
[Federal Register Volume 88, Number 187 (Thursday, September 28, 2023)]
[Notices]
[Pages 66913-66916]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-21136]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98489; File No. SR-NASDAQ-2023-036]


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

September 22, 2023.
    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 September 12, 2023, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 4120 (Limit Up-Limit Down and 
Trading Halts) and Rule 4753 (Nasdaq Halt Cross) to set forth specific 
requirements for halting and resuming

[[Page 66914]]

trading in a security that is subject to a reverse stock split.
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/nasdaq/rules, 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
    In conjunction with the increase in overall reverse stock splits in 
recent years, Nasdaq proposes to amend Rule 4120 and Rule 4753 to set 
forth specific requirements for halting trading in a security that is 
subject to a reverse stock split and resuming trading using the Nasdaq 
Halt Cross. Current Rule 4120 does not specifically list rule reverse 
stock splits in its numerated circumstances in which Nasdaq may halt 
trading in a security. The proposed amendments will be specific to the 
automatic initiation, pre-market trading and opening of a Nasdaq-listed 
security undergoing a reverse stock split.
Background
    Nasdaq has observed that the current market environment has led to 
an increase in reverse stock split activity. In 2022, Nasdaq processed 
196 reverse stock splits, compared to 35 in 2021 and 98 in 2020. Just 
in the first quarter of 2023, Nasdaq processed 78 reverse stock splits, 
and projects significantly more throughout 2023. Reverse stock splits 
are often effected by smaller companies that do not have broad media or 
research coverage. In most cases, the companies are listed on the 
Capital Market tier and are conducting reverse stock splits to achieve 
compliance with Nasdaq's $1 minimum bid price requirement.\3\
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    \3\ Rule 5550(a)(2) specifies that a Company that has its 
Primary Equity Security listed on the Capital Market must have a 
minimum bid price of at least $1 per share. See also Rule 5450(a)(1) 
(Global and Global Select Markets). Companies are afforded a grace 
period pursuant to Rule 5810(c)(3)(A) to regain compliance.
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    Nasdaq believes that the increase in companies effecting reverse 
stock splits warrants amendments to the trading halt rules to allow for 
Nasdaq to help reduce the potential for errors resulting in a material 
effect on the market resulting from market participants' processing of 
the reverse stock split, including incorrect adjustment or entry of 
orders. Nasdaq currently processes reverse stock splits overnight, with 
the security opening for trading at 4:00 a.m. EST in the pre-market 
hours (i.e., the trading session between 4:00 a.m. to 9:30 a.m. EST) on 
a split-adjusted basis. Recently, market participants have expressed 
concerns with allowing trading on an adjusted basis at 4:00 a.m., 
noting that it is not optimal because system errors or problems with 
orders may go unnoticed for a period of time when a security that has 
undergone a reverse stock split opens for trading with the other 
thousands of securities. These errors have the potential to adversely 
affect investors, market participants and the issuer.\4\ For example, 
in one recent instance problems in connection with the processing of a 
reverse stock split resulted in a broker executing trades selling more 
shares than customers held in their accounts, resulting in a temporary 
short position.
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    \4\ In a separate filing, Nasdaq also proposed changes to adopt 
specific notification and disclosure requirements for reverse stock 
splits. See Securities Exchange Act Release No. 98014 (July 28, 
2023), 88 FR 51376 (August 3, 2023) (SR-Nasdaq-2023-21).
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    As such, Nasdaq believes it is appropriate to impose a regulatory 
halt, which would prohibit pre-market trading immediately after a 
reverse stock split and open trading in such securities using the 
Nasdaq Halt Cross \5\ process set forth in Rule 4753. The proposed new 
rule will allow for Nasdaq and market participants to better detect any 
errors or problems with orders for the security resulting from the 
reverse stock split before trading in the security begins and thereby 
avoid any material effect on the market.
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    \5\ The ``Nasdaq Halt Cross'' is the process for determining the 
price at which Eligible Interest shall be executed at the open of 
trading for a halted security and for executing that Eligible 
Interest. See Rule 4753(a)(4). ``Eligible Interest'' shall mean any 
quotation or any order that has been entered into the system and 
designated with a time-in-force that would allow the order to be in 
force at the time of the Halt Cross. See Nasdaq Rule 4753(a)(5).
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Description of the Proposed Amendment
    Nasdaq is proposing to: (1) amend Rule 4120(a) to provide the 
Exchange with explicit authority to declare a trading halt before the 
end of Post-Market Hours \6\ on the day immediately before the market 
effective date of a reverse stock split; and (2) amend Rule 4120(c) to 
include this halt in the existing procedures for initiating and 
terminating a trading halt. More specifically, proposed Rule 
4120(a)(14) provides that Nasdaq shall halt trading of a security for 
which Nasdaq is the primary listing market before the end of the Post-
Market Hours on the day immediately before the market effective date of 
a reverse stock split. A trading halt due to a reverse stock split will 
be mandatory pursuant to proposed Rule 4120(a)(14). Nasdaq also 
proposes to modify Rule 4120(c)(7)(A) to include the new halt authority 
proposed in Rule 4120(a)(14) in the reopening process currently 
applicable to halts under Rules 4120(a)(1), (4), (5), (6), (9), (10) 
and (11). In general, Nasdaq expects to initiate the halt at 7:50 p.m., 
prior to the close of post-market trading at 8:00 p.m. on the day 
immediately before the split is effective,\7\ and resume trading at 
9:00 a.m. on the day the split is effective.\8\ Nasdaq believes that 
this halt and delayed opening will give sufficient time for investors 
to review their orders and the quotes for the security and allow market 
participants to ensure that their systems have properly adjusted for 
the reverse stock split.
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    \6\ The term ``Post-Market Hours'' means the period of time 
beginning immediately after the end of Market Hours and ending at 
8:00 p.m. ET. See Nasdaq Rule Equity 1, Section 1(a)(9).
    \7\ Initiating the halt at approximately 7:50 p.m. will provide 
Nasdaq with a limited buffer to ensure that trading in a security 
that is undergoing a reverse stock split will not continue after the 
close of post-market trading.
    \8\ Nasdaq may change the resumption time if, for example, there 
was an Extraordinary Market Activity that could interfere with a 
fair and orderly 9:00 a.m. resumption. ``Extraordinary Market 
Activity'' is defined in the Fiftieth Amendment to the Joint Self-
Regulatory Organization Plan Governing the Collection, Consolidation 
and Dissemination of Quotation and Transaction Information for 
Nasdaq-Listed Securities Traded on Exchanges on an Unlisted Trading 
Privileges Basis.
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    Nasdaq is also proposing to update Rule 4753(b) to include proposed 
Rule 4120(a)(14) in the list of numerated provisions that would be 
subject to the Nasdaq Halt Cross. As such, any security that is subject 
to a reverse stock split will be reopened using the Nasdaq Halt Cross 
prior to trading during market hours.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with the 
requirements of the Act and the rules and regulations thereunder that 
are applicable to a national securities

[[Page 66915]]

exchange, and, in particular, with the requirements of section 6(b) of 
the Act.\9\ Specifically, the proposal is consistent with section 
6(b)(5) of the Act \10\ because it would promote just and equitable 
principles of trade, remove impediments to, and perfect the mechanism 
of, a free and open market and a national market system, and, in 
general, protect investors and the public interest.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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    As described above, the Exchange is seeking to amend rules related 
to halting and resuming trading in U.S.-listed equity securities 
subject to a reverse stock split. The Exchange believes that 
establishing a reverse stock split trading halt rule will protect 
investors by giving the Exchange automatic authority to act in 
situations where it is necessary to maintain fair and orderly markets. 
It will also ensure that the process for resuming trading following a 
reverse stock split halt is consistent with other types of halts 
initiated by Nasdaq. Currently, none of the provisions in Rule 4120 
provide authority to pre-emptively halt during pre-market hours the 
trading in a security undergoing a significant corporate action that 
could lead to investor or market confusion. The Exchange believes that 
the proposed amendments will provide greater transparency and clarity 
with respect to the manner in which trading will be halted due to a 
reverse stock split, and the process through which that halt will be 
implemented and terminated. Particularly, Nasdaq will not have the 
discretion of determining when to halt a security following a reverse 
stock split. Rather, following the reverse stock split of the security 
for which Nasdaq is the primary listing market, trading in the security 
will automatically halt prior to the close of post-market trading at 
8:00 p.m. The proposed changes seek to achieve consistency with respect 
to the initiation and termination of a trading halt with respect to 
securities that have undergone a reverse stock split, while maintaining 
a fair and orderly market, protecting investors and protecting the 
public interest.
    Additionally, establishing a mandatory trading halt for securities 
that have undergone a reverse stock split and resuming trading 
thereafter promotes fair and orderly markets and the protection of 
investors, because it encourages Nasdaq to consider the broader 
interests of the national market system and addresses potential 
concerns that system errors may affect immediate trading in those 
securities. Based on the foregoing, the Exchange believes that the 
proposed rules are consistent with section 6(b)(5) of the Act \11\ 
because they will promote just and equitable principles of trade and 
will remove any impediments to a free and open market and a national 
market system by allowing sufficient time for investors to review their 
orders and the quotes for a security that has undergone a reverse stock 
split, and allow market participants to ensure that their systems have 
properly accounted for the reverse stock split. As discussed 
previously, the Exchange believes that the proposed amendments 
establishing the authority and process for reverse stock split trading 
halts and the resumption of trading is consistent with the Act, which 
itself imposes obligations on exchanges with respect to issuers that 
are listed.
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    \11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes the proposal is consistent with section 
6(b)(8) of the Act in that it does not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act as explained below.
    The Exchange believes the proposal will not impose a burden on 
intermarket competition that is not necessary or appropriate in 
furtherance of the purposes of the Act because the proposed rule change 
is designed to protect investors and facilitate a fair and orderly 
market, which are both important purposes of the Act. To the extent 
that there is any impact on intermarket competition, it is incidental 
to these objectives.
    The Exchange does not believe that the proposed rule change imposes 
a burden on intra-market competition because the provisions apply to 
all market participants and issuers equally. In addition, information 
regarding the halting and resumption of trading will be disseminated 
using several freely accessible sources to ensure broad availability of 
information offered by the Exchange that are available to subscribers.
    In addition, the proposals include provisions related to the 
declaration and timing of trading halts and the resumption of trading 
designed to avoid any advantage to those who can react more quickly 
than other participants.

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

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-NASDAQ-2023-036 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-2023-036. 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 (https://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

[[Page 66916]]

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 a.m. and 3 p.m. Copies of the 
filing also will be available for inspection and copying at the 
principal office of the Exchange. Do not include personal identifiable 
information in submissions; you should submit only information that you 
wish to make available publicly. We may redact in part or withhold 
entirely from publication submitted material that is obscene or subject 
to copyright protection. All submissions should refer to file number 
SR-NASDAQ-2023-036 and should be submitted on or before October 19, 
2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-21136 Filed 9-27-23; 8:45 am]
BILLING CODE 8011-01-P


