
[Federal Register Volume 76, Number 92 (Thursday, May 12, 2011)]
[Notices]
[Pages 27710-27730]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-11610]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64437; File No. SR-BX-2010-059]


Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Order 
Granting Approval of Proposed Rule Change and Amendment No. 1 Thereto 
and Notice of Filing and Order Granting Accelerated Approval to 
Amendment No. 2 Thereto To Create a Listing Market on the Exchange

May 6, 2011.
    On August 20, 2010, NASDAQ OMX BX, Inc. (the ``Exchange'' or 
``BX'') filed with the Securities and Exchange Commission (the 
``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to create a listing market on the Exchange, called 
``The BX Venture Market'' (``BX Venture Market''). The proposed rule 
change was published for comment in the Federal Register on September 
8, 2010.\3\ The Commission subsequently extended the time period in 
which to either approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether to 
disapprove the proposed rule change, to December 7, 2010.\4\ The 
Commission received three comments in response to the Notice.\5\
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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. 62818 (September 1, 
2010), 75 FR 54665 (``Notice'').
    \4\ See Securities Exchange Act Release No. 63105 (October 14, 
2010), 75 FR 64772 (October 20, 2010).
    \5\ See Letters to Elizabeth M. Murphy, Secretary, Commission, 
from William F. Galvin, Secretary of the Commonwealth, Commonwealth 
of Massachusetts, dated September 28, 2010 (``MSD Letter''); Michael 
R. Trocchio, Bingham McCutchen LLP, on behalf of Pink OTC Markets 
Inc., dated October 3, 2010 (``Pink OTC Markets Letter''); and Tom 
A. Alberg, Managing Director and Founder, Madrona Venture Group, 
dated December 1, 2010 (``Madrona Letter'').
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    On December 6, 2010, the Exchange submitted Amendment No. 1 to the 
proposed rule change.\6\ On December 7, 2010, the Commission instituted 
proceedings to determine whether to disapprove the proposed rule 
change, as modified by Amendment No. 1.\7\ The Commission thereafter 
received eight comments on the proposal.\8\ The Exchange submitted a 
response letter to the comments on February 17, 2011.\9\ On March 3, 
2011, the Commission issued a notice of designation of longer period 
for Commission action on proceedings to determine whether to disapprove 
the proposed rule change, as modified by Amendment No. 1.\10\ On May 4, 
2011, the Exchange submitted Amendment No. 2 to 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

[[Page 27711]]

comments on Amendment No. 2 from interested persons and is approving 
the proposed rule change, as modified by Amendment Nos. 1 and 2, on an 
accelerated basis.
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    \6\ See Securities Exchange Act Release No. 63597 (December 22, 
2010), 75 FR 82098 (December 29, 2010).
    \7\ See Securities Exchange Act Release No. 63448 (December 7, 
2010), 75 FR 77036 (December 10, 2010) (``Order Instituting 
Proceedings'').
    \8\ See Letters to Elizabeth M. Murphy, Secretary, Commission, 
from James J. Angel, Ph.D., CFA, dated January 14, 2011 (``Angel 
Letter''); K. Richard B. Niehoff, Chairman and CEO, United States 
OTC Markets, Inc., dated January 20, 2011 (``Niehoff Letter''); Mark 
G. Heesen, President, National Venture Capital Association, dated 
January 21, 2011 (``NVCA Letter''); Alan F. Eisenberg, Executive 
Vice President, Emerging Companies and Business Development, 
Biotechnology Industry Organization, dated January 24, 2011 (``BIO 
Letter''); Michael R. Trocchio, Bingham McCutchen LLP, on behalf of 
OTC Markets Group Inc., dated January 24, 2011 (``OTC Markets Group 
Letter''); Rey Ramsey, President and CEO, TechNet, dated January 24, 
2011 (``TechNet Letter''); William F. Galvin, Secretary of the 
Commonwealth, Commonwealth of Massachusetts, dated January 26, 2011 
(``MSD Letter II''); and James McCarthy, Co-Founder, the US Venture 
Exchange, dated April 19, 2011 (``McCarthy Letter'').
    \9\ See Letter to Elizabeth M. Murphy, Secretary, Commission, 
from Joan C. Conley, Senior Vice President and Corporate Secretary, 
The NASDAQ OMX Group, dated February 17, 2011 (``BX Response 
Letter'').
    \10\ See Securities Exchange Act Release No. 64028 (March 3, 
2011), 76 FR 13010 (March 9, 2011).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of Amendment No. 2 to the Proposed Rule Change

    The Exchange proposes to create a listing market, which will be 
called ``the BX Venture Market.'' Following Commission approval, the 
Exchange will announce the operational date of the new market in an 
Equity Trader Alert and press release. The proposed rules will become 
effective on the operational date.
    The text of the proposed rule change is available at http://nasdaqomxbx.cchwallstreet.com, at BX's principal office, 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
    In connection with the acquisition of the former Boston Stock 
Exchange by The NASDAQ OMX Group, Inc., the Exchange discontinued its 
listing marketplace and delisted all securities previously listed on 
the Exchange.\11\ Since January 2009, the Exchange has operated as a 
trading venue only, allowing market participants to trade securities 
listed on other national securities exchanges pursuant to unlisted 
trading privileges. The Exchange is proposing to begin listing 
securities again, through the creation of a new listing market, to be 
called ``The BX Venture Market.'' The BX Venture Market will have 
minimal quantitative listing standards, but will have qualitative 
requirements that are, in many respects, similar to those required for 
listing on The NASDAQ Stock Market (``NASDAQ'') and other national 
securities exchanges.\12\ The Exchange believes that the name BX 
Venture Market will appropriately convey the lower financial standards 
required for listing on this market and distinguish the BX Venture 
Market from other national securities exchanges. The term ``venture'' 
is already used to designate the junior market in Canada, the TSX 
Venture Market. Moreover, ``venture'' by definition broadly connotes an 
undertaking involving some uncertainty or risk in return for the hope 
of profit, rather than referring solely to companies that are backed by 
venture capital. It is thus a familiar term for a venue designed to 
provide an attractive alternative to companies being delisted from 
another national securities exchange for failure to meet quantitative 
listing standards (including price or other market value measures), as 
well as smaller companies contemplating an initial exchange listing. 
The Exchange further believes that the proposed listing venue will 
provide a transparent, well-regulated marketplace for these companies 
and their investors.\13\
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    \11\ See Securities Exchange Act Release No. 59265 (January 16, 
2009), 74 FR 4790 (January 27, 2009) (approving SR-BSE-2008-36 
relating to the delisting of all securities from the Exchange in 
connection with the Exchange's discontinuation of trading).
    \12\ The Exchange notes that not all qualitative requirements 
imposed by other exchanges would be required. See Listing 
Requirements, infra, for a full discussion of the proposed 
quantitative and qualitative requirements for listing on BX.
    \13\ The Exchange will propose in a separate rule filing changes 
to the BX Equities Platform to govern trading of, and reporting of 
transactions in, these listed securities and introducing and 
modifying market data products to permit dissemination of accurate 
quotation information and reporting of transactions.
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    As discussed in more detail below, the Exchange will operate and 
regulate the BX Venture Market through regulatory contracts with FINRA 
and the NASDAQ Stock Market LLC, which will be in place prior to the 
Market becoming operational. While the Exchange will retain all legal 
responsibility for and control of the functions performed by these 
entities, it will leverage FINRA's expertise overseeing the over-the-
counter markets, surveillance enhancements provided by the SMARTS 
Group,\14\ and the deep experience of the NASDAQ Listing Qualifications 
Department to ensure high quality oversight for market activity and 
listed companies. Moreover, the Exchange has proposed rules to provide 
a clear signal to investors that a company is listed on the BX Venture 
Market and to distinguish the BX Venture Market from NASDAQ and other 
national securities exchanges. These proposed rules also require a 
rigorous vetting procedure before a company may attain a listing, and 
heightened scrutiny thereafter of listed Companies. Finally, the 
Exchange will not launch the BX Venture Market before approval is 
obtained for an arrangement between the Exchange and FINRA to 
consolidate and disseminate best quotation and last sale data for BX 
Venture Market listed securities and that arrangement is 
operational.\15\ All of these matters are discussed more fully below.
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    \14\ SMARTS Group, a subsidiary of NASDAQ OMX, is a leading 
technology provider of market surveillance solutions to exchanges 
and regulators around the world
    \15\ The Commission notes that its order in Section VI, infra, 
does not contain this condition.
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    Listing Requirements
    The BX Venture Market would list Common Stock, Preferred Stock, 
Ordinary Shares, Shares or Certificates of Beneficial Interest of 
Trust, Limited Partnership Interests, American Depositary Receipts 
(ADR), American Depositary Shares (ADS), Units, Rights and Warrants. To 
be listed on the BX Venture Market, companies will need to meet the 
following qualitative listing standards, each of which is equivalent to 
the comparable listing standard of NASDAQ or is derived from the 
Federal securities laws:
    (a) The company must be registered under Section 12(b) of the Act 
\16\ and current in its periodic filings with the Commission and, as a 
result, subject to the requirements of the Sarbanes-Oxley Act of 2002 
\17\ (proposed Rule 5210(a) and 5210(e));
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    \16\ 15 U.S.C. 781(b).
    \17\ 15 U.S.C. 7201-7266.
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    (b) The company must have a fully independent Audit Committee 
comprised of at least three members and comply with the requirements of 
SEC Rule 10A-3, promulgated under the Act \18\ (proposed Rule 5605(c));
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    \18\ 17 CFR 240.10A-3.
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    (c) The company must have independent directors make compensation 
decisions for executive officers (proposed Rule 5605(d));
    (d) The company will be prohibited from taking any corporate action 
with the effect of nullifying, restricting or disparately reducing the 
per share voting rights of holders of an outstanding class of the 
company's common stock registered pursuant to Section 12 of the Act 
(proposed Rule 5640);
    (e) The company's auditor will be required to be registered with 
the Public Company Accounting Oversight

[[Page 27712]]

Board \19\ (proposed Rules 5210(b) and 5250(c)(3));
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    \19\ See Section 102 of the Sarbanes-Oxley Act, 15 U.S.C. 7212.
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    (f) The company will be required to hold an annual shareholders' 
meeting and solicit proxies for each shareholders' meeting (proposed 
Rule 5620);
    (g) The company will be required to obtain shareholder approval for 
the use of equity compensation (proposed Rule 5635);
    (h) The company will be required to adopt a code of conduct, 
applicable to all directors, officers and employees (proposed Rule 
5610);
    (i) The company will be required to conduct an appropriate review 
and oversight of all related party transactions, to address potential 
conflict of interest situations (proposed Rule 5630);
    (j) The company will be required to disclose material information 
through any Regulation FD compliant method (or combination of methods) 
(proposed Rule 5250(b) and IM-5250-1);
    (k) The listed securities must be eligible for a Direct 
Registration Program operated by a clearing agency registered under 
Section 17A of the Act \20\ (proposed Rules 5210(c) and 5255);
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    \20\ 15 U.S.C. 78q-1.
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    (l) Public ``shells'' would not be allowed to list (proposed Rule 
5103(b)); and
    (m) The Exchange will conduct a public interest review of the 
company and significant persons associated with it (proposed Rules 
5205(c) and 5104 and IM-5104-1). A company would not be eligible for 
listing if any executive officer, director, promoter, or control person 
was involved in any event described in Item 401(f)(2)-(8) of Regulation 
S-K that occurred during the prior five years (proposed Rule 5103(a)).
    In addition, the BX Venture Market would apply the following 
quantitative listing standards, set out in proposed Rules 5505 and 5506 
(initial listing) and 5550 (continued listing), which are designed to 
assure a minimum level of trading consistent with a public market for 
the securities:
    (a) 200,000 publicly held shares;
    (b) 200 public shareholders, at least 100 of which must be round 
lot holders for initial listing, and 200 public shareholders for 
continued listing;
    (c) A market value of listed securities of at least $2 million for 
initial listing and $1 million for continued listing;
    (d) Two market makers; and
    (e) A minimum initial listing price of $0.25 per share for 
securities previously listed on a national securities exchange and 
$1.00 per share for securities not previously listed on a national 
securities exchange. For continued listing, securities will be required 
to maintain a minimum $0.25 per share bid price.
    Further, with respect to companies not previously listed on a 
national securities exchange, the BX Venture Market will also require 
for initial listing that the company have either $1 million 
stockholders' equity or $5 million total assets, a one year operating 
history, and a plan to maintain sufficient working capital for the 
company's planned business for at least twelve months after the first 
day of listing.
    The Exchange would also require that rights and warrants will only 
be eligible for initial and continued listing if the underlying 
security is listed on the BX Venture Market or is a covered security, 
as described in Section 18(b) of the Securities Act of 1933.\21\
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    \21\ 15 U.S.C. 77r(b).
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    The proposed listing standards are designed to allow companies that 
are being delisted from another national securities exchange for 
failure to meet that exchange's quantitative listing requirements the 
opportunity to provide their investors with a better regulated, more 
transparent trading environment than may otherwise be available in the 
over-the-counter markets. The Exchange believes that allowing these 
companies to continue trading on a national securities exchange may 
enable some institutional investors to continue their ownership stake 
in the company, which could provide greater stability to the company's 
shareholder base and possibly avoid forced sales by such investors.\22\ 
The Exchange also believes that the BX Venture Market will provide an 
opportunity for smaller, private, venture-backed companies to expand 
their capital financing opportunities and go public, and at the same 
time, encourage investment in early-stage companies by providing 
private equity and venture funders with an exit strategy. In addition, 
companies currently traded over-the-counter could view this market as 
an aspirational step towards a listing on another national securities 
exchange. The Exchange believes that the agreement of such companies to 
comply with the Exchange's corporate governance standards and the 
application of the Exchange's public interest authority will provide 
additional protections to their investors than would be available in 
their present trading venue. Moreover, the Exchange believes that a 
listing on the BX Venture Market could help such companies raise 
capital, in turn promoting job creation within the United States. 
Finally, the Exchange believes that the BX Venture Market will be a 
more attractive alternative to domestic companies that might otherwise 
have considered a listing on non-U.S. junior markets, which generally 
have lower listing requirements.
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    \22\ Many institutional investors have investment policies that 
limit their ownership to securities listed on a national securities 
exchange, or that prohibit the ownership of securities that only are 
traded in the over-the-counter market.
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Investor Protection Provisions
    The Exchange recognizes that the listing requirements for the BX 
Venture Market will be lower than those of the NASDAQ Stock Market and 
other national securities exchanges, and that the market will, 
therefore, attract smaller, less liquid companies, which may create 
higher risks for investors. Mindful of these risks and the Exchange's 
objective to preserve the quality of and public confidence in its 
market, the Exchange has adopted rules to preclude investor confusion 
about BX Venture Market listings. The Exchange will also subject 
companies and associated individuals to a rigorous review process 
before approving a listing, and apply heightened regulatory scrutiny to 
listed Companies.
    References to Listing. To avoid investor confusion, the listing 
rules of the BX Venture Market specify that a BX Venture Market-listed 
company must refer to its listing as on the BX Venture Market, unless 
otherwise required by applicable rules or regulations. Staff will 
review any failure of a company to follow this requirement, and take 
appropriate action pursuant to the Rule 5800 Series. A company that 
represents itself as listed on the NASDAQ Stock Market or refers to 
itself as a NASDAQ listed company will be subject to immediate 
delisting pursuant to procedures in the Rule 5800 Series.\23\ To 
enforce this prohibition, the Exchange will monitor the press releases 
issued by a BX Venture Market-listed company \24\ and will annually 
review the company's Web site to determine how the company is referring 
to its listing.
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    \23\ Proposed Rule 5250(b)(4).
    \24\ Pursuant to Proposed Rule 5250, which addresses disclosure 
obligations, a listed company that issues a press release in 
satisfaction of its disclosure obligations is required to 
disseminate the press release over a national newswire service 
acceptable to the Exchange.
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    Similarly, in describing this listing venue, the Exchange will 
refer to it as the BX Venture Market and not as NASDAQ OMX BX. The 
Exchange will also prominently include information on its Web site 
describing the

[[Page 27713]]

differences between the BX Venture Market and other national securities 
exchanges, including NASDAQ.\25\ For example, it will inform users that 
BX Venture Market-listed stocks are not ``blue sky'' exempt, are not 
NMS securities, and are not subject to the trade-through rule, and 
provide side-by-side comparisons of BX Venture Market and NASDAQ Stock 
Market features. Marketing materials for the BX Venture Market will 
also include a prominent disclaimer explaining that the BX Venture 
Market is separate from, and not a tier of, the NASDAQ Stock Market. 
Finally, as required by proposed Rule 5106 and discussed in more detail 
later in this filing, the Exchange will require data vendors to 
identify when the BX Venture Market is the listing market for a 
security with a unique market center identifier, so as to clearly 
differentiate those securities from securities listed on NASDAQ or 
other exchanges or traded over-the-counter.
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    \25\ Rule 5106.
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    Automatic Bars to Listing. Proposed Rule 5103 provides for certain 
automatic bars to listing. Under that Rule, the Exchange will not 
approve for listing or allow the continued listing of ``shell'' 
Companies.\26\ This prohibition is based on concerns that the investors 
in shell companies are unaware of the ultimate business in which they 
are investing and that trading in such securities is more susceptible 
to market manipulation. The Exchange will also decline to list any 
company, and will delist any listed company, that attempts to rely on 
an exemption from state securities registration which otherwise may be 
available under state law to Companies listed on the Exchange. Finally, 
the Exchange will not approve for listing or allow the continued 
listing of a company if any executive officer, director, promoter, or 
control person was involved in any event that occurred during the prior 
five years described under Item 401(f)(2)--(8) of Regulation S-K under 
the Act. Such events include criminal convictions and pending charges, 
violations of securities laws, and court or administrative actions 
barring or limiting the individual from certain security related 
activities.\27\
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    \26\ Proposed Rule 5103(b) sets forth a number of factors that 
the Exchange will consider in determining whether a Company is a 
shell, including whether the Company is considered a ``shell 
company'' as defined in Rule 12b-2 under the Act, 17 CFR 240.12b-2.
    \27\ If a listed Company discloses an event involving an 
executive officer, director, promoter, or control person described 
under Item 401(f)(2)-(8) of Regulation S-K, the Exchange would 
provide the Company with thirty days to remove the executive 
officer, director, promoter, or control person. If the Company does 
not do so, the Exchange would send a delisting notification to the 
Company.
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    To enforce these automatic bars, and to identify other public 
interest concerns that, while not triggering an automatic bar, may call 
for the use of the Exchange's discretionary authority to disapprove a 
listing, the Exchange will engage in a rigorous review of listing 
applications, which will include background checks of individuals 
associated with the company and the assistance of independent qualified 
third-party investigators.
    Application and Public Interest Review. The listing application 
will require provision to the Exchange, and Staff review, of all 
reports and documents required to be filed with the Commission or other 
regulatory authority, as well as any other information or 
documentation, public or non-public, Staff determines is necessary for 
its review. Companies must also provide detailed descriptions and 
supporting documentation of all pending or prior inquiries, 
investigations, lawsuits, litigation, arbitration, hearings or any 
other legal or administrative proceedings involving the company, its 
executive officers, directors, promoters, and ten percent or greater 
shareholders of the company.\28\ The company must, in addition, 
disclose any events described under Item 401(f) of Regulation S-K 
involving officers, directors, promoters, or control persons; describe 
all bridge financings, shelf registrations, Regulation S offerings or 
private placements consummated in the prior six months; and provide 
copies of any blue sky memoranda.
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    \28\ A ten year history of such inquiries, investigations, and 
proceedings involving the company will be required; there is no time 
limit on the history required for executive officers, directors, 
promoters, or controlling shareholders.
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    Staff will also review the company's proxy disclosures to screen 
for events described pursuant to Item 401(f) of Regulation S-K under 
the Act. Moreover, it will conduct background checks of the company and 
affiliated individuals. This background investigation will be conducted 
by Staff members experienced in such reviews and will make use of 
public databases and other resources, such as Lexis-Nexis, the Web-CRD 
regulatory database, and web-based search engines, such as Google.\29\ 
Finally, the Exchange will request review of a company by an 
independent qualified third-party investigative firm in appropriate 
circumstances, as discussed in more detail below.
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    \29\ Proposed Rule 5205(c)(1).
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    If the Exchange identifies a regulatory issue that triggers an 
automatic bar the application will be disapproved. If the Exchange 
identifies a regulatory event described pursuant to Item 401(f)(2)-(8) 
of Regulation S-K about an officer, director, promoter, or control 
person that occurred more than five years prior; or a history of 
regulatory misconduct by a person that is not an officer, director, 
promoter, or control person of the company but who has significant 
influence on or importance to the company, it will ordinarily exercise 
its discretionary authority to deny listing. However, if the Exchange 
determines that the information identified may not rise to the level 
requiring denial of the listing, or if it identifies any issue that 
raises potential public interest concerns about which it seeks 
additional information (such as, for example, media accounts of 
criminal allegations or improper business practices, or any indication 
of financial improprieties) it will refer the company to an independent 
qualified third party investigative firm for review. Any decision to 
list a company that has been referred to an independent investigative 
review based on the regulatory history of an associated individual that 
does not trigger an automatic bar, must be approved in writing by the 
Chief Regulatory Officer (``CRO'') of the Exchange. The CRO must also 
approve the listing of any company with an officer, director, promoter, 
or control person who has described a bankruptcy under Item 401(f)(1) 
of Regulation S-K. Finally, whenever Staff has identified a past 
violation or evasion of a corporate governance standard pursuant to its 
review of a formerly exchange-listed company's past corporate 
governance activities, but decides not to exercise its discretionary 
authority to deny listing, the listing must be approved in writing by 
the CRO. Documentation of the CRO's approvals will be maintained with 
the Exchange's listing file for the company.
    Independent Investigative Assistance. The Exchange will retain a 
qualified independent third party investigative firm to assist in its 
public interest review process. Staff will make random, regular 
referrals to such a firm of at least 10% of applicant companies that 
were not previously listed on a national securities exchange.\30\ In 
addition, Staff

[[Page 27714]]

will utilize an investigative firm when it would be impractical to 
research a regulatory history occurring outside the United States. 
Finally, Staff will seek review of a company when its internal review 
has uncovered a regulatory issue or potential public interest concern 
that does not trigger an automatic bar and Staff has not made a 
determination to disapprove the application. While the scope of 
investigations will vary based on the reasons for review, they 
generally will focus on criminal history, government sanctions and 
watchlists, and will also include online and onsite checks of court 
records, searches of relevant state and country criminal databases, and 
searches of global risk compliance databases covering government 
prohibited and barred persons. In appropriate circumstances, such as 
where questions are raised related to the legitimacy or appropriateness 
of an applicant's business practices, customers, or suppliers, whether 
through whistle blower complaints or otherwise, the outside firm would 
be asked to make inquiries with respect to those matters.
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    \30\ Proposed Rule 5205(d). While the Exchange expects to refer 
between 10-20% of such applicant companies, this ratio could change 
upon evaluation of the findings provided by the investigative firms. 
The Exchange does not expect that random referrals of companies that 
have previously been listed on a national securities exchange will 
be necessary, but will reevaluate that assumption on an on-going 
basis.
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    These procedures and determinations shall be followed, as 
applicable, whenever a listed company names a new officer, director, 
promoter, or control person or describes an event pursuant to Item 
401(f) of Regulation S-K under the Act, and whenever Staff, in the 
course of its on-going monitoring of listed Companies, identifies a 
potential public interest concern. These background procedures would 
also apply when a listed company combines or reverse-merges with a non-
listed entity, resulting in a ``change of control'' transaction 
pursuant to Listing Rule 5110.\31\
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    \31\ If a listed Company combines or reverse merges with a non-
listed entity, resulting in a change of control, the post-merger 
company must apply for and meet all initial listing requirements 
before listing on the Exchange. Delisting proceedings will be 
initiated if an application for listing of the new entity has not 
been approved before consummation of the transaction. Rule 5110 
includes a non-exclusive list of considerations to be used for 
determining whether a change of control has occurred.
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Oversight of Listings and Delistings

    Pursuant to an intercompany regulatory services agreement that will 
be in place before the BX Venture Market is operational, Staff in 
NASDAQ's Listing Qualifications Department will be responsible for 
processing listings, conducting on-going compliance monitoring of 
listed companies, and implementing delistings. Notwithstanding the 
contractual arrangement, the Exchange retains ultimate legal 
responsibility for, and control of, these functions. The NASDAQ Listing 
Qualifications Department is presently comprised of 33 individuals, 
which include 13 continued listing analysts, four initial listing 
analysts, and an investigations group. This Staff is extremely 
experienced in regulatory analysis: the average person has over ten 
years of experience at NASDAQ and several have extensive backgrounds 
outside NASDAQ in investigating alleged violations of the Federal 
securities laws. The sophisticated technology used by this Department 
enables Staff to efficiently review public filings and identify and 
prioritize issues that may raise concerns under the listing standards, 
including public interest concerns. Among other things, this system is 
programmed to identify any quantitative deficiencies arising from the 
filings or from trading data, immediately notify the appropriate Staff, 
and keep an auditable record of how Staff treated the deficiency.
    The proposed rules require, moreover, that the listing process will 
at all times be supervised by at least one person with substantial 
prior experience supervising such a program at a national securities 
exchange with a currently active listing program. The head of the 
Exchange's Listing Department, who will have no marketing 
responsibilities and will report to NASDAQ OMX's Chief Regulatory 
Officer, will be involved in all decisions concerning whether to permit 
or deny listing to a company based on a public interest concern. In 
addition, the investigations group must be supervised by at least one 
person with substantial prior regulatory experience at another national 
securities exchange or with an organization, such as the SEC's 
Enforcement Division or FINRA, which has securities-related enforcement 
responsibilities. Finally, the Exchange's Chief Regulatory Officer will 
be required to have had substantial prior regulatory experience with a 
national securities exchange or equivalent experience.\32\ This person 
will be required to approve the listing of any company where potential 
regulatory concerns have been identified, including cases where the 
company has disclosed information about an executive officer, director, 
promoter, or control person involving an event described under Item 
401(f) of Regulation S-K that does not trigger the automatic bar 
described above.\33\
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    \32\ Proposed Rule 5102.
    \33\ Proposed IM 5104-1.
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    Should the workload resulting from the new BX Venture Market prove 
sufficiently high, the Exchange and NASDAQ have each committed to 
hiring additional staff, as necessary. In that regard, the staffing 
within Listing Qualifications is now, and will continue to be, reviewed 
regularly by NASDAQ's Chief Regulatory Officer and Regulatory Oversight 
Committee and will also be reviewed by the Exchange's Regulatory 
Oversight Committee.
Quantitative Listing Standards
    The Exchange proposes that any company that meets the quantitative 
(e.g., financial) requirements for listing on NASDAQ will not be 
approved for listing on the BX Venture Market. This will assure that 
such companies only become listed on the exchange with higher listing 
standards.
    Given that the Exchange expects to list companies that do not meet 
the quantitative listing requirements of the primary existing national 
securities exchanges, it is expected that BX Venture Market-listed 
companies will include smaller companies and companies facing business 
or other challenges. Thus, the proposed quantitative standards for the 
BX Venture Market were deliberately structured to be lower than those 
of the other primary exchanges. In that regard, the minimum price 
requirement for listing on the BX Venture Market will be $0.25 per 
share for a security previously listed on another national securities 
exchange and $1.00 per share for a security previously quoted in the 
over-the-counter market or listing in connection with its initial 
public offering. Until September 30, 2011, the Exchange would consider 
any company that was listed on another national securities exchange at 
any time since January 1, 2010, to be eligible to list with a $0.25 per 
share price. The Exchange believes it appropriate to consider a company 
delisted since January 1, 2010, as previously listed on another 
national securities exchange because the BX Venture Market would not 
have been available to such companies when they were delisted. A number 
of companies were delisted during 2010 as a result of difficulties 
arising from the financial crisis and this look-back will also allow 
these companies, which may have recovered but not yet meet the initial 
listing requirements of another exchange, to list on the BX Venture 
Market. Furthermore, the Exchange believes it is appropriate to 
continue this treatment until September 30, 2011, to assure that such 
companies have an adequate opportunity to learn about the BX

[[Page 27715]]

Venture Market and sufficient time to complete their application and 
have that application processed by the Exchange. After September 30, 
2011, a company will be considered to have been previously listed on a 
national securities exchange, and therefore eligible to list with a 
$0.25 per share price, only if it was listed on such an exchange at any 
time during the three months prior to its listing on the BX Venture 
Market. The Exchange believes that this three month period will allow 
the company sufficient time to apply for listing on the BX Venture 
Market and have its application processed.
    For continued listing, a security will be required to maintain a 
minimum $0.25 per share bid price.\34\ If the security does not 
maintain a minimum $0.25 per share bid price for 20 consecutive trading 
days, Exchange Staff would issue a Staff Delisting Determination and 
the security would be suspended from trading on the BX Venture 
Market.\35\ A company could appeal that determination to a Hearings 
Panel, however such an appeal would not stay the suspension of the 
security.\36\ During the Hearings Panel process, the security could 
regain compliance by achieving a $0.25 per share minimum bid price 
while trading on another venue, such as the over-the-counter market, 
for ten consecutive days. However, if the company has received three or 
more Staff Delisting Determinations for failure to comply with minimum 
price requirement in the prior 12 months, the company could only regain 
compliance by achieving a closing bid price of $0.25 per share or more 
for at least 20 consecutive trading days. The Exchange believes that 
this higher requirement for companies that were previously non-
compliant is appropriate to reduce the likelihood of future instances 
of non-compliance and the concomitant investor confusion concerning the 
ability of the company to remain listed. If the Hearings Panel 
determines that the security has satisfied the applicable standard to 
regain compliance, the trading halt would be terminated and the 
security would resume trading on the Exchange.
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    \34\ The Exchange notes there is also no price requirement for 
initial or continued listing on the National Stock Exchange or for 
continued listing on NYSE Amex and therefore that the proposed 
continued listing requirement exceeds the requirement of those 
exchanges.
    \35\ Proposed Rule 4120(a)(12).
    \36\ Proposed Rule 5815(a)(1)(C).
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    To be eligible for initial listing, a company not previously listed 
on a national securities exchange must have at least a one year 
operating history, a minimum of either $1 million in stockholders' 
equity or $5 million in total assets, and demonstrate that it has a 
plan to maintain sufficient working capital for its business for at 
least twelve months after the first day of listing. The Exchange 
believes that these requirements will help assure that a company that 
was not previously subject to exchange regulation nonetheless has a 
credible and sustainable business.
    The Exchange believes that the proposed public float, holder and 
market maker requirements, together with the minimum market value of 
listed securities requirement, will assure sufficient liquidity in 
listed securities. In that regard, the Exchange notes that the 
shareholder and publicly held shares requirements are comparable to, or 
higher than, requirements for listing a preferred stock or secondary 
class of common stock on the NASDAQ Capital Market, which require 100 
round lot shareholders and 200,000 publicly held shares. The Exchange 
is not aware of any difficulties in the trading in securities meeting 
these requirements. Further, requiring two market makers will assure 
competing quotations for potential buyers and sellers of the securities 
listed on the BX Venture Market. Finally, the Exchange believes that 
the minimum market value of listed securities requirement will help 
assure that the company issuing the securities is of a sufficient size 
to generate interest from investors and market participants. While 
these proposed standards may be lower than those of other exchanges, 
investors will be protected by the fact that securities listed on the 
BX Venture Market would be considered penny stocks under Exchange Act 
Rule 3a51-1, unless they qualify for an exemption from the definition 
of a penny stock.\37\ As such, broker-dealers would be required to pre-
approve their customers for trading in penny stocks and investors will 
obtain the disclosures required to be made by broker-dealers in 
connection with penny stock transactions, providing them with trade and 
market information prior to effecting a transaction. Further, there 
will be no ``blue sky'' exemption available under Section 18 of the 
Securities Act of 1933,\38\ so companies will be required to satisfy 
state law registration requirements and other state laws that regulate 
the sale and offering of securities. Because some state laws and 
regulations may provide an exemption from certain registration or 
``blue sky'' requirements for companies listed on the former Boston 
Stock Exchange, based on the higher listing standards previously 
applied by that Exchange, proposed Rule 5103(c) would provide that the 
Exchange will take action to delist any company listed on the BX 
Venture Market that attempts to rely on such an exemption.\39\ 
Companies will also agree not to rely on any such exemption as a 
provision of the BX Venture Market Listing Agreement. Listed companies 
will be required to represent to the Exchange that they are not relying 
on any such exemption in connection with any securities offering and 
will be required to provide the Exchange with copies of any ``blue sky 
memoranda'' prepared in connection with the issuance of shares.\40\ 
These steps will allow the Exchange to assure that the company is not 
inappropriately relying on such an exemption.
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    \37\ 17 CFR 240.3a51-1. The Exchange is not seeking an exemption 
from the penny stock rules for securities listed on BX, however a 
security may be excluded from the definition of a penny stock as a 
result of the security having a price in excess of $5 or its issuer 
having net tangible assets in excess of $2 million (if the issuer 
has been in continuous operation for at least three years) or $5 
million (if the issuer has been in continuous operation for less 
than three years) or average revenue of at least $6 million for the 
last three years. Rule 3a51-1(d) and (g), 17 CFR 240.3a51-1(d) and 
(g).
    \38\ 15 U.S.C. 77r.
    \39\ The Exchange notes that the Massachusetts Securities 
Division has requested comment on a proposed change to its 
regulations to eliminate its exemption from the registration 
requirement for securities listed on the BX Venture Market. See 
http://www.sec.state.ma.us/sct/sctnewregs/newregsidx.htm#hearing.
    \40\ Proposed Rule 5250(e)(7). The Exchange has proposed to add 
these requirements in response to comments submitted on the original 
proposal.
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Qualitative Listing Standards
    The BX Venture Market corporate governance requirements are 
generally comparable to those of the other exchanges. The Exchange 
would require that a listed company have an audit committee comprised 
of at least three independent directors that also meet the requirements 
of SEC Rule 10A-3.\41\ For a director to be considered an independent 
director, the company's board would have to determine that the 
individual does not have a relationship which, in the board's opinion, 
would interfere with the exercise of independent judgment in carrying 
out the responsibilities of a director.\42\ The board would be 
precluded from finding a director independent based on certain 
relationships, including if that director

[[Page 27716]]

is currently an employee of the company or was employed by the company 
during the prior three years (including as an executive officer), 
accepted certain compensation or payments from the company during the 
prior three years, or had a family member with certain affiliations 
with the company.\43\
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    \41\ 17 CFR 240.10A-3. See proposed Rule 5605(c)(2). Companies 
may be eligible for a phase-in or cure period with respect to 
certain of these requirements.
    \42\ Proposed Rule 5605(a)(2) and IM-5605-1. The proposed 
definition of an independent director is identical to NASDAQ's 
definition of an independent director.
    \43\ Id.
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    The audit committee would be required to have a charter setting out 
its responsibilities, including the committee's purpose of overseeing 
the accounting and financial reporting processes of the company and the 
audits of the company's financial statements and the responsibilities 
and authority necessary to comply with SEC Rule 10A-3.\44\ The audit 
committee, or another independent body of the board, will also be 
required to conduct an appropriate review and oversight of any related 
party transaction.\45\ The Exchange believes that this requirement will 
limit the potential for self-dealing in connection with any related 
party transactions.
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    \44\ Proposed Rule 5605(c)(1).
    \45\ Proposed Rule 5630.
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    The Exchange would also require that independent directors make 
compensation decisions concerning the chief executive officer and other 
executive officers.\46\ Independent directors would be required to meet 
on a regular basis in executive sessions.\47\ These requirements for 
audit committees, compensation decisions, and executive sessions are 
identical to those of NASDAQ and substantially similar to those of the 
other national securities exchanges and the Exchange believes they will 
serve to empower the independent directors of its listed companies.
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    \46\ Proposed Rule 5605(d) and IM-5605-6. A company can satisfy 
this requirement by having their independent directors make these 
decisions in executive session, or by having independent directors 
sit on a compensation committee. If the company chooses to use a 
compensation committee and the committee is comprised of at least 
three members, one director who is not independent as defined in 
Rule 5605(a)(2) and is not a current officer or employee or a Family 
Member of an officer or employee, may be appointed to the 
compensation committee under exceptional and limited circumstances, 
provided the company makes appropriate disclosure. Of course the 
Exchange will adopt rules required by Section 952 of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act following the 
necessary SEC rulemaking related to that provision. See Listing 
Standards for Compensation Committees, Release No. 33-9199 (April 6, 
2011) (76 FR 18966).
    \47\ Proposed Rule 5605(b).
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    While the Exchange would require that a listed company have at 
least three independent directors to satisfy the audit committee 
requirement described above, it would not require that a majority of 
the company's board of directors be independent or an independent 
nomination committee because the Exchange believes those requirements 
could impose significant additional costs on these smaller companies 
and therefore discourage companies from pursuing an otherwise 
beneficial listing. In that regard, given the significant 
responsibilities imposed on audit and compensation committee members, 
directors who serve on these committees are sometimes reluctant to 
serve on other committees. As such, if the BX Venture Market were to 
also require an independent nominations committee, companies may have 
to increase the size of their boards and add additional independent 
directors. Similarly, requiring that independent directors comprise a 
majority of a company's board could also require companies to add 
additional independent directors. In each case, the need to add 
independent directors would impose additional costs on the company.\48\ 
Moreover, nothing in the Commission's rules or the Act mandate these 
requirements.\49\ However, the Exchange believes that the requirement 
for executive sessions of the independent directors will provide a 
forum for the independent directors to consider whether the governance 
structure of the company is appropriate and raise any concerns, 
notwithstanding the lack of a majority independence and nominations 
committee requirement.
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    \48\ The 2008-2009 Director Compensation Report prepared by the 
National Association of Corporate Directors (available from http://www.nacdonline.org/) found that the median total direct compensation 
per director was $78,060 for smaller companies (defined as companies 
with annual revenues of $50 to $500 million).
    \49\ See, e.g., Item 407(a) of Regulation S-K, which requires 
disclosure of non-independent directors who serve on nomination 
committees, implicitly allowing such service.
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    Companies listing on the BX Venture Market will be permitted to 
phase in compliance with the audit committee and compensation committee 
requirements following their listing. With respect to the audit 
committee requirements, a company listing in connection with its 
initial public offering would be required to have one independent 
director on the committee at the time of listing; a majority of 
independent members within 90 days of the date of effectiveness of the 
company's registration statement; and all independent members within 
one year of the date of effectiveness of the company's registration 
statement. For this purpose, a company will be considered to be listing 
in conjunction with an initial public offering only if it meets the 
conditions in SEC Rule 10A-3(b)(1)(iv)(A), namely that the company was 
not, immediately prior to the effective date of its registration 
statement, required to file reports with the Commission pursuant to 
Section 13(a) or 15(d) of the Act.
    With respect to the compensation committee requirement, a company 
listing in connection with its initial public offering, upon emerging 
from bankruptcy, or that otherwise was not subject to a substantially 
similar requirement prior to listing (such as a company only traded in 
the over-the-counter market) would be required to have one independent 
director on the committee at the time of listing; a majority of 
independent members within 90 days of listing; and all independent 
members within one year of listing. For this purpose, a company will be 
considered to be listing in conjunction with an initial public offering 
if immediately prior to listing it does not have a class of common 
stock registered under the Act.
    A company that transfers to the BX Venture Market from another 
national securities exchange with a substantially similar requirement 
will be immediately subject to the audit and compensation committee 
requirements, provided that the company will be afforded the balance of 
any grace period afforded by the other market.
    The Exchange will require companies to adopt a code of conduct 
applicable to all directors, officers and employees.\50\ Any waivers of 
the code for directors or executive officers must be approved by the 
board and disclosed. The Exchange believes that this requirement will 
help promote the ethical behavior of individuals associated with 
companies listed on the BX Venture Market.
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    \50\ Proposed Rule 5610.
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    In addition, the Exchange will require shareholder approval when a 
company adopts or materially amends a stock option or purchase plan or 
other equity compensation arrangement pursuant to which stock may be 
acquired by officers, directors, employees, or consultants.\51\ The 
Exchange would not require shareholder approval for other share 
issuances, however, given that the companies expected to list on the 
Exchange may have a greater need to issue shares more frequently or 
more quickly, due to their expected smaller size and the business 
challenges they may be facing. As such, the Exchange believes that the 
cost and delay associated with seeking approval for share issuances 
would discourage companies from pursuing an otherwise

[[Page 27717]]

beneficial listing.\52\ Nonetheless, the Exchange will require listed 
Companies to provide notice of any 5% change in its shares outstanding 
and any capital raising transactions,\53\ and the Exchange Staff will 
review such issuances for public interest concerns, such as issuances 
significantly below the market price or for the benefit of related 
parties.
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    \51\ Proposed Rule 5635.
    \52\ In this regard, the proposed rules are comparable to the 
rules of the National Stock Exchange, which require shareholder 
approval for equity compensation issuances but not for other share 
issuances. See National Stock Exchange Rule 15.6.
    \53\ Proposed Rules 5250(e)(1) and (e)(7).
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Appeal Process
    Companies denied initial listing or delisted by the Exchange would 
be afforded an appeal process similar to that contained in the existing 
Rule 4800 Series of the Exchange's rules, which was modeled on the 
process available to companies listed on NASDAQ.\54\ The Exchange's 
Listing Qualifications Staff only will be able to allow time-limited 
exceptions for certain deficiencies from the continued listing 
standards, such as the failure to file periodic reports, certain of the 
corporate governance requirements and any quantitative deficiency which 
does not contain a compliance period.\55\ Other of the continued 
listing requirements would provide for automatic compliance periods, 
including the market maker, market value of listed securities, and 
audit committee requirements, and a determination that an officer, 
director, promoter, or control person of a company was involved in any 
event that occurred during the prior five years described in Item 
401(f)(2)-(8) of Regulation S-K under the Act.\56\ If the company fails 
to timely solicit proxies or hold its annual meeting or fails to meet 
the minimum price requirement, or if Staff has public interest concerns 
in connection with the company, or if a company represents itself as 
listed on the NASDAQ Stock Market or refers to itself as a NASDAQ 
listed-company, or attempts to rely on an exemption from state 
securities registration that otherwise may be available under state law 
to companies listed on the Exchange, the Listing Qualifications Staff 
will issue an immediate delisting letter to the company.\57\ Any other 
deficiency would result in the Listing Qualifications Staff issuing a 
Public Reprimand Letter or a delisting notification.\58\ Hearings 
Panels composed of individuals not affiliated with the Exchange would 
be permitted to grant additional, but limited time to companies that 
received a delisting notification, or to reverse a denial of initial 
listing. A company could appeal a decision of the Hearings Panel to the 
Listing and Hearing Review Council, which is a committee appointed by 
the Exchange's Board to act for the Board with respect to listing 
decisions.\59\ The Listing and Hearing Review Council decision would be 
final, unless it is called for a discretionary review by the Exchange 
Board. The compliance periods and discretion to allow a non-compliant 
company to remain listed are generally shorter on the BX Venture 
Exchange than would be allowed an equivalent company listed on NASDAQ. 
For example, a Hearings Panel would only be permitted to grant 90 
calendar days for a company to regain compliance with a listing 
standard, instead of the 180 calendar days available on NASDAQ. 
Similarly, a company that falls below the market value of listed 
securities requirement would be provided a 90 calendar day compliance 
period, instead of the 180 days available to a NASDAQ company.
---------------------------------------------------------------------------

    \54\ Nasdaq Listing Rules 5800-5899.
    \55\ Proposed Rule 5810(c)(2).
    \56\ Proposed Rule 5810(c)(3).
    \57\ Proposed Rule 5810(c)(1).
    \58\ Proposed Rule 5810(c).
    \59\ Section 6.1 of the By-Laws on NASDAQ OMX BX, Inc.
---------------------------------------------------------------------------

Oversight of Market Activity
    The Exchange represents that it will have in place before the BX 
Venture Market is operational a contractual arrangement with FINRA to 
regulate market activity on the BX Venture Market, as it does today for 
NASDAQ. FINRA's oversight will include review of trading that takes 
place on the over-the-counter market in securities listed on the BX 
Venture Market. Based on its breadth of experience overseeing the over-
the-counter markets and advanced technology, FINRA will implement 
electronic surveillance patterns designed to detect a wide range of 
potential issues, including, for example, insider trading, front-
running, fraud, auto-execution manipulation, mid-point cross 
manipulation, wash sales, layering, open/close marking, and Reg SHO 
clearing fails. FINRA intends to revise a number of its existing 
automated surveillance patterns to incorporate NASDAQ OMX BX trading 
activity and over-the-counter trading activity in issues eligible for 
trading on The BX Venture Market, and will develop and implement 
specific automated surveillance patterns to address any rule and 
functionality changes resulting from The BX Venture Market initiative. 
FINRA will enhance its review process by calibrating surveillance 
patterns to detect potential issues that may arise particularly in low 
priced, less liquid stocks. In addition, the Exchange and FINRA will 
leverage the expertise of SMARTS Group, a leading technology provider 
of market surveillance solutions to exchanges and regulators around the 
world,\60\ in creating a new suite of quoting and trading patterns to 
detect suspicious activity in low priced and less widely traded 
securities. Further, FINRA will review the activity of firms on the BX 
Venture Market when conducting their reviews of these firms. This 
review will include ``focused exams'' concentrated on sales practices 
and firm oversight. The review will include any other activities 
required to effectively regulate the Market.
---------------------------------------------------------------------------

    \60\ SMARTS Group is a subsidiary of NASDAQ OMX.
---------------------------------------------------------------------------

    The Exchange represents that an agreement with FINRA for these 
activities will be in place before the BX Venture Market begins 
operations. Notwithstanding the contractual arrangement with FINRA, the 
Exchange retains ultimate legal responsibility for and control of all 
regulatory functions for the Exchange.
    The Exchange will monitor real-time trading of securities listed on 
the BX Venture Market, and plans to implement a broad suite of realtime 
surveillance patterns and functional analysis tools based on the most 
up-to-date technology solution, SMARTS.
    The Exchange will provide a monthly report to the Directors of the 
Division of Trading and Markets and the Office of Compliance, 
Inspections and Examinations describing any significant developments on 
the BX Venture Market, including companies added or removed from the 
market during that period. In addition, the Exchange's Chief Regulatory 
Officer will provide quarterly reports to the Directors of the Division 
of Trading and Markets and the Office of Compliance, Inspections and 
Examinations describing the regulatory activities of the Exchange and 
FINRA during the prior quarter. The Exchange will also provide copies 
of the Listing Department's procedures manuals and surveillance 
procedures used by FINRA and the Exchange to the Commission's Office of 
Compliance, Inspections and Examinations. Finally, before the BX 
Venture Market is operational, the Exchange will represent, in a letter 
to the Staff in the Commission's Office of Compliance Inspections and 
Examinations, that it and FINRA have adequate regulatory procedures and 
programs in place to effectively regulate the BX Venture Market and its 
listing

[[Page 27718]]

program, and adequate procedures and programs in place to effectively 
process trades and maintain the confidentiality, integrity, and 
availability of the Exchange's systems.
Market Data
    The Exchange has committed to broad dissemination of quotation and 
last sale information about BX Venture Market listed securities to 
ensure that public investors and all market participants have all the 
information needed to make informed investing and trading decisions. 
Information about securities listed on the BX Venture Market will be 
disseminated via several mechanisms. First, BX Venture Market listed 
securities will have real-time consolidated market data for both quotes 
and trades consistent with that provided by the network processors for 
national market system securities. The Exchange notes that operation of 
the BX Venture Market will be conditioned by the Commission upon 
approval and operation of an arrangement by the Exchange and FINRA to 
consolidate and disseminate the best quotation and last sale data for 
BX Venture Market listed securities that is made available by BX and 
FINRA.\61\ The consolidated market data for BX Venture Market listed 
securities will be made available at no charge for the foreseeable 
future.\62\ Second, the Exchange will disseminate real-time last sale 
data, tick-by-tick details, and best bid and offer quotations and trade 
data from the BX execution system.\63\
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    \61\ The Commission notes that its order in Section VI, infra, 
does not contain this condition.
    \62\ The Exchange will, as always, be required to file a 
proposed rule change in order to assess a fee for this data in the 
future.
    \63\ BX Last Sale provides real-time last sale data from the BX 
execution systems. BX TotalView provides tick-by-tick details for 
all displayable orders in the BX Execution systems, and BX Basic 
provides best bid and offer quotations and trade data from the BX 
execution system.
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    Market data regarding BX Venture Market listed securities will be 
disseminated in a manner that facilitates adoption and use of the new 
data provided, in that the Exchange will ensure ease and efficiency for 
market data vendors and potential recipients. Specifically, 
consolidated data will leverage the widespread distribution network and 
administrative operations that the Exchange already employs including 
existing market data contracts, connectivity ports, transmission lines, 
network operations, data message specifications, billing and auditing. 
By leveraging existing data technology and administration, data 
regarding BX Venture Market listed securities will become instantly 
available through hundreds of market data distributors reaching an 
audience of millions of potential users via multiple distribution 
channels.
    Further, the Exchange is committed to ensuring that BX Venture 
Market securities are clearly distinguished, and distinguishable, from 
securities listed on the traditional exchanges on those data products 
and to end-users of the data. To that end, all market data for BX 
Venture Market securities will include a unique data identifier in the 
``Market Center'' field to distinguish the security from those listed 
on other exchanges and the over-the-counter markets. This Market Center 
identifier is already utilized by the Exchange and network processors 
on every consolidated and proprietary data feed supplied by the network 
processors and by NASDAQ and other national securities exchanges. The 
Market Center identifier is utilized by the network processors to 
demarcate, for example, NASDAQ (``Q''), NYSE (``N''), Amex (``A''), 
Arca (``P''), and OTC stocks. BX Venture Market listed securities would 
be identified with its own unique Market Center identifier ``B'' on any 
new BX consolidated data feeds and in the BX Venture Market Daily List 
data product.\64\ The Daily List data product will be adopted through 
an amendment to Rule 7022 in a separate filing with the Commission.
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    \64\ At the request of Commission staff, the Exchange assessed 
the feasibility of adopting a multi-character market center 
identifier, and it concluded that this proposal is infeasible. 
Single-character market center identifiers are hard-coded into a 
worldwide network of market data distributors and cannot be 
modified. The Exchange also investigated without success adopting 
other options including root symbol modifiers and lengthy security 
symbols.
---------------------------------------------------------------------------

    The Exchange will require market data distributors, through 
distribution agreements and by amendments to its global data policy 
document to prominently identify the BX Venture Market as the listing 
market, and, where the display of text is not consistent with the 
display methodology or user needs of the distributor, to use the Market 
Center identifier ``B'' to prominently display the listing market with 
quotation and last sale information for BX Venture Market-listed 
securities. Every market data vendor that distributes BX Venture Market 
data to users must sign a data distribution agreement. These agreements 
bind the data vendor to abide by the terms and conditions of data 
purchase and usage, including conditions governing data display within 
the global data policy document. The requirement to prominently display 
the listing market will be a legal obligation backed by contractual 
sanctions including termination of the distribution agreement. These 
agreements have been used effectively in the past to require the 
display of key data elements to customers. The Exchange represents that 
these agreements will be in place before the BX Venture Market begins 
operations, and that the Market Center identifier will be distributed 
and required to be displayed upon the launch of the market.
    Market data distributors and data users, including retail 
investors, are already familiar with this approach. Data distributors 
such as Bloomberg and Thompson Reuters, Internet portals such as Google 
and Yahoo, mutual fund complexes and brokers such as Vanguard, Schwab, 
and E*Trade, all currently use Market Center identifiers to understand 
where a security is listed and display that information on their Web 
sites and portals, typically next to the company name. For example, on 
Yahoo's Web site, ``NasdaqGS'' is currently displayed next to the name 
of all companies listed on The NASDAQ Global Select Market; that 
display would read, for BX Venture Market companies, ``BX Venture'' or 
``BX Venture Market.'' The requirement that the Market Center 
identifier for BX Venture Market listed securities be prominently 
displayed by all of these market participants will mean that investors 
viewing a quotation or last sale report will be able to clearly 
distinguish a stock listed on the BX Venture Market from those listed 
on NASDAQ or other markets.
    The Exchange will, in connection with the launch of the BX Venture 
Market, proactively review the displays of prominent data distributors 
and require immediate compliance if they fail to meet the requirements 
of the market data agreements. Following the launch of the BX Venture 
Market, the Exchange will conduct periodic audits of all market data 
vendors to ensure compliance. If a market data vendor does not satisfy 
the Exchange's display requirements, the Exchange will take action 
against the vendor, up to and including terminating the vendor's 
ability to receive data from the Exchange. The Exchange is committed to 
working with market participants and the Commission to evaluate, on an 
on-going basis, whether this display requirement is effective in 
distinguishing BX Venture Market-listed securities from other national 
exchange-listed securities in order to reduce investor confusion.
Symbology
    The assignment of symbols for companies listed on the BX Venture

[[Page 27719]]

Market will be governed by the existing National Market System Plan for 
the Selection and Reservation of Securities Symbols, which is the 
exclusive means of allocating and using trading symbols. Pursuant to 
that Plan, securities listed on the BX Venture Market, like every other 
national securities exchange today, are eligible to have a trading 
symbol of one to five characters. This eligibility is important because 
the BX Venture Market is intended to afford a listing venue for 
companies formerly listed on other national securities exchanges, which 
will want to retain their symbols.\65\ In approving the symbology Plan, 
the Commission distinguished securities listed on an exchange, which 
can trade with a symbol of one to five characters, from those trading 
over the counter, which can trade only with a four or five character 
symbol, noting that ``[e]xchange listing standards are approved by the 
Commission and must include corporate governance requirements that 
comply with Rule 10A-3 under the Exchange [sic] Act. Issuers traded on 
over-the-counter equity venues (including the OTCBB and Pink Sheets) 
are not subject to such listing standards.''\66\
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    \65\ The Commission found that allowing all exchanges to utilize 
from one to five characters minimizes investor confusion when a 
company changes its listing from one venue to another. Securities 
Exchange Act Release No. 58904 (November 6, 2008), 73 FR 67218 at 
67227 (November 13, 2008) (``The Commission finds that allowing the 
automatic portability of a symbol in the event that an issuer 
transfers its listing to another exchange will further the purposes 
of the Act and should reduce investor confusion by allowing the 
symbol already associated with the issuer to continue to be used by 
the issuer on the new exchange.''). The Commission also noted that 
the portability feature of the plan would promote ``competition 
among listing markets, including potential new listing markets.'' 
Id. at 67224 (emphasis added).
    \66\ Id. at 67225 (footnotes omitted). The Exchange notes that 
it will have listing standards approved by the Commission, including 
corporate governance requirements that comply with Rule 10A-3, and 
go far beyond those requirements.
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    Although all BX Venture Market listed companies are subject to 
listing standards approved by the Commission, and must meet corporate 
governance requirements similar to those required for listing on other 
national securities exchanges, the Exchange will require Companies not 
previously listed on a national securities exchange to adopt a four or 
five character ticker symbol as a prerequisite to listing on the BX 
Venture Market. Companies that list on the BX Venture Market following 
a delisting from another national securities exchange and that traded 
on that exchange with a one, two, or three character ticker symbol, 
will be permitted to retain their ticker symbol when listing on the BX 
Venture Market, provided that the company must, prior to listing on the 
BX Venture Market, issue a press release announcing its delisting from 
the other exchange and comply with the disclosure requirements of Item 
3.01 of Form 8-K.\67\
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    \67\ Proposed Rule 5210(j).
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Fees
    Companies would be required to submit an application review fee of 
$7,500 with their application for listing on the BX Venture Market, and 
would be required to pay a $15,000 annual fee for the first class 
listed on the Exchange and $5,000 for each additional class. The annual 
fee would be pro-rated for a company's first year of their listing. The 
application review fee will allow the Exchange to recover some of the 
costs associated with the initial review of the company's application, 
including staff time and the systems supporting the initial review 
process. The annual fee would similarly offset the staff and system 
costs of continued monitoring of the company. The proposed application 
and annual fees are substantially less than those charged by other 
national securities exchanges.\68\ Companies that were previously 
listed on NASDAQ would receive a credit, which can only be used to 
offset the annual fee, for any annual fees paid to NASDAQ during the 
same calendar year that they initially list on the BX Venture Market, 
for the months following their delisting from NASDAQ. The Exchange 
believes this credit is a reasonable allocation of fees under the Act 
because it will avoid a double charge of a company that has paid NASDAQ 
a non-refundable fee to provide similar services as those that will be 
provided by the Exchange under its annual fee. As such, the Exchange 
believes it would be inequitable to charge the company a second fee in 
the same year to support the provision of those services. Companies 
eligible for a credit would of course undergo the same rigorous initial 
listing application process to which all companies seeking a listing on 
the Exchange are subject.
---------------------------------------------------------------------------

    \68\ For example, the initial listing fees for listing common 
stock on the NASDAQ Capital Market range from $50,000 to $75,000 and 
the annual fees are $27,500; the initial listing fees for listing 
common stock on NYSE Amex range from $50,000 to $70,000 and the 
annual fees range from $27,500 to $40,000; the initial listing fees 
for listing common stock on the New York Stock Exchange range from 
$150,000 to $250,000 and the annual fees range from $38,000 to 
$500,000. See Nasdaq Rule 5920(a)(1) and (c)(1)(A), NYSE Amex Listed 
Company Guide Sections 140 and 141, and NYSE Listed Company Manual 
902.03.
---------------------------------------------------------------------------

    Fees would also be assessed for certain one-time events, such as a 
$7,500 fee for substitution listing events, a $2,500 fee for record-
keeping changes, and a $4,000 or $5,000 fee for a written or oral 
hearing, respectively. These fees are identical to those charged on 
NASDAQ and are designed to recoup the costs of making changes to the 
Exchange's systems and distributing those changes to market data users.
    Under Proposed Rule 5602, a company considering a specific action 
or transaction can request an interpretation from the Exchange, and in 
return, the Exchange will prepare a responsive letter as to how the 
rules apply to the proposed action or transaction. No company is 
required to request an interpretation, and Staff will orally discuss 
the application of the Exchange's rules with companies without any 
additional charge. However, if the company seeks a written response, 
the Exchange proposes to charge a $15,000 fee to recoup the cost of 
Staff's time in reviewing and responding to the request.\69\ The 
Exchange believes that the fee is appropriate, as the written response 
is applicable only to the company that requests it. The Exchange also 
believes that the written interpretive process, and the associated fee, 
will provide an additional public benefit in that Staff will prepare 
anonymous summaries of interpretations, as well as frequently asked 
questions based on requests received from companies, including those 
withdrawn before a written response is issued. These summaries and 
questions will be posted on the Exchange's Web site so that the general 
public, practitioners, and other companies can better understand how 
the Exchange applies its rules and policies. In this way, the overall 
need to request such interpretations is minimized, thus reducing 
burdens on companies and Staff alike.
---------------------------------------------------------------------------

    \69\ No fee would be charged in connection with requests 
involving a company's initial listing application given that the 
company will pay an application fee.
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Other Changes
    As part of the proposed rule change, the Exchange is deleting 
portions of the Rule 4000 Series related to the listing and trading of 
securities eligible to be listed on the BX Venture Market and 
correcting cross-references to those deleted sections. The Exchange is 
maintaining those provisions of the Rule 4000 Series applicable to 
securities that will not be eligible to be listed on the BX Venture 
Market, such as Portfolio Depository Receipts, Index Fund Shares,

[[Page 27720]]

Trust Issued Receipts, Securities Linked to the Performance of Indexes 
and Commodities, and Managed Fund Shares, to enable the continued 
trading of such securities on the Exchange pursuant to unlisted trading 
privileges.
    The Exchange is deleting Rule 4430, which provided listing criteria 
for limited partnership rollup transactions using language that was 
substantially similar to language contained in FINRA Rule 2310. 
Instead, the Exchange addresses these issues in proposed Rule 5210(h). 
This rule adopts the same approach taken by NASDAQ and NYSE AMEX by 
incorporating the FINRA rule by reference.\70\ In this manner, the 
Exchange satisfies the requirement of Section 6(b)(9) of the Act,\71\ 
which requires that the rules of a national securities exchange 
prohibit certain limited partnership rollup transactions.
---------------------------------------------------------------------------

    \70\ Nasdaq Rule 5210(h) and NYSE Amex Listed Company Guide 
Section 126.
    \71\ 15 U.S.C. 78f(b)(9).
---------------------------------------------------------------------------

    The Exchange is also moving the additional requirements applicable 
to the listing of securities issued by NASDAQ OMX or its affiliates 
from Rule 4370 to Rule 5701.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\72\ in general and with 
Section 6(b)(5) of the Act,\73\ in particular in that it is 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. The proposed new listing 
venue will advance these goals by allowing qualified issuers to list on 
a transparent, well-regulated marketplace with increased transparency 
about the trading of these securities, thereby protecting investors and 
the public interest and helping to prevent fraudulent and manipulative 
acts and practices.
---------------------------------------------------------------------------

    \72\ 15 U.S.C. 78f.
    \73\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    In addition, the Exchange believes that the proposed market is 
consistent with Section 17B of the Act, which codifies Congress' 
findings that it is in the public interest and appropriate for the 
protection of investors and the maintenance of fair and orderly markets 
to improve significantly the information available to brokers, dealers, 
investors, and regulators with respect to quotations for and 
transactions in penny stocks and that a fully implemented automated 
quotation system for penny stocks would meet the information needs of 
investors and market participants and would add visibility and 
regulatory and surveillance data to that market. Section 17B further 
instructs the Commission to facilitate the widespread dissemination of 
reliable and accurate last sale and quotation information with respect 
to penny stocks, as the Exchange will for securities listed on the BX 
Venture Market, through one or more automated quotation systems 
operated by a registered securities association or a national 
securities exchange, providing reliable pricing information and 
reporting of transactions.
    Finally, the Exchange believes the fees proposed in this filing are 
consistent with Section 6 of the Act,\74\ in general, and with Section 
6(b)(4) of the Act,\75\ in particular, in that they provide for the 
equitable allocation of reasonable dues, fees and other charges among 
members and issuers and other persons using any facility or system 
which the Exchange operates or controls. The application and listing 
fees are substantially lower than comparable fees on The NASDAQ Stock 
Market and other national securities exchanges, commensurate with the 
smaller size and resources of the companies the BX Venture Market will 
attract. The application review fee and annual fees will allow the 
Exchange to recover some of the costs associated with the initial 
review of the company's application and monitoring of the company, 
including staff time and the systems supporting the review and 
monitoring. The fee schedule provides for a credit to offset an annual 
fee paid to NASDAQ for any company that lists on the BX Venture Market 
after a delisting from NASDAQ during the same calendar year. The 
Exchange believes this is a reasonable allocation of fees under the Act 
because it would be inequitable to charge a company a second fee in the 
same year to support services similar to those it had already paid for 
previously.
---------------------------------------------------------------------------

    \74\ 15 U.S.C. 78f.
    \75\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------

    Fees are proposed for certain one-time events, such as substitution 
listings, recordkeeping changes, and written or oral hearings. These 
fees, which are the same as those charged on NASDAQ, offset some of the 
Exchange's costs associated with facilitating these events. Fees 
charged for a formal, written interpretation of the application of the 
Exchange's rules to a specific transaction or event similarly serve to 
recoup the cost of staff's time in providing the interpretation. The 
Exchange believes these fees are reasonable and fairly allocated. Staff 
will orally discuss the application of the Exchange's rules without any 
charge, and the Exchange provides written summaries of interpretations, 
the answers to frequently asked questions, and other guidance on its 
publicly available Web site. If, however, a company voluntarily 
requests a written interpretation tailored its unique facts, it is 
reasonable to recoup some cost of Staff's time for that process.

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

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, as amended.

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

    Written comments were neither solicited nor received.

III. Discussion

    After careful review of the proposal and consideration of the 
comment letters,\76\ the Commission finds that the proposed rule change 
to establish a new listing market on the Exchange is consistent with 
the requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange and, in particular, the 
requirements of Section 6 of the Act.\77\ Specifically, the Commission 
finds that the proposal is consistent with Section 6(b)(5) of the 
Act,\78\ which, among other things, requires that rules of a national 
securities exchange to be 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, to protect 
investors and the public interest, and to not permit unfair 
discrimination between customers, issuers, brokers, or

[[Page 27721]]

dealers.\79\ In addition, the Commission finds that the proposed fees 
are consistent with Section 6(b)(4) of the Act,\80\ which requires that 
an exchange have rules that provide for the equitable allocation of 
reasonable dues, fees, and other charges among its members and issuers 
and other persons using its facilities.
---------------------------------------------------------------------------

    \76\ The Commission received eleven comment letters on the 
proposal. Of the comment letters received, five supported the 
proposal (Madrona Letter; Angel Letter; NVCA Letter; TechNet Letter; 
and BIO Letter), one generally supported the proposal but expressed 
several concerns (Niehoff Letter), and five opposed the proposal 
(MSD Letter; Pink OTC Markets Letter; OTC Markets Group Letter; MSD 
Letter II; and McCarthy Letter).
    \77\ 15 U.S.C. 78f.
    \78\ 15 U.S.C. 78f(b)(5).
    \79\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rules' impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \80\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------

A. Benefits of the BX Venture Market

    As noted above, the Exchange believes that the BX Venture Market 
will provide a transparent, well-regulated marketplace for companies 
being delisted from another national securities exchange for failure to 
meet quantitative listing standards and for smaller companies 
contemplating an initial exchange listing.\81\ In addition, the 
Exchange notes that the BX Venture Market could make it easier for 
smaller, private, venture-backed companies and companies that currently 
trade in the over-the-counter market to raise capital, thereby, 
according to the Exchange, promoting job creation.\82\
---------------------------------------------------------------------------

    \81\ See Amendment No. 2.
    \82\ Id.
---------------------------------------------------------------------------

    In the Order Instituting Proceedings, the Commission asked whether 
commenters agree with the Exchange's contention that a BX listing could 
help companies raise capital and thus promote job creation within the 
United States. Five commenters supported this statement,\83\ while one 
commenter disagreed.\84\ Commenters in support asserted that, because 
of the lower listing standards of the BX Venture Market, this market 
will be particularly valuable to smaller and emerging companies that 
wish to make a public offering but are unable to meet the quantitative 
listing standards of other national securities exchanges.\85\ A few 
commenters also expressed their belief that the BX Venture Market would 
attract companies and capital that might otherwise be drawn to foreign 
markets.\86\ Three commenters opined that the BX Venture Market would 
attract companies that would otherwise transfer to, or remain on, the 
Pink Sheets or the OTC Bulletin Board, where there is less regulation 
and transparency.\87\ The commenter who disagreed with the Exchange's 
statement believed that the over-the-counter market currently provides 
a robust solution for companies that are unable to meet the listing 
standards of a national securities exchange, and that the BX Venture 
Market seeks to occupy a niche that is already well-served by the over-
the-counter market.\88\
---------------------------------------------------------------------------

    \83\ See Madrona Letter, supra note 5 at 1-2; TechNet Letter, 
supra note 8 at 1; BIO Letter, supra note 8 at 2; NVCA Letter, supra 
note 8 at 2-3; and Angel Letter, supra note 8 at 3-4. See also 
Niehoff Letter, supra note 8 at 3.
    \84\ See OTC Markets Group Letter, supra note 8.
    \85\ See Madrona Letter, supra note 5 at 1; TechNet Letter, 
supra note 8 at 1; BIO Letter, supra note 8 at 1-2; and NVCA Letter, 
supra note 8 at 1-2.
    \86\ See Madrona Letter, supra note 5 at 2. See also Angel 
Letter, supra note 8 at 8 (stating that companies voluntarily ``go 
dark'' and that the SEC has made it easier for foreign issuers to 
deregister from U.S. markets) and Niehoff Letter, supra note 8 at 3 
(stating that foreign second and third tier markets have yielded 
positive acceptance and economic results for U.S. issuers that have 
sought foreign marketplaces for their listings).
    \87\ See TechNet Letter, supra note 8 at 1. See also NVCA 
Letter, supra note 8 at 3 and Angel Letter, supra note 8 at 10. One 
commenter specifically stated that the ``Commission should quickly 
approve experiments like [the BX Venture Market] in the small-cap 
sector because of the crisis in capital formation indicated by the 
dramatic drop in the number of exchange-listed U.S. companies.'' 
Angel Letter, supra note 8 at 1.
    \88\ See OTC Markets Group Letter, supra note 8 at 2.
---------------------------------------------------------------------------

    The Commission believes the BX Venture Market could offer a number 
of benefits to smaller issuers and those who seek to invest in them. 
The BX Venture Market would provide small companies with an alternative 
to being quoted on the over-the-counter market by offering these 
companies the opportunity to list their securities on an exchange, in 
an environment that offers the potential of enhanced liquidity, 
transparency and oversight. Moreover, providing an alternative to the 
over-the-counter market could also facilitate competition for the 
quotation/listing of securities of smaller issuers.\89\ The 
availability of an exchange listing, and the prospect of more efficient 
secondary market trading in the securities of smaller issuers, could 
facilitate their ability to raise capital and invest in the growth of 
their businesses.
---------------------------------------------------------------------------

    \89\ The Commission notes that such companies could determine 
not to pursue a listing on the BX Venture Market if they determine 
that the over-the-counter market better serves their needs. In 
addition, the Commission notes that securities of small companies 
could continue to be traded over-the-counter, even if listed on the 
BX Venture Market.
---------------------------------------------------------------------------

    As discussed more fully below,\90\ the Commission believes the 
Exchange has appropriately addressed the potential risks associated 
with the listing of smaller issuers on an exchange by, among other 
things, providing for more rigorous vetting of listing applicants, 
enhanced surveillance of trading in BX-listed securities, and clear 
disclosure to investors that BX-listed securities differ from other 
exchange-listed securities.
---------------------------------------------------------------------------

    \90\ See Section III.C, infra.
---------------------------------------------------------------------------

B. Listing Standards

    The Commission believes that, among other things, listing standards 
must be designed to assure that only bona fide companies with 
substantial public float, investor base, and trading interest will be 
listed. The development and enforcement of adequate listing standards 
governing the initial and continued listing of securities on an 
exchange are activities of critical importance to the financial markets 
and the investing public.\91\ Listing standards serve as a means for an 
exchange to screen issuers and to provide listed status only to bona 
fide companies that have, or in the case of an initial public offering 
will have, sufficient public float, investor base, and trading interest 
to provide the depth and liquidity necessary to promote fair and 
orderly markets.\92\ Adequate standards are especially important given 
the expectations of investors regarding exchange trading and the 
imprimatur of listing on a particular market.\93\ Once a security has 
been approved for initial listing, continued listing standards allow an 
exchange to monitor the status and trading characteristics of that 
security to ensure that it continues to meet the exchange's standards 
for market depth and liquidity so that fair and orderly markets can be 
maintained, and so that only companies suitable for listing remain 
listed on a national securities exchange.
---------------------------------------------------------------------------

    \91\ See, e.g., Securities Exchange Act Release No. 61912 (April 
15, 2010), 75 FR 21094, 21094 (April 22, 2010) (SR-NYSE-2010-15).
    \92\ See id.
    \93\ See id.
---------------------------------------------------------------------------

    While the BX Venture Market would have quantitative listing 
standards that are lower than those of any other national securities 
exchange with an active listings program, the Commission notes that the 
Exchange proposes to adopt a number of enhanced vetting, surveillance/
examination, and disclosure requirements.\94\ As discussed in more 
detail below, the Commission views these enhanced requirements as being 
a necessary and integral part of the BX Venture Market proposal.\95\ 
Accordingly, for the reasons discussed below, the Commission finds that 
the BX Venture Market listing standards, when viewed in conjunction 
with the Exchange's enhanced vetting, surveillance/examination, and 
disclosure requirements, are consistent with the Act.
---------------------------------------------------------------------------

    \94\ See Section III.C, infra.
    \95\ See id.

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

[[Page 27722]]

1. Quantitative Standards
    In the Order Instituting Proceedings, the Commission asked whether 
the proposed initial and continued listing standards and the delisting 
process for the BX listing market are sufficiently designed to prevent 
the listing of stocks that are of a type that historically have been 
prone to fraudulent schemes. One commenter stated that the BX Venture 
Market will be a listing market for penny stocks because of the 
proposed minimum bid price requirements.\96\ In its response, the 
Exchange noted that its listed penny stocks will not be exempt from the 
Commission's penny stock rules,\97\ and stated its belief that its 
regulatory program will provide appropriate and adequate oversight.\98\ 
Another commenter also expressed concern regarding the level of certain 
quantitative listing standards of the BX Venture Market.\99\
---------------------------------------------------------------------------

    \96\ See MSD Letter, supra note 5 at 2. See also MSD Letter II, 
supra note 8 at 1-2.
    \97\ See 15 U.S.C. 78o(h) and 17 CFR 240.15g-1-100.
    \98\ See BX Response Letter, supra note 9 at 4.
    \99\ See McCarthy Letter, supra note 8 at 2.
---------------------------------------------------------------------------

    The Commission believes that the proposed quantitative listing 
standards, while lower than those of any other national securities 
exchange with an active listings program, are reasonably designed to 
help ensure that a fair and orderly market be maintained. As proposed, 
the minimum bid price per share for the initial listing of securities 
not previously listed on a national securities exchange is $1.00,\100\ 
while the minimum bid price for securities previously listed on a 
national securities exchange is $0.25.\101\ For purposes of the initial 
bid price requirement, a company will be considered to have been 
previously listed on another national securities exchange if it was 
listed on such an exchange at any time during the three months before 
its listing on the BX Venture Market, or in the case of a company that 
applies to list prior to September 30, 2011, if it was listed on 
another national securities exchange at any time between January 1, 
2010 and September 30, 2011.\102\
---------------------------------------------------------------------------

    \100\ See BX Rule 5505(a)(5).
    \101\ See BX Rule 5506(a)(4).
    \102\ See BX Rule 5506(b).
---------------------------------------------------------------------------

    With respect to the definition of ``previously listed on a national 
securities exchange,'' one commenter stated that ``[w]e do not 
understand why the Exchange suggests a three year and nine month look-
back for initially determining whether a security was previously listed 
on another exchange, and only a three-month look-back when making such 
a determination after September 30, 2011.'' \103\ The Commission notes 
that, subsequent to this comment, the Exchange shortened the look-back 
period, which will now begin on January 1, 2010. The Exchange believes 
that this look-back period is appropriate because the BX Venture Market 
would not have been available to such companies when they were 
delisted.\104\ Further, the Exchange stated that it is appropriate to 
continue this treatment until September 30, 2011 because it will give 
such companies an adequate opportunity to learn about the BX Venture 
Market, complete their applications, and have their applications 
processed by the Exchange.\105\ Additionally, the Exchange stated that 
the three-month look-back as period after September 30, 2011 is 
appropriate because it will allow a company sufficient time to apply 
for listing on the BX Venture Market and have its application 
processed.\106\
---------------------------------------------------------------------------

    \103\ OTC Markets Letter, supra note 8 at 8.
    \104\ See Amendment No. 2. The Exchange also stated that a 
number of companies were delisted in 2010 as a result of the 
financial crisis, and this look-back will allow these companies, 
which may have recovered but not yet meet the initial listing 
requirements of another exchange, to list on the BX Venture Market. 
See id.
    \105\ See id.
    \106\ See id.
---------------------------------------------------------------------------

    For continued listing, all securities will be required to maintain 
a minimum bid price of at least $0.25 per share.\107\ With respect to 
the bid price requirement for continued listing on the Exchange, the 
Commission notes that if the security does not maintain a minimum $0.25 
per share bid price for 20 consecutive trading days, Exchange staff 
would issue a Staff Delisting Determination to inform the company that 
its securities are immediately subject to suspension and delisting from 
the Exchange.\108\ While a company could appeal that determination to a 
Hearings Panel,\109\ such an appeal would not stay the suspension of 
the security.\110\ The Hearings Panel may determine that the company 
has regained compliance if the security maintains a closing bid price 
of $0.25 per share or more for at least 10 consecutive trading days on 
the over-the-counter market, prior to the Hearings Panel's 
Decision.\111\ In addition, companies that have previously failed to 
comply with the minimum bid price requirement would have stricter 
requirements for achieving compliance. Specifically, for a company that 
has received three or more Staff Delisting Determinations for failure 
to comply with the minimum bid price requirement in the prior 12 
months, the Hearings Panel would determine that the company has 
regained compliance only if the security maintains a closing bid price 
of $0.25 per share or more for at least 20 consecutive trading days 
prior to the Hearings Panel's decision.\112\ The Commission believes 
that this higher requirement for companies that were previously non-
compliant is appropriate to reduce the likelihood of future instances 
of non-compliance and the potential investor confusion concerning the 
ability of the company to remain listed.
---------------------------------------------------------------------------

    \107\ See BX Rule 5550(d).
    \108\ See BX Rule 5810(c)(1).
    \109\ The Hearings Panel is an independent panel made up of at 
least two persons who are not employees or otherwise affiliated with 
the Exchange or its affiliates, and who have been authorized by the 
Exchange's Board of Directors. See BX Rule 5805(d).
    \110\ See BX Rule 5815(a)(1)(C).
    \111\ See BX Rule 5815(c)(1)(F).
    \112\ See Id.
---------------------------------------------------------------------------

    The Commission also notes that, according to the Exchange, the 
securities listed on the BX Venture Market would be considered penny 
stocks under Rule 3a51-1 under the Act, unless they qualify for one of 
the exceptions from the definition of a penny stock as set forth in 
Rule 3a51-1.\113\ As such, broker-dealers would be required to pre-
approve their customers for trading in penny stocks and investors will 
obtain the disclosures required to be made by broker-dealers in 
connection with penny stock transactions, providing them with trade and 
market information prior to effecting a transaction.\114\ Further, 
there will be no ``blue sky'' exemption available under Section 18 of 
the Securities Act of 1933 for BX Venture Market-listed 
securities,\115\ so companies will be required to satisfy state law 
registration requirements and other state laws that regulate the sale 
and offering of securities. Because some state laws and regulations may 
provide an exemption from certain registration or ``blue sky'' 
requirements for companies listed on the former Boston Stock Exchange, 
based on the higher listing standards previously applied by that 
Exchange, BX Rule 5103(c) would provide that the Exchange will not 
list, and will delist any BX Venture Market-

[[Page 27723]]

listed company that attempts to rely on such an exemption. Finally, as 
discussed in more detail below,\116\ the Commission notes that the 
Exchange will have in place enhanced vetting, due diligence, and 
surveillance procedures designed to limit the initial or continued 
listing of companies that may be more prone to manipulation or fraud.
---------------------------------------------------------------------------

    \113\ 17 CFR 240.3a51-1. The Exchange noted that it is not 
seeking an exemption from the penny stock rules for securities 
listed on the BX Venture Market: However, a security is not a penny 
stock if it has a price in excess of $5 or if its issuer has net 
tangible assets in excess of $2 million (if the issuer has been in 
continuous operation for at least three years) or $5 million (if the 
issuer has been in continuous operation for less than three years) 
or average revenue of at least $6 million for the last three years. 
See Amendment No. 2 (citing Rule 3a51-1(d) and (g), 17 CFR 240.3a51-
1(d) and (g)).
    \114\ See Amendment No. 2.
    \115\ 15 U.S.C. 77r.
    \116\ See Section III.C, infra.
---------------------------------------------------------------------------

    Furthermore, the Commission notes that the BX Venture Market would 
be an alternative to the over-the-counter market and could provide 
important benefits to small companies who otherwise would not qualify 
for an exchange listing. In particular, the Exchange's proposed listing 
standards would be higher than the requirements for quoting on the OTC 
Bulletin Board, which does not have any listing requirements per 
se,\117\ but only requires companies to remain current in their filings 
with the Commission or other applicable regulatory authorities. For 
example, as the Exchange notes, the agreement of BX-listed companies to 
comply with the Exchange's corporate governance standards and the 
application of the Exchange's public interest authority could provide 
additional protections to investors than the protections available at 
their present trading venue.\118\ The Commission also notes that 
trading in BX-listed securities would be subject to regulation by the 
Exchange through its trading rules and surveillance authority.
---------------------------------------------------------------------------

    \117\ The OTC Bulletin Board is not a registered national 
securities exchange and is therefore not subject to the requirements 
of Section 6 or Section 19 of the Act.
    \118\ See Amendment No. 2.
---------------------------------------------------------------------------

2. Qualitative Listing Standards
    In the Order Instituting Proceedings, the Commission asked whether 
the proposed corporate governance standards for the BX listing market 
are sufficiently designed to assure an appropriate level of corporate 
governance. One commenter expressed support for the proposed corporate 
governance rules for BX-listed companies and stated that requiring 
small and emerging companies to have majority independent boards would 
be inappropriate and impose unnecessary costs upon these companies and 
their shareholders.\119\ This commenter also expressed support for not 
requiring shareholder approvals for capital raising activities and 
stated that small companies frequently need to raise money without the 
expense and delay associated with a shareholder vote in order to thrive 
and react to opportunities.\120\
---------------------------------------------------------------------------

    \119\ See NVCA Letter, supra note 8 at 2.
    \120\ See id. at 2-3.
---------------------------------------------------------------------------

    The Commission believes that the proposed qualitative listing 
requirements strike a reasonable balance between protecting the 
interests of investors and recognizing that smaller and emerging 
companies, with fewer resources, are likely to list on the BX Venture 
Market. The Commission notes that, although the Exchange would not 
require that a majority of the company's board of directors be 
independent or an independent nomination committee, the Exchange's 
listing rules impose independence requirements designed to help assure 
that certain key decisions of smaller companies are made by independent 
directors. Specifically, the BX Rules provide the independent directors 
with significant responsibilities, as well as an opportunity to meet 
separately from other directors. For example, independent directors 
must have regularly scheduled meetings at which only independent 
directors are present (``executive sessions'').\121\ In addition, the 
audit committee must be fully independent,\122\ and compensation of the 
executive officers of the company must be determined, or recommended to 
the board for determination, either by independent directors 
constituting a majority of the board's independent directors in a vote 
in which only independent directors participate, or a compensation 
committee comprised solely of independent directors.\123\ These 
provisions are designed to help lessen the potential of independent 
directors being dominated or overly influenced by other directors.
---------------------------------------------------------------------------

    \121\ See BX Rule 5605(b).
    \122\ See BX Rule 5605(c)(2). In addition, BX Rule 5605(c)(2) 
requires that each member of the audit committee must meet the 
criteria for independence set forth in Rule 10A-3(b)(1) under the 
Act (subject to the exemptions provided in Rule 10A-3(c) under the 
Act). See id. BX Rule 5605(c)(2)(B), which is identical to Nasdaq 
Capital Market Rule 5605(c)(2)(B), provides an exception to this 
independence requirement under exceptional and limited 
circumstances.
    \123\ See BX Rule 5605(d). The chief executive officer may not 
be present during the voting or deliberations on the chief executive 
officer's compensation. See id. BX Rule 5605(d)(3), which is 
identical to Nasdaq Capital Market Rule 5605(d)(3), provides an 
exception to this independence requirement under exceptional and 
limited circumstances.
---------------------------------------------------------------------------

    One commenter objected to the proposed rules that allow BX Venture 
Market-listed companies to phase-in compliance with independent audit 
committee and compensation committee requirements.\124\ The commenter 
stated that BX-listed companies should be required to comply 
immediately with the proposed independent director requirements for the 
audit and compensation committees and that the Exchange's failure to 
require full compliance with these requirements prior to listing will 
likely result in some investors purchasing securities of companies that 
have inadequate audit standards or corporate governance practices.\125\ 
In response, the Exchange stated that the proposed phase-in periods are 
identical to the rules of other national securities exchanges \126\ and 
were permitted by the Commission's rulemaking regarding audit 
committees.\127\ The Exchange also explained that the proposed phase-in 
provisions acknowledge the difficulty emerging companies have in 
recruiting independent directors.\128\
---------------------------------------------------------------------------

    \124\ See Pink OTC Markets Letter, supra note 5 at 5-6 and OTC 
Markets Group Letter, supra note 8 at 6.
    \125\ See OTC Markets Group Letter, supra note 8 at 6.
    \126\ See BX Response Letter, supra note 9 at 6 (citing Nasdaq 
Rule 5615(b) and NYSE Listed Company Manual Section 303A.00).
    \127\ See id. (referring to Rule 10A-3(b)(1)(iv)(A), 17 CFR 
240.10A-3(b)(1)(iv)(A)).
    \128\ See id.
---------------------------------------------------------------------------

    The Commission notes that the phase-in provisions for audit and 
compensation committees are substantially similar to those of Nasdaq 
and other national securities exchanges \129\ and acknowledges the 
difficulty emerging companies have in recruiting independent directors. 
In addition, the Commission notes that, while the Exchange will require 
shareholder approval when a company adopts or materially amends a stock 
option or purchase plan or other equity compensation arrangement 
pursuant to which stock may be acquired by officers, directors, 
employees, or consultants,\130\ the Exchange would not require 
shareholder approval for other share issuances. The Exchange believes 
that the companies expected to list on the Exchange may have a greater 
need to issue shares more frequently or more quickly, due to their 
expected smaller size and the business challenges they may be 
facing.\131\ However, the Commission notes that the Exchange will 
require listed Companies to provide notice of any 5% change in its 
shares outstanding and any capital raising transactions,\132\ and the 
Exchange Staff

[[Page 27724]]

will review such issuances for public interest concerns, including 
issuances significantly below the market price or for the benefit of 
related parties.\133\
---------------------------------------------------------------------------

    \129\ See e.g., Nasdaq Rule 5615(b) and NYSE Listed Company 
Manual Section 303A.00.
    \130\ See BX Rule 5635.
    \131\ See Amendment No. 2. The Exchange states that the proposed 
rules are comparable to the rules of the National Stock Exchange, 
which require shareholder approval for equity compensation issuances 
but not for other share issuances. See National Stock Exchange Rule 
15.6.
    \132\ See BX Rule 5250(e)(1) and (7).
    \133\ See Amendment No. 2.
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C. Enhanced Vetting, Surveillance/Examinations, and Disclosure

1. Vetting of Prospective Issuers
    The Commission believes that the Exchange's proposed vetting and 
due diligence process of prospective issuers are reasonably designed to 
reduce the risk of listing companies that might be more prone to fraud 
and manipulation and that might erode investor confidence in the 
market. The Commission notes that the Exchange will employ the staff in 
Nasdaq's Listing Qualifications Department to apply and enforce its 
listing standards pursuant to a regulatory contract \134\ and that the 
rules of the BX Venture Market require capable, experienced persons to 
supervise the staff in Nasdaq's Listing Qualifications Department.\135\ 
BX Rules further require that the Exchange's Chief Regulatory Officer 
have substantial prior regulatory experience with a national securities 
exchange or equivalent experience.\136\
---------------------------------------------------------------------------

    \134\ See BX Rule 5102. In addition to review of companies 
seeking an initial listing, the Listing Qualifications Department 
will also monitor compliance with all listing standards on an on-
going basis through the regular review of public filings, Form 8-K 
disclosures, press releases, market data, and closing bid price. See 
id.
    \135\ See id. Notwithstanding the contractual agreement with 
Nasdaq, the Exchange stated that it retains ultimate legal 
responsibility for, and control of, these functions. See id.
    \136\ See id.
---------------------------------------------------------------------------

    In connection with the initial listing process, the BX Rules would 
require applicant companies to disclose, among other things, current 
and past actions and proceedings involving the company, current 
executive officers, directors, promoters, and ten percent or greater 
shareholders,\137\ any events described under Item 401(f) of Regulation 
S-K involving officers, directors, promoters and control persons, and 
to furnish additional documentation.\138\ The Exchange will not approve 
for initial listing, or allow the continued listing, of a company if an 
executive officer, director, promoter, or control person of the company 
was involved in any event described under Item 401(f)(2)-(8) of 
Regulation S-K \139\ that occurred during the prior five years (``the 
automatic bar'').\140\ The Exchange also will not approve for initial 
listing, or allow the continued listing, of shell companies.\141\ 
Moreover, even if the company satisfies the Exchange's listing 
requirements, the Exchange will still have the discretionary authority 
to deny listing to or to delist a security when necessary to preserve 
and strengthen the quality of and public confidence in its market.\142\ 
The Commission notes that the Exchange can use its discretionary 
authority only to deny listing, apply additional or more stringent 
criteria for initial or continued listing, or suspend or delist 
securities.\143\
---------------------------------------------------------------------------

    \137\ See BX Rule 5205(b). BX Rules provide that an applicant 
company must provide descriptions and supporting documentations of 
all pending or prior actions and proceedings involving current 
executive officers, directors, promoters, and ten percent or greater 
shareholders of the company, and all actions and proceedings 
commenced within the past 10 years involving the company, its 
predecessors and subsidiaries. See id.
    \138\ See id.
    \139\ These events include criminal convictions and pending 
charges, violations of securities laws, and court or administrative 
actions barring or suspending a person from engaging in certain 
securities-related activities.
    \140\ See BX Rule 5103(a).
    \141\ See BX Rule 5103(b).
    \142\ See BX Rule 5104.
    \143\ See id.
---------------------------------------------------------------------------

    The Commission emphasizes that the Exchange does not have the 
discretionary authority to approve the initial listing of securities 
that do not meet the enumerated listing standards, or to maintain the 
listing of securities that stay below the continued listing 
standards.\144\ If the Exchange exercises discretion to permit the 
listing of a company after it has discovered that an executive officer, 
director, promoter, or control person of the company was involved in an 
event described under Item 401(f) of Regulation S-K that does not rise 
to the level of an automatic bar (such as if the event occurred more 
than five years prior), or a past corporate governance issue of the 
company,\145\ the decision to list such a company must be approved in 
writing by the Exchange's Chief Regulatory Officer.\146\
---------------------------------------------------------------------------

    \144\ See id.
    \145\ The Exchange's review for past corporate governance issues 
may include activities taking place while the company is listed on 
the Exchange or an exchange that imposes corporate governance 
requirements, as well as activities taking place after a formerly 
listed company is no longer listed on the Exchange or such an 
exchange. See BX Rule IM-5104-3. The Exchange may take appropriate 
action if it determines that there have been violations or evasions 
of such corporate governance standards. See id.
    \146\ See BX Rule IM-5104-1 and 3.
---------------------------------------------------------------------------

    The Commission notes that one commenter noted the importance of 
screening prospective listed companies in light of the failure of the 
former American Stock Exchange Emerging Company Marketplace.\147\ This 
commenter then suggested that the Exchange should conduct background 
checks and other similar review of potential listing companies and not 
be permitted to merely rely on the documents presented by an issuer 
during the listing process.\148\ As discussed below, the Exchange will 
review documents other than those presented by an issuer during the 
listing process. Specifically, the Exchange would review the applicant 
company's public filings and proxy disclosures, and conduct background 
investigations of its executive officers, directors, promoters, and 
control persons using publicly available databases and other public 
resources, such as Lexis-Nexis and the Web-CRD regulatory database, and 
web-based search engines.\149\ Moreover, the Exchange will engage 
independent qualified third party investigative firms when it uncovers 
a regulatory issue or potential public interest concern that does not 
trigger an automatic bar to listing and the Exchange has determined to 
not exercise its discretionary authority to deny the listing, or when 
it would be impractical for the Exchange to research a regulatory 
history that occurred outside of the United States.\150\ For example, 
if the Exchange becomes aware of media accounts of criminal allegations 
or improper business practices, or indication of financial impropriety, 
the Exchange will engage an independent qualified third party 
investigative firm.\151\ The Exchange also will make random, regular 
referrals of at least 10% of the applicants that were not previously 
listed on a national securities exchange to the independent qualified 
third party investigative firm.\152\ Any decision to list a company 
that has been referred to third party review must be approved in 
writing by the Exchange's Chief Regulatory Officer.\153\
---------------------------------------------------------------------------

    \147\ See Pink OTC Markets Letter, supra note 5 at 6-7 
(referring to the American Stock Exchange Emerging Company 
Marketplace that the American Stock Exchange operated from 1992 to 
1995). See also OTC Markets Letter, supra note 8 at 3.
    \148\ See Pink OTC Markets Letter, supra note 5 at 6-7.
    \149\ See BX Rule 5205(c). The Exchange also will conduct 
background investigations, as applicable, whenever a new executive 
officer, director, promoter, or control person becomes associated 
with a BX Venture Market-listed company; whenever a BX Venture 
Market-listed company makes a disclosure of an event described under 
Item 401(f) of Regulation S-K; and whenever the staff in the Listing 
Qualifications Department, in the course of its on-going monitoring 
of listed companies, identifies a potential public interest concern. 
See BX Rule 5205(e).
    \150\ See BX Rule 5205(c) and (d).
    \151\ See BX Rule 5205(c).
    \152\ See BX Rule 5205(d).
    \153\ See BX Rule 5205(c).
---------------------------------------------------------------------------

    In sum, the Commission believes that the proposed vetting and due 
diligence measures are reasonably designed to reduce the risk of 
fraudulent and

[[Page 27725]]

manipulative behavior with respect to the listing and/or trading of BX-
listed securities.
2. Surveillance/Examination
    The Commission believes that strong and effective surveillance and 
examination programs are vital, particularly with respect to BX Venture 
Market-listed securities, which are subject to listing standards that 
are lower than those of any national securities exchange with an active 
listings program. Under the proposal, the Exchange will monitor real-
time trading of securities listed on the BX Venture Market.\154\ The 
Exchange would contract with FINRA to regulate market activity of BX-
listed securities (e.g., to implement surveillance patterns to detect 
possible insider trading, front-running, fraud, auto-execution 
manipulation, mid-point cross manipulation, wash sales, layering, open/
close marking, and Reg SHO clearing fails),\155\ but the Exchange would 
retain ultimate legal responsibility for, and control of, all 
regulatory functions for the Exchange.\156\ The Commission expects the 
Exchange to ensure that it and FINRA have effective regulatory programs 
relating to BX Venture Market-listed securities before the BX Venture 
Market begins operations. Also, the Exchange committed to represent in 
a letter to the staff in the Commission's Office of Compliance 
Inspections and Examinations, before the operation of the Exchange, 
that it and FINRA have adequate regulatory procedures and programs in 
place to effectively regulate the BX Venture Market and its listing 
program, and adequate procedures and programs in place to effectively 
process trades and maintain the confidentiality, integrity, and 
availability of the Exchange's systems.\157\
---------------------------------------------------------------------------

    \154\ See BX Rule 5105.
    \155\ See BX Rule 5105 and Amendment No. 2. The Exchange stated 
that it will have in place, before the BX Venture Market is 
operational, a contractual agreement with FINRA to regulate market 
activity on the Exchange. See BX Rule 5105 and Amendment No. 2.
    \156\ See BX Rule 5105 and Amendment No. 2.
    \157\ See Amendment No. 2.
---------------------------------------------------------------------------

    The Commission notes that one commenter stated that there have been 
significant problems in the penny stock market, including boiler room 
sales practices by brokerages and market manipulation (including the 
spreading of false rumors) by stock promoters and brokerages that hold 
a block of a given stock.\158\ This commenter is also concerned that 
new technology has given stock manipulators powerful tools to distort 
the market and swindle retail investors.\159\ As such, this commenter 
stated that extreme caution is warranted when any party proposes to 
establish a new market to trade penny stocks.\160\ The commenter also 
expressed concern that the proposed BX rules will not prevent penny 
stock promoters or boiler room brokerages from asserting that 
securities they are offering and selling are exempt from state 
registration because they are listed on the Boston Stock Exchange.\161\ 
In addition, this commenter stated that twelve states have registration 
exemptions for securities listed on the Boston Stock Exchange, which 
were predicated on the protections provided by the higher listing 
standards of that exchange.\162\ The Commission acknowledges these 
comments and notes that BX stated that its regulatory program will 
have: (i) Surveillance patterns revised to incorporate trading activity 
of BX Venture Market-listed securities on the Exchange and on the over-
the-counter market; (ii) specific automated surveillance patterns to 
address any rule and functionality changes resulting from the BX 
Venture Market initiative; and (iii) calibrated surveillance patterns 
to detect potential issues that may arise particularly in low-priced, 
less liquid stocks.\163\ Moreover, the regulatory program will include 
review of the activity of firms on the BX Venture Market.\164\ The 
review will include ``focused exams'' concentrated on sales practices 
and firm oversight, as well as any other activities required to 
effectively regulate the market.\165\ As stated above, the Exchange 
represented that a regulatory program for these activities will be in 
place before the BX Venture Market begins operations.\166\ Further, the 
Commission notes, in addition to Commission oversight and oversight by 
the Exchange and FINRA, under Section 18 of the Securities Act of 1933, 
``the securities commission (or any agency or office performing like 
functions) of any State shall retain jurisdiction under the laws of 
such State to investigate and bring enforcement actions with respect to 
fraud or deceit, or unlawful conduct by a broker or dealer, in 
connection with securities or securities transactions.'' \167\
---------------------------------------------------------------------------

    \158\ See MSD Letter, supra note 5 at 3 and MSD Letter II, supra 
note 8 at 2.
    \159\ See MSD Letter II, supra note 8 at 2.
    \160\ See MSD Letter, supra note 5 at 3 and MSD Letter II, supra 
note 8 at 2.
    \161\ See MSD Letter, supra note 5 at 2.
    \162\ See id. The Exchange noted that the Massachusetts 
Securities Division has requested comment on a proposed rule change 
to its regulations to eliminate the exemption from the registration 
requirements for securities listed on the BX Venture Market. See 
Amendment No. 2.
    \163\ See BX Rule 5105 and Amendment No. 2.
    \164\ See BX Rule 5105.
    \165\ See id.
    \166\ See BX Rule 5105 and Amendment No. 2.
    \167\ 15 U.S.C. 77r(c)(1).
---------------------------------------------------------------------------

    The Exchange also committed to providing a monthly report to the 
Directors of the Division of Trading and Markets and Office of 
Compliance Inspections and Examinations describing any significant 
developments on the BX Venture Market, including companies added to or 
removed from the market during that period.\168\ In addition, the 
Exchange's Chief Regulatory Officer will provide quarterly reports to 
the Directors of the Division of Trading and Markets and Office of 
Compliance Inspections and Examinations describing the regulatory 
activities of the Exchange and FINRA during the prior quarter.\169\ The 
Exchange also stated that it will provide copies of the Listing 
Department's procedures manuals and surveillance procedures used by 
FINRA and the Exchange to the Commission's Office of Compliance 
Inspections and Examinations.\170\
---------------------------------------------------------------------------

    \168\ See BX Rule 5105 and Amendment No. 2.
    \169\ See BX Rule 5105.
    \170\ See Amendment No. 2.
---------------------------------------------------------------------------

3. Disclosure of BX-listed Securities
    The Commission believes that it is important to reduce the 
likelihood of investor confusion regarding the BX Venture Market. Three 
commenters expressed concern that investors would confuse BX Venture 
Market-listed securities with Nasdaq-listed securities.\171\ One 
commenter believed that ticker symbols for BX Venture Market-listed 
securities should differentiate such securities from other securities 
that meet the higher listing standards typically associated with 
listing on a national securities exchange.\172\ This commenter 
suggested that BX-listed securities should only use four or five 
character ticker symbols because shorter symbols are typically used by 
exchanges with higher listing standards than the BX Venture 
Market.\173\ Further, this commenter stated that if BX-listed 
securities are permitted to use symbols with three or fewer characters, 
those securities would be precluded from trading in the over-the-
counter market because the OTCBB and Pink's OTC systems are 
programmatically limited to trading four

[[Page 27726]]

or five character symbols.\174\ This commenter reiterated these issues 
in a subsequent letter, and expressed concern that shorter ticker 
symbols would reduce the amount of over-the-counter market trading 
volume in BX-listed securities and result in a decrease in competition 
for execution of investor orders.\175\ A second commenter disagreed and 
contended that ticker symbols no longer say anything to the investor 
about the nature of the company and changing symbols can cause 
confusion.\176\ However, this commenter stated that it is reasonable to 
require BX-listed securities to use only four or five character symbols 
until the industry technology can handle shorter ticker symbols.\177\
---------------------------------------------------------------------------

    \171\ See MSD Letter, supra note 5 at 3, MSD Letter II, supra 
note 8 at 2, Pink OTC Markets Letter, supra note 5 at 4-5, and 
Niehoff Letter, supra note 8 at 1-2.
    \172\ See Pink OTC Markets Letter, supra note 5 at 2 and OTC 
Markets Group Letter, supra note 8 at 5.
    \173\ See Pink OTC Markets Letter, supra note 5 at 2.
    \174\ See id. at 2-3.
    \175\ See OTC Markets Group Letter, supra note 8 at 5-6.
    \176\ See Angel Letter, supra note 8 at 11.
    \177\ See id.
---------------------------------------------------------------------------

    With respect to the comments regarding ticker symbols, the Exchange 
stated that the BX Venture Market is a national securities exchange and 
a party to the existing National Market System Plan for the Selection 
and Reservation of Securities Symbols (``Symbology Plan''), and as such 
is eligible to trade symbols of one to five characters.\178\ The 
Exchange explained that this eligibility is important because the BX 
Venture Market is intended to afford a listing venue to former 
exchange-listed companies that would want to retain their symbols.\179\ 
The Exchange stated its belief that its proposed data vendor display 
requirement is a far more effective means of communicating the listing 
market to investors.\180\ Further, the Exchange stated that BX Venture 
Market-listed securities should not be limited to four or five 
characters because firms can quote or trade securities on either the 
Exchange or in the over-the-counter market until their technology is 
updated, and listed companies that believe this hurts their liquidity 
can elect to change their symbol.\181\
---------------------------------------------------------------------------

    \178\ See BX Response Letter, supra note 9 at 7.
    \179\ See id.
    \180\ See id. at 8.
    \181\ See id. at note 28.
---------------------------------------------------------------------------

    As noted in Section II above, the Exchange proposes different 
ticker symbol requirements, depending on whether the company was 
previously listed on a national securities exchange. Specifically, the 
Exchange would prohibit companies that were not previously listed on a 
national securities exchange from utilizing one to three character 
ticker symbols.\182\ Companies that were delisted from a national 
securities exchange before listing on BX could retain their one to 
three character ticker symbols, provided that the company must, prior 
to listing on the BX Venture Market, issue a press release announcing 
its delisting from the other exchange and comply with the disclosure 
requirements of Item 3.01 of Form 8-K.\183\ The Commission believes 
that such approach is not inconsistent with the Act. As the Exchange 
noted, this approach is permitted under the Symbology Plan.\184\ In 
addition, as stated above, although certain companies might be 
permitted to retain their one to three character ticker symbols when 
listing on the BX Venture Market, in order to inform investors, such 
companies would be required to issue a press release announcing its 
delisting and comply with the disclosure requirements of Form 8-K.\185\ 
The Commission acknowledges the comments that companies with ticker 
symbols of less than four characters cannot trade on the OTCBB or the 
Pink OTC system because they are programmatically limited to four or 
five character symbols; \186\ however, the Commission notes that 
companies that believe this limitation hurts their liquidity can elect 
to not list on the BX Venture Market, or, as the Exchange noted in the 
BX Response Letter, change their symbol.\187\
---------------------------------------------------------------------------

    \182\ See BX Rule 5210(j).
    \183\ See id.
    \184\ See Securities Exchange Act Release No. 58904 (November 6, 
2008), 73 FR 67218 (November 13, 2008) (order approving the National 
Market System Plan for the Selection and Reservation of Securities 
Symbols).
    \185\ See BX Rule 5210(j).
    \186\ See Pink OTC Markets Letter, supra note 5 at 2-3.
    \187\ See BX Response Letter, supra note 9 at note 28.
---------------------------------------------------------------------------

    While the Exchange is not substantially changing the ticker symbol 
length a BX Venture Market-listed company can use,\188\ the Exchange 
has proposed several other measures intended to reduce the likelihood 
that investors will believe securities listed on the BX Venture Market 
are of the same caliber as securities listed on other national 
securities exchanges. In particular, the Exchange proposes specific 
rules to differentiate securities of the BX Venture Market from those 
of the NASDAQ Stock Market, which is also owned by the NASDAQ OMX 
Group. Toward that end, the listing rules of the BX Venture Market 
specify that a BX Venture Market-listed company must refer to its 
listing as on the BX Venture Market, unless otherwise required by 
applicable rules or regulations, and that such company must never 
represent that it is listed on The NASDAQ Stock Market.\189\ To enforce 
this prohibition, the Exchange has committed to monitor the press 
releases issued by BX Venture Market-listed companies and to annually 
review each company's Web site to determine how each company is 
referring to its listing.\190\ A BX Venture Market-listed company that 
refers to itself as listed on the NASDAQ Stock Market or on NASDAQ will 
be subject to immediate delisting.\191\
---------------------------------------------------------------------------

    \188\ As stated above, the Exchange, however, will prohibit 
companies not previously listed on a national securities exchange 
from utilizing a one to three character ticker symbol.
    \189\ See BX Rule 5250(b)(4).
    \190\ See Amendment No. 2.
    \191\ See BX Rule 5250(b)(4).
---------------------------------------------------------------------------

    Additionally, in describing the BX Venture Market, the Exchange 
will refer to itself as the BX Venture Market, and not as NASDAQ OMX 
BX, in its communications and marketing literature.\192\ The Exchange 
will also include information prominently on its Web site describing 
the differences between the BX Venture Market and other national 
securities exchanges, including Nasdaq.\193\ For example, the 
Exchange's Web site will inform users in a prominent manner that BX 
Venture Market-listed securities are not ``blue sky'' exempt, are not 
NMS securities, and are not subject to the Commission's trade-through 
rule.\194\ The Exchange's Web site also will provide side-by-side 
comparisons of BX Venture Market and NASDAQ Stock Market features.\195\ 
Additionally, marketing materials for the BX Venture Market will 
include a prominent disclaimer explaining that BX Venture Market is 
separate from, and not a tier of, the NASDAQ Stock Market.\196\ 
Further, in order to prevent regulatory arbitrage, the Exchange 
proposes that any company that meets the quantitative (e.g., financial) 
requirements for listing on any tier of the NASDAQ Stock Market will 
not be approved for listing on the BX Venture Market.\197\ 
Specifically, it is appropriate for the Exchange to restrict such 
companies from listing on the BX Venture Market to reduce the 
likelihood of a company listing on the Exchange to benefit from lower 
quantitative listing standards when such companies are of sufficient 
size that it should comply with the higher Nasdaq listing standards.
---------------------------------------------------------------------------

    \192\ See BX Rule 5106 and Amendment No. 2.
    \193\ See BX Rule 5106 and Amendment No. 2.
    \194\ 17 CFR 242.611. See Amendment No. 2.
    \195\ See id.
    \196\ See BX Rule 5106.
    \197\ See BX Rule 5210(i).
---------------------------------------------------------------------------

    The Exchange will disseminate information about securities listed 
on the BX Venture Market via several

[[Page 27727]]

mechanisms to ensure broad dissemination of quotation and last sale 
information.\198\ The Exchange committed to ensuring that BX Venture 
Market-listed securities are clearly distinguished, and 
distinguishable, from securities listed on the traditional exchanges on 
its data products and to end-users of the data.\199\ The Exchange 
stated that all market data for BX Venture Market-listed securities 
will include a unique data identifier in the ``Market Center'' field to 
distinguish the security from those listing on other exchanges and the 
over-the-counter markets (``Market Center Identifier'').\200\ The 
Exchange represented that it will require that market data distributors 
use the Market Center Identifier to prominently identify the listing 
market with quotation and last sale information for BX Venture Market-
listed securities through its distribution agreements and by amendments 
to its global market data policy document.\201\ Specifically, the 
Exchange will require market data distributors to prominently identify 
the BX Venture Market as the listing market, and where the display of 
text is not consistent with the display methodology or user needs of 
the distributor, to use ``B''.\202\
---------------------------------------------------------------------------

    \198\ See Amendment No. 2.
    \199\ See BX Rule 5106.
    \200\ See Amendment No. 2. The Exchange stated that BX Venture 
Market-listed securities would be identified with its own unique 
Market Center Identifier (``B'') on any new consolidated data feeds 
and in the BX Venture Market Daily List data product. See id. The 
Exchange stated that the Daily List will be adopted in a separate 
filing with the Commission. See id. The Commission notes that 
approval of the BX Venture Market in no way prejudges or determines 
what action the Commission may take with respect to any data product 
not previously approved by the Commission.
    \201\ See BX Rule 5106 and Amendment No. 2.
    \202\ See BX Rule 5106 and Amendment No. 2.
---------------------------------------------------------------------------

    The Commission believes that the measures described above that are 
designed to help clarify the differences between the BX Venture Market 
and the NASDAQ Stock Market should aid in reducing the potential for 
investor confusion. For example, as stated above, the Exchange stated 
that it will require market data distributors to prominently display 
the listing market for BX Venture Market-listed securities through its 
distribution agreements and its global market data policy document and 
that these agreements and amendments will be in place before the BX 
Venture Market begins operations.\203\ The Exchange also represented 
that the Market Center Identifier will be distributed by the Exchange 
and displayed by the data vendors upon launch of the market.\204\ To 
assure compliance with this requirement, the Exchange stated that it 
will proactively review the displays of prominent data distributors in 
connection with the launch of the market and the displays of all data 
distributors periodically after the launch, and require immediate 
compliance if any displays fail to meet the requirements of the market 
data agreements.\205\ The Exchange further stated that if a market data 
vendor does not satisfy this display requirement, the Exchange will 
take action against the vendor, up to and including terminating the 
vendor's ability to receive data from the Exchange.\206\ Lastly, the 
Exchange has stated that it is committed to working with market 
participants and the Commission to evaluate, on an on-going basis, 
whether the display requirement described above is effective in 
distinguishing BX Venture Market-listed securities from those listed on 
another national securities exchange in order to reduce investor 
confusion.\207\
---------------------------------------------------------------------------

    \203\ See BX Rule 5106 and Amendment No. 2.
    \204\ See BX Rule 5106.
    \205\ See BX Rule 5106 and Amendment No. 2.
    \206\ See BX Rule 5106 and Amendment No. 2.
    \207\ See Amendment No. 2.
---------------------------------------------------------------------------

    The Commission recognizes the reputational tradeoff associated with 
distinguishing the BX Venture Market from Nasdaq. If the BX Venture 
Market were to fail, Nasdaq would not suffer as much reputational 
damage as investors and issuers would not necessarily associate a BX 
Venture Market failure with Nasdaq. As a result, Nasdaq may not have as 
much incentive to ensure that the BX Venture Market is a success than 
if Nasdaq had more reputation capital on the line. While considering 
this tradeoff, the Commission believes that Nasdaq has sufficient 
incentives, absent this reputational risk, to ensure that the BX 
Venture Market is a success, and that avoiding the risk of investor 
confusion is a priority.

D. Review Process

    The Commission believes that the proposed deficiency notification, 
delisting, and appeals procedures strike a balance between the 
Exchange's obligation to protect investors and their confidence in the 
market, with its parallel obligation to perfect the mechanism of a free 
and open market. The measures by which a company may return to 
compliance with continued listing standards are explicitly delineated, 
providing transparency to the process and potentially fostering 
investor confidence in the integrity of the markets.
    The Commission further notes that the compliance periods and 
discretion to allow a non-compliant company to remain listed are 
generally shorter on the BX Venture Market than what would be allowed a 
company listed on other exchanges, including Nasdaq. For example, a 
Hearings Panel would be permitted to grant only 90 calendar days for a 
company to regain compliance with a listing standard,\208\ instead of 
the 180 calendar days available on Nasdaq.\209\ Similarly, a company 
that falls below the market value of listed securities requirement 
would be provided a 90 calendar day compliance period,\210\ instead of 
the 180 days available to a Nasdaq company.\211\ The Commission 
believes that these shorter timelines will serve to protect investors, 
given that the securities listed on the BX Venture Market are subject 
to lower listing standards than other exchange-listed securities.
---------------------------------------------------------------------------

    \208\ See BX Rule 5815(c)(1)(A).
    \209\ See Nasdaq Rule 5815(c)(1)(A).
    \210\ See BX Rule 5810(c)(3)(B).
    \211\ See Nasdaq Rule 5810(c)(3)(C).
---------------------------------------------------------------------------

    One commenter suggested that the Exchange should increase the 
amount of time a company has to regain compliance with BX listing 
standards from 90 to 180 days because it will allow companies that are 
trading publicly for the first time to learn the nuances of the market 
and to adjust to the market.\212\ The Commission believes that the 
compliance period timeframe proposed by the Exchange is appropriate. 
The Commission notes that the listing standards of the BX Venture 
Market are substantially lower than the listing standards of other 
national securities exchanges. The Commission believes that the lower-
tier and smaller companies likely to trade on the BX Venture Market 
warrant careful monitoring and, for reasons of investor protection, 
believes that such companies cannot be permitted to not meet listing 
standards for a lengthy period of time. The Commission believes that 90 
calendar days is sufficient to determine whether BX-listed companies 
have the resources and capability to attain compliance with listing 
standards.
---------------------------------------------------------------------------

    \212\ See BIO Letter, supra note 8 at 3.
---------------------------------------------------------------------------

    Overall, the Commission believes that the proposed appeals process 
is reasonable and affords adequate due process to issuers, while at the 
same time bringing efficiency to the listing and delisting processes. 
Among other things, the process provides companies with the right to 
appeal a staff determination to deny initial or continued listing to a 
Hearings Panel.\213\ The company has the right to appeal an

[[Page 27728]]

adverse Hearings Panel decision to the Listing Council.\214\ All 
decisions of the Listing Council, as well as certain Hearings Panel 
decisions also will be subject to review at the discretion of the 
Exchange Board.\215\
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    \213\ See BX Rule 5815.
    \214\ See BX Rule 5820.
    \215\ See BX Rule 5825.
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E. Fees

    In response to the proposed fees, one commenter stated that a 
market targeted to smaller companies, with listing requirements and 
listing costs tailored to their current economic reality, would open a 
door that has been closed for many venture-backed companies.\216\ After 
considering this comment, the Commission finds that the proposed fees 
are consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange. 
Specifically, the Commission finds that the proposal is consistent with 
Sections 6(b)(4) and (b)(5) of the Act,\217\ which require, among other 
things, that the rules of an exchange (i) provide for the equitable 
allocation of reasonable dues, fees, and other charges among its 
members and issuers and other persons using its facilities, and (ii) 
are not designed to permit unfair discrimination between customers, 
issuers, brokers, or dealers.
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    \216\ See Madrona Letter, supra note 5 at 1.
    \217\ 15 U.S.C. 78f(b)(4) and (b)(5).
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    The Commission believes that the proposal does not unfairly 
discriminate between issuers as all companies will be subject to the 
same fee schedule. The Commission believes that the proposed fees are 
reasonable, given the regulatory expenses of the Exchange and the types 
of companies expected to list on the Exchange. The Commission notes 
that the Exchange has committed to enhanced vetting, examination, 
surveillance and disclosure requirements, all of which require 
additional expenses. In addition, the Commission expects the Exchange 
to maintain its commitment of resources to its regulatory oversight of 
the listing process and its ongoing compliance review of listed 
companies under its regulatory program.
    According to the Exchange, the application review fee will allow 
the Exchange to recover some of the costs associated with the initial 
review of the company's application, including staff time and the 
systems supporting the initial review process.\218\ Similarly, the 
annual fee would offset the staff and system costs of continued 
monitoring of the company.\219\ In addition, the Commission notes that 
the proposed application and annual fees are less than those charged by 
other national securities exchanges.\220\ Also, the Exchange states 
that fees for certain one-time events (i.e., a $7,500 fee for 
substitution listing events, a $2,500 fee for record-keeping changes, 
and a $4,000 or $5,000 fee for a written or oral hearing, respectively) 
will allow it to recover some of the costs associated with facilitating 
these events.\221\ The Exchange further proposes a $15,000 fee for 
written interpretations of Exchange rules, and states that the fee for 
written interpretations of Exchange rules is intended to recoup the 
cost of Exchange staff's time in reviewing and responding to the 
request and that no such fee would be charged in connection with 
requests involving a company's initial listing application, given that 
the company will pay an application fee.\222\
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    \218\ See Amendment No. 2. The Exchange proposed a $7,500 
initial listing fee, and a $15,000 annual fee for the first class of 
securities listed on the Exchange and a $5,000 annual fee for each 
additional class of securities listed on the Exchange. See BX Rule 
5910.
    \219\ See Amendment No. 2.
    \220\ For example, the Exchange noted that the initial listing 
fees for listing common stock on the NASDAQ Capital Market range 
from $50,000 to $75,000 and the annual fees are $27,500; the initial 
listing fees for listing common stock on NYSE Amex range from 
$50,000 to $70,000 and the annual fees range from $27,500 to 
$40,000; the initial listing fees for listing common stock on the 
New York Stock Exchange range from $150,000 to $250,000 and the 
annual fees range from $38,000 to $500,000. See Amendment No, 2 
(citing Nasdaq Rule 5920(a)(1) and (c)(1)(A), NYSE Amex Listed 
Company Guide Sections 140 and 141, and NYSE Listed Company Manual 
902.02 and 902.03).
    \221\ See BX Rules 5815(a)(3) and 5910 and Amendment No. 2.
    \222\ See BX Rule 5602 and Amendment No. 2. See also Securities 
Exchange Act Release No. 61669 (March 5, 2010), 75 FR 11958 (March 
12, 2010) (SR-NASDAQ-2009-081) (order granting approval of Nasdaq's 
proposed rule change to modify the fee for written interpretations 
of Nasdaq listing rules to $15,000).
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    The Commission notes that companies that were previously listed on 
Nasdaq would receive a credit, which could be used only to offset the 
annual fee, for any annual fees paid to Nasdaq during the same calendar 
year that they initially list on the BX Venture Market, for the months 
following their delisting from Nasdaq.\223\ The Exchange believes that 
this credit is reasonable because it will avoid double charging 
companies that have paid Nasdaq a non-refundable fee to provide similar 
services as those that the Exchange will provide under its annual 
fee.\224\ In approving this fee credit, the Commission notes its 
expectation that a rigorous and independent review by the Exchange of 
compliance with the listing standards will be conducted for any former 
Nasdaq-listed company that is eligible for a credit, just as for any 
company that lists on the BX Venture Market.
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    \223\ See Amendment No. 2.
    \224\ See id.
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F. Market Data

    Currently, NMS securities listed on national securities exchanges 
are subject to a consolidated trade reporting plan,\225\ so that all 
trades are disseminated in a single data stream. Likewise, because all 
trades in non-NMS securities today occur in the over-the-counter 
market, complete trade data is collected and distributed by FINRA. 
Since there currently is no joint SRO trade reporting plan for non-NMS 
securities, trades on the BX Venture Market and any other exchange that 
might trade BX Venture Market-listed securities pursuant to unlisted 
trading privileges (``UTP'') could be reported separately from the 
over-the-counter trade data disseminated by FINRA. For similar reasons, 
quotation data could be disseminated separately by BX and any UTP 
exchange.
---------------------------------------------------------------------------

    \225\ See 17 CFR 242.608.
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    In the Order Instituting Proceedings, the Commission asked whether 
BX sufficiently addressed how quotations and transactions reports 
relating to BX-listed securities will be disseminated. The Commission 
was concerned that the proposal could result in fragmentation of 
pricing information relating to these securities and undermine the 
ability of investors to receive best execution. One commenter stated 
that fragmentation of pricing data was a valid concern.\226\ Another 
commenter stated that market data for BX-listed securities must be 
disseminated in a manner that makes clear that BX-listed securities are 
not NMS securities and that they do not meet the higher listing 
standards for exchange-listed securities.\227\ This commenter stated 
that in order to prevent investor confusion between NMS securities and 
BX-listed securities, quotations and transaction reports for BX-listed 
securities should not be disseminated under any NMS plan and should not 
be commingled with NMS data.\228\ Further, this commenter stated that 
it would be inappropriate for market data of BX-listed securities to be 
distributed under the Nasdaq UTP plan.\229\ Another commenter stated 
that BX must clarify how market data

[[Page 27729]]

products will be engaged to ensure broad dissemination of quotation and 
last sale information and suggested that the Commission require the 
consolidation of market place quotation and last sale data for BX 
Venture Market-listed securities from the BX execution system and the 
over-the-counter market.\230\ However, a third commenter believed that 
the proposal could provide a good experiment in the dissemination of 
market data outside the existing NMS plans, in which Nasdaq OMX 
directly markets the data to market participants.\231\
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    \226\ See Niehoff Letter, supra note 8 at 2-3.
    \227\ See Pink OTC Markets Letter, supra note 5 at 2-3 and OTC 
Markets Group Letter, supra note 8 at 6-7.
    \228\ See Pink OTC Markets Letter, supra note 5 at 3. See also 
OTC Markets Letter, supra note 8 at 7.
    \229\ See Pink OTC Markets Letter, supra note 5 at 3. See also 
OTC Markets Letter, supra note 8 at 7.
    \230\ See Niehoff Letter, supra note 8 at 2.
    \231\ See Angel Letter, supra note 8 at 10.
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    In response, the Exchange stated that it ``is committed to ensuring 
that quotations and transaction information for listed securities 
occurring on The BX Venture Market * * * are consolidated fully with 
the same information from OTC quoting and trading that FINRA 
supervises.'' \232\ Additionally, in response to comments that market 
data for BX Venture Market-listed securities must be disseminated in a 
manner that makes clear that these securities are not NMS securities 
and that they do not meet the higher listing standards for exchange-
listed securities, the Exchange proposed restrictions on the use of one 
to three character ticker symbols, as discussed above.\233\
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    \232\ BX Response Letter, supra note 9 at 9.
    \233\ See Section III.C.3, infra.
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    With respect to the trading of BX Venture Market-listed securities, 
the Commission notes that until other exchanges have appropriate 
trading rules and oversight mechanisms for transactions in second-tier 
securities, other exchanges will not be able to extend UTP to BX-listed 
securities.\234\ The Commission notes, however, that until other 
exchanges trade BX Venture Market-listed securities on a UTP basis, BX 
Venture Market-listed securities could trade not only on BX, but also 
over-the-counter, thus increasing the competition for orders in these 
securities, as these securities previously were only able to trade 
over-the-counter or not at all.
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    \234\ See 17 CFR 240.12f-5. Rule 12f-5 provides that ``[a] 
national securities exchange shall not extend unlisted trading 
privileges to any security unless the national securities exchange 
has in effect a rule or rules providing for transactions in the 
class or type of security to which the exchange extends unlisted 
trading privileges.'' Id. Specifically, the Commission noted that 
Rule 12f-5 ``is intended to preserve a benefit of Commission review 
of UTP applications,'' referring to the fact that the Commission 
previously reviewed each UTP application to ensure, among other 
things, that the applicant exchange had proper trading rules in 
place to provide a fair and orderly market in each security named, 
and had sufficient standards for regulatory oversight of each 
security to provide for the protection of investors. See Securities 
Exchange Act Release Nos. 35323 (February 2, 1995), 60 FR 7718 at 
7719, 7722 (February 9, 1995); 35637 (April 21, 1995), 60 FR 20891 
at 20892, 20895 (April 28, 1995). Here, the Exchange proposed 
listing standards that are substantially lower than those of any 
other listings market, but the Exchange also proposed to adopt a 
number of enhanced surveillance, oversight and disclosure 
requirements. As discussed previously, the Commission views these 
enhanced requirements as being a necessary and integral part of the 
BX Venture Market proposal. Since these enhanced requirements 
address concerns associated with the listing of securities that do 
not meet the listing requirements of other national securities 
exchanges and since Rule 12f-5 requires any exchange seeking to 
trade securities on a UTP basis to have in effect rules that provide 
for transactions in those securities, the Commission believes that 
any national securities exchange wishing to extend UTP to a BX 
Venture Market-listed security would also need to supplement their 
surveillance, oversight and disclosure requirements in order to 
comply with Rule 12f-5.
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G. Margin

    BX-listed securities may be less liquid and more volatile than 
securities listed on another national securities exchange. In 
anticipation of the BX Venture Market, the Commission notes that FINRA 
has issued Regulatory Notice 11-15 (``FINRA Notice''),\235\ which 
reminds its members to consider the risks associated with low-priced 
equity securities \236\ when extending credit in a strategy-based or 
portfolio margin account.\237\ According to the FINRA Notice, ``[p]rice 
volatility is more often associated with low-priced, rather than 
higher-priced, equity securities. Low-priced equity securities tend to 
trade with bid and ask spreads that make up a greater percentage of the 
security's price. This is especially true for newer companies whose 
stock is priced low and whose earnings may be more volatile. In 
addition, due to lower volumes, low priced equity securities can 
experience large price swings during a given trading day, which 
translates into greater price risk. Further, low-priced equity 
securities may be removed from an index, which can increase the 
volatility and exacerbate the price risk.'' \238\
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    \235\ Low-Priced Equity Securities, FINRA Regulatory Notice 11-
15 (April 2011) (``FINRA Notice'').
    \236\ The BX Venture Market may likely have low-priced equity 
securities listed on its exchange.
    \237\ As equity securities listed on a national securities 
exchange, the securities traded on the BX Venture Market would meet 
the definition of ``margin security'' under the Federal Reserve 
Board's Regulation T, which specifies initial margin requirements. 
See 12 CFR 220.2. However, in extending credit to customers in a 
margin account, broker-dealers also must comply with SRO margin 
requirements (including maintenance margin requirements). See, e.g., 
FINRA Rule 4210.
    \238\ FINRA Notice.
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    The FINRA Notice also states that ``[f]irms should take into 
account volatility and concentrated positions in a single customer 
account and across all customer accounts, as well as the daily volume 
and market capitalization of each security when imposing ``house'' 
maintenance margin requirements. Firms should also consider the 
fundamental business drivers and financial performance of the issuer in 
setting house requirements. Increased maintenance margin requirements 
can help to ensure that the equity in each customer account is 
sufficient to cover any large variances in the price of a security.'' 
\239\ Further, the Notice states that ``FINRA believes that a best 
practice is for firms to pay close attention to low-priced equity 
securities when considering the dollar amount of credit to be extended 
to any one customer. Similarly, in a portfolio margin account, FINRA 
believes that a best practice is for firms to subject low-priced or 
concentrated positions to heightened review and daily monitoring, 
subjected to higher margin requirements, where appropriate, and to 
include such positions in exception reporting to senior management.'' 
\240\ Finally, the FINRA Notice reminds members that, pursuant to the 
SEC's net capital rule, Rule 15c3-1,\241\ ``if markets can absorb only 
a limited number of shares of a security for which a ready market 
exists (a marketplace blockage), the non-marketable portion in the 
proprietary or other accounts of a broker dealer is subject to a 100 
percent deduction to net capital, and is treated as a non-allowable 
asset.'' \242\ As such, the FINRA Notice reminds firms that when 
dealing with low-priced equity securities that are thinly traded or 
concentrated, a firm may be required to impose heightened house margin 
requirements, where appropriate, and value the securities 
conservatively, in accordance with FINRA's margin requirements.\243\
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    \239\ Id.
    \240\ Id.
    \241\ 17 CFR 240.15c3-1.
    \242\ See FINRA Notice, supra note 235; see also Letter from 
Michael A. Macchiaroli, Assistant Director, Division of Market 
Regulation, Commission, dated October 5, 1987 to Edward Kwalwasser, 
Esq., NYSE and Mr. Thomas R. Cassella, NASD; and FINRA 
Interpretation Rule 15c3-1(c)(2)(vii)/01 in FINRA's Interpretations 
of Financial and Operational Rules. These interpretations may be 
found at FINRA's Web site at: http://www.finra.org/Industry/Regulation/Guidance/FOR/index.htm.
    \243\ See FINRA Rule 4210.
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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. 2, is consistent with the Act. 
Comments

[[Page 27730]]

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-BX-2010-059 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-BX-2010-059. 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 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 publicly available. All 
submissions should refer to File Number SR-BX-2010-059 and should be 
submitted on or before June 2, 2011.

V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 2

    Amendment No. 2 revised the proposed rule change, as modified by 
Amendment No. 1, to, among other things: (1) Explain the process of 
reviewing companies for initial listing, including conducting 
background checks on companies and associated individuals, and the use 
of third-party investigative firms; (2) clarify the Exchange's 
discretionary authority to deny listing to or delist companies based on 
regulatory concerns; (3) add provisions relating to the internal 
structure and experience of those charged with oversight of the listing 
program; (4) describe market oversight activities for BX Venture 
Market-listed securities; (5) detail the use of market center 
identifiers to distinguish companies listed on the BX Venture Market; 
(6) add restrictions on ticker symbol length; and (7) clarify the 
consolidation of BX Venture Market data with over-the-counter 
information for the same securities. These amendments clarify aspects 
of the proposal, are responsive to commenters' concerns about investor 
protection and brand confusion, and strengthen the listing standards of 
the BX Venture Market. Accordingly, the Commission also finds good 
cause, pursuant to Section 19(b)(2) of the Act,\244\ for approving the 
proposed rule change, as modified by Amendment No. 2, prior to the 30th 
day after the date of publication of notice in the Federal Register.
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    \244\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\245\ that the proposed rule change (SR-BX-2010-059), as modified 
by Amendment Nos. 1 and 2, be, and hereby is, approved on an 
accelerated basis.
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    \245\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

    It is further ordered that operation of the BX Venture Market is 
conditioned on the satisfaction of the requirements below:
    A. Market Data Display. BX must update its global market data 
policy document and must enter into amended data distribution 
agreements to require data vendors to prominently identify the listing 
market for BX Venture Market-listed securities before the market begins 
operations. In addition, BX must represent in a letter to the staff in 
the Commission's Division of Trading and Markets that such policy 
document and agreements have been amended and that the provisions in 
such documents that require data vendors to prominently identify or 
display the listing market for BX-listed securities will be effective 
with respect to all vendors that distribute BX-listed securities data 
at the time the BX Venture Market begins operations.
    B. Regulatory Services Agreement. Before the BX Venture Market 
begins operations, BX and FINRA must enter into a regulatory services 
agreement relating to regulatory activities to be conducted by FINRA as 
described above.
    C. Examination by the Commission. BX must have, and represent in a 
letter to the staff in the Commission's Office of Compliance 
Inspections and Examinations that it and FINRA have, adequate 
regulatory procedures and programs in place to effectively regulate the 
BX Venture Market and its listing program, and adequate procedures and 
programs in place to effectively process trades and maintain the 
confidentiality, integrity, and availability of the Exchange's systems, 
before the BX Venture Market begins operations.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\246\
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    \246\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-11610 Filed 5-11-11; 8:45 am]
BILLING CODE 8011-01-P


