all 
markets for a security that has traded in the OTC

[[Page 38323]]

market and not previously listed on the Exchange, but for which a 
regulatory halt would promote fair and orderly markets. The Exchange 
believes that permitting the Exchange to declare a regulatory halt in 
such securities before trading on the Exchange begins would avoid 
potential price disparities or anomalies that may occur during any UTP 
trading before the first transaction on the primary listing 
exchange.\11\ More specifically, the Exchange believes that quoting and 
trading in the pre-market of an OTC transfer can be erratic and 
investors may be harmed if their securities trade during this period. 
The Exchange therefore believes that having the authority to declare a 
regulatory halt for a security that is the subject of an OTC transfer 
is consistent with the protection of investors and the public interest 
and would promote fair and orderly markets by helping to protect 
against volatility in pricing before the initial transaction on the 
primary listing exchange.
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    \11\ Approving similar changes to Rule 123D of the New York 
Stock Exchange (NYSE), the Commission stated that it ``believes that 
extending the authority of the [NYSE] to declare a regulatory 
trading halt prior to the initial pricing on the [NYSE] of 
securities that were previously traded in the OTC market is 
consistent with the Act because it is reasonably designed to address 
any potential price disparities or anomalies that may occur during 
UTP trading before the first transaction on the [NYSE].'' See 
Securities Exchange Act Release No. 86351 (July 11, 2019), 84 FR 
34219 (July 17, 2019) (Approving SR-NYSE-2019-32).
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    The proposed rule change to clarify the fourth tie-breaker used in 
calculating the Current Reference Price disseminated in the Nasdaq 
Order Imbalance Indicator and the price at which the Nasdaq Halt Cross 
will occur, protects investors and the public interest by describing 
such fourth tie-breaker for a security that is not the subject of an 
IPO, but that has traded in the OTC market pursuant to FINRA Form 211 
immediately prior to the initiation of trading on Nasdaq. The proposed 
rule change establishes that in such a case the Current Reference Price 
and price at which the Nasdaq Halt Cross will occur will be the most 
recent transaction price in the OTC market. Nasdaq believes the most 
recent price from such trading is predictive of the price that will 
develop upon listing of the securities on Nasdaq.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The Exchange believes that the 
benefit to investors to halt trading in a security that transfers from 
an OTC market to a primary listing exchange outweighs any burden on 
competition that may result from a regulatory halt in such security 
before the initial listing on the primary listing exchange. The 
proposed rule change is consistent with existing authority for the 
Exchange to declare a regulatory halt in trading of a security before 
the initial pricing on the Exchange and would extend that authority to 
a transfer from the OTC market.
    In addition, the proposed change is designed to more fully describe 
the application of the IPO Halt Cross to a security that has traded in 
the OTC market pursuant to FINRA Form 211 immediately prior to the 
initiation of trading on Nasdaq in the determination of the forth tie-
breaker in calculating the Current Reference Price for the security and 
the price at which the Nasdaq Halt Cross will occur. The proposed rule 
change will have no impact on competition as it is merely designed to 
improve the opening process for investors in securities of certain 
companies that have already chosen to list on the Exchange and to 
insure that the Current Reference Price and the price at which the 
Nasdaq Halt Cross will occur is appropriately calculated.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change 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 email to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2019-060 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-2019-060. 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-2019-060, and should be submitted 
on or before August 27, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-16722 Filed 8-5-19; 8:45 am]
 BILLING CODE 8011-01-P