[Federal Register Volume 84, Number 239 (Thursday, December 12, 2019)]
[Notices]
[Pages 67974-67976]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-26728]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87677; File No. SR-NASDAQ-2019-091]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Adopt a New Rule Permitting 
Nasdaq To Halt Trading in a Security and Request Information From the 
Company Regarding the Number of Unrestricted Publicly Held Shares in 
Certain Circumstances and in Certain Circumstances Request a Plan To 
Increase the Number of Unrestricted Publicly Held Shares to an Amount 
That Is Higher Than the Applicable Publicly Held Shares Requirement

December 6, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on November 22, 2019, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the Exchange. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to adopt a new rule permitting Nasdaq to halt 
trading in a security and request information from the company 
regarding the number of unrestricted publicly held shares when Nasdaq 
observes unusual trading characteristics in a security or a company 
announces an event that may cause a contraction in the number of 
unrestricted publicly held shares.
    The text of the proposed rule change is available on the Exchange's 
website at http://nasdaq.cchwallstreet.com, at the principal office of 
the Exchange, and at the Commission's Public Reference Room.

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

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

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

1. Purpose
    Nasdaq's listing requirements include a number of criteria designed 
to ensure that a listed security has adequate liquidity and is thus 
suitable for listing and trading on a national securities exchange. 
These requirements are intended to ensure that there are sufficient 
shares available for trading to facilitate proper price discovery in 
the secondary market. On July 5, 2019, the Commission approved Nasdaq's 
proposed changes to enhance its initial listing standards related to 
liquidity (the ``Approval Order'').\3\ Under the revised standards, 
securities subject to resale restrictions for any reason (``restricted 
securities'') are excluded from the calculation of publicly held shares 
for initial listing purposes.\4\ Nasdaq believes that, by excluding 
securities that are not freely transferrable or available for investors 
to purchase, the revised standards help the Exchange to ensure that 
companies seeking to list on Nasdaq have sufficient public float, 
investor base, and trading interest likely to generate depth and 
liquidity.
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    \3\ See Securities Exchange Act Release No. 86314 (July 5, 
2019), 84 FR 33102 (July 11, 2019) (approving SR-NASDAQ-2019-009).
    \4\ Rule 5005(a)(37) defines ``Restricted Securities'' as 
``securities that are subject to resale restrictions for any reason, 
including, but not limited to, securities: (1) Acquired directly or 
indirectly from the issuer or an affiliate of the issuer in 
unregistered offerings such as private placements or Regulation D 
offerings; (2) acquired through an employee stock benefit plan or as 
compensation for professional services; (3) acquired in reliance on 
Regulation S, which cannot be resold within the United States; (4) 
subject to a lockup agreement or a similar contractual restriction; 
or (5) considered ``restricted securities'' under Rule 144.''
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    These changes apply only to a company's initial listing, and do not 
apply to Nasdaq's calculation of publicly held shares for continued 
listing purposes.\5\ Instead, for continued listing purposes, a company 
is required to maintain a minimum number of publicly held shares, which 
means shares not held directly or indirectly by an officer, a director 
or any person who is the beneficial owner of more than 10 percent of 
the total shares outstanding.\6\ Restricted securities are not excluded 
from the calculation of a listed company's publicly held shares.
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    \5\ See Approval Order at 33112 (``Nasdaq states that it is not 
proposing to change the requirements for continued listing at this 
time, and believes that the proposed heightened initial listing 
requirements will result in enhanced liquidity for the companies 
that satisfy them on an ongoing basis.'').
    \6\ Rule 5005(a)(35) defines ``Publicly Held Shares'' as 
``shares not held directly or indirectly by an officer, director or 
any person who is the beneficial owner of more than 10 percent of 
the total shares outstanding. Determinations of beneficial ownership 
in calculating publicly held shares shall be made in accordance with 
Rule 13d-3 under the Act.''
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    Nasdaq believes that, as a result of the exclusion of restricted 
securities from the liquidity tests upon initial listing, securities 
listing on Nasdaq will be more likely to trade better after listing. 
However, while newly listing companies must satisfy the revised initial 
listing requirements, companies that were not required to meet those 
requirements upon initial listing may still have restricted securities 
that are not freely tradable. In addition, a listed company may conduct 
a transaction that decreases the number of unrestricted securities in 
its public float, such as a reverse stock split, tender offer, stock 
buyback, or entering into a contractual agreement such as a standstill 
or lockup. The Exchange believes that the new initial listing standards 
do not sufficiently address these concerns, which could potentially 
result in a security that is illiquid.
    Illiquid securities may trade infrequently and in a more volatile 
manner and change hands at a price that may not reflect their true 
market value. Less liquid securities may also be more susceptible to 
price manipulation as a relatively small amount of trading activity can 
have an inordinate effect on market prices. Nasdaq has observed 
problems with a small number of listed companies that have a large 
number of restricted securities in their public float. Such companies 
may not have sufficient liquidity to meet investor demand, particularly 
upon announcement of material news, which may result in unusual trading 
characteristics, such as extreme price movements and unusually large 
bid-ask spreads.
    While Nasdaq's existing rules allow it to apply additional and more 
stringent criteria to a listed company that satisfies all of the 
continued listing requirements where there are indications that there 
is insufficient liquidity in the security to support fair and orderly 
trading,\7\

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Nasdaq believes that it would enhance investor protection and the 
transparency of Nasdaq's regulatory process to adopt a rule specifying 
certain situations in which Nasdaq would act in this manner. Therefore, 
the Exchange is proposing to adopt a new Rule 5120, which would 
specifically permit Nasdaq to request information from a company 
regarding the number of unrestricted publicly held shares \8\ when 
Nasdaq observes unusual trading characteristics of a security or if a 
company announces an event that may cause a contraction in the number 
of unrestricted publicly held shares. Nasdaq may also halt trading in 
the security in connection with such a request pursuant to Nasdaq's 
authority under Rule 4120(a)(5).\9\ If information provided by the 
company, or otherwise obtained by Nasdaq, indicates that the number of 
unrestricted publicly held shares is below the applicable publicly held 
shares requirement for continued listing of the security, Nasdaq 
generally will use its authority under Rule 5101 to apply more 
stringent criteria and request a plan to increase the number of 
unrestricted publicly held shares to an amount that is higher than the 
applicable publicly held shares requirement, as provided in the Rule 
5800 Series.\10\
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    \7\ Rule 5101 provides, in part, that ``Nasdaq may use [its 
broad discretionary authority] to . . . apply additional or more 
stringent criteria for the initial or continued listing of 
particular securities, or suspend or delist particular securities 
based on any event, condition, or circumstance that exists or occurs 
that makes initial or continued listing of the securities on Nasdaq 
inadvisable or unwarranted in the opinion of Nasdaq, even though the 
securities meet all enumerated criteria for initial or continued 
listing on Nasdaq.'' See also Approval Order at 33103 (footnote 9).
    \8\ Rule 5005(a)(45) defines ``Unrestricted Publicly Held 
Shares'' as ``the Publicly Held Shares that are Unrestricted 
Securities.'' Rule 5005(a)(46) defines ``Unrestricted Securities'' 
as ``securities that are not Restricted Securities.''
    \9\ Rule 4120(a)(5) provides that Nasdaq ``may halt trading in a 
security listed on Nasdaq when Nasdaq requests from the issuer 
information relating to: (A) Material news; (B) the issuer's ability 
to meet Nasdaq listing qualification requirements, as set forth in 
the Listing Rule 5000 Series; or (C) any other information which is 
necessary to protect investors and the public interest.''
    \10\ The Rule 5800 Series sets forth procedures for the 
independent review, suspension, and delisting of companies that fail 
to satisfy one or more standards for initial or continued listing, 
and thus are ``deficient'' with respect to the listing standards.
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    Under proposed Rule 5120, in considering whether there are unusual 
trading characteristics, Nasdaq may review volume, price movements, 
spread and the presence or absence of any news. Events that may cause a 
contraction in the number of unrestricted publicly held shares include 
reverse stock splits, tender offers, stock buybacks, or entering into 
contractual agreements such as standstills or lockups. Nasdaq is also 
proposing to revise Rule 5810(c)(2)(A) to correct punctuation within 
the rule and add a new subsection (vii) to provide that when Nasdaq 
requests a plan to increase the number of publicly held shares [sic], 
such plan must generally be provided to Nasdaq within 45 calendar days 
of the date of the request.
    The proposed rule would not impose any burden on companies, which 
may not otherwise regularly track or report the number of their 
unrestricted publicly held shares, to determine these amounts unless 
Nasdaq observed unusual trading characteristics or a change in the 
company's total shares outstanding. As such, Nasdaq believes that the 
proposed rule change is finely tailored to address the Exchange's 
concerns, without imposing an unnecessary burden on companies.
    Finally, Nasdaq is proposing to revise the phrase ``market value of 
publicly held shares'' to ``Market Value of Publicly Held Shares'' in 
Rules 5810(c)(3)(A)(i) and 5810(c)(3)(A)(ii) to correct an inadvertent 
error and clarify that these references are to the term as defined in 
Rule 5005(a).
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\11\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\12\ in particular, in that it is designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general to protect investors and the public 
interest. The proposed change will enhance transparency and ensure that 
securities listed on Nasdaq are liquid and have sufficient freely 
tradable shares to meet investor demand, which will reduce trading 
volatility and price manipulation, thereby protecting investors and the 
public interest and supporting fair and orderly trading. Illiquid 
securities may trade infrequently, in a more volatile manner and with a 
wider bid-ask spread, all of which may result in trading at a price 
that may not reflect their true market value. Less liquid securities 
also may be more susceptible to price manipulation, as a relatively 
small amount of trading activity can have an inordinate effect on 
market prices.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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    Nasdaq believes that it will protect investors and the public 
interest to halt trading in a security that exhibits unusual trading 
characteristics and request information from the company regarding its 
number of unrestricted publicly held shares in order to determine 
whether such unusual trading characteristics were caused by a large 
number of restricted securities. Nasdaq believes that it also will 
protect investors and the public interest to halt trading in a security 
and request information from the company regarding its number of 
unrestricted publicly held shares if the company has announced a 
liquidity-reducing event in order to determine whether a company has a 
sufficient number of unrestricted publicly held shares following such 
liquidity-reducing event. The Exchange believes that these changes will 
help Nasdaq to ensure that the security has enough liquidity to meet 
investor demand after the liquidity-reducing event, which will support 
fair and orderly trading.
    Nasdaq currently monitors securities for unusual trading 
characteristics and receives notifications from companies regarding 
material news and changes in total shares outstanding. Therefore, the 
proposed rule would not require companies to report unrestricted 
publicly held shares to Nasdaq on an ongoing basis. As such, Nasdaq 
believes that the proposed rule change is finely tailored to address 
the Exchange's concerns, without imposing an unnecessary burden on 
companies.
    The Commission has previously opined on the importance of 
meaningful listing standards for the protection of investors and the 
public interest.\13\ In particular, the Commission stated:
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    \13\ Securities Exchange Act Release No. 65708 (November 8, 
2011), 76 FR 70799 (November 15, 2011) (approving SR-Nasdaq-2011-073 
adopting additional listing requirements for companies applying to 
list after consummation of a ``reverse merger'' with a shell 
company).

    Among other things, listing standards provide the means for an 
exchange to screen issuers that seek to become listed, and to 
provide listed status only to those that are bona fide companies 
with sufficient public float, investor base, and trading interest 
likely to generate depth and liquidity sufficient to promote fair 
and orderly markets. Meaningful listing standards also are important 
given investor expectations regarding the nature of securities that 
have achieved an exchange listing, and the role of an exchange in 
overseeing its market and assuring compliance with its listing 
standards.\14\
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    \14\ Id. at 70802.

    Further, the Exchange believes that this proposal is not designed 
to permit unfair discrimination between customers, issuers, brokers, or 
dealers. While the proposed changes will only apply to securities 
exhibiting unusual trading characteristics and companies which announce 
an event that may cause a contraction in the number of unrestricted 
publicly held shares of a listed security, they will apply equally

[[Page 67976]]

to all such securities listed on Nasdaq and the Exchange believes that 
evidence of unusual trading characteristics is a non-discriminatory 
reason to apply additional criteria to these securities.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. All companies and securities 
listed on Nasdaq will be affected in the same manner by these changes, 
across all market tiers. To the extent that companies prefer listing on 
a market with these proposed listing standards, other exchanges can 
choose to adopt similar enhancements to their requirements. As such, 
these changes are neither intended to, nor expected to, impose any 
burden on competition between exchanges.

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

    No written comments were either solicited or received.

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

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

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2019-091 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2019-091. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NASDAQ-2019-091 and should be submitted 
on or before January 2, 2020.
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    \15\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-26728 Filed 12-11-19; 8:45 am]
 BILLING CODE 8011-01-P


