[Federal Register Volume 85, Number 114 (Friday, June 12, 2020)]
[Notices]
[Pages 35967-35969]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-12686]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89028; File No. SR-NASDAQ-2020-026]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing of Proposed Rule Change To Adopt a New Requirement
Related to the Qualification of Management for Companies From
Restrictive Markets
June 8, 2020.
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 May 29, 2020, 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 requirement related to the
qualification of management for certain companies.
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
Under federal securities laws, a company's management is
responsible for preparing financial statements and for establishing and
maintaining disclosure controls and procedures and internal control
over financial reporting.\3\ Nasdaq's listing requirements include
transparent quantitative criteria, which are based on the company's
financial statements and market information. They also impose
disclosure obligations (along with applicable federal securities laws)
and establish minimum corporate governance requirements, which are
designed to protect investors and the public interest. A company's
management is also responsible for ensuring compliance with these
listing requirements on an ongoing basis.\4\ For these reasons, Nasdaq
believes that it is critically important for companies to have
management that is familiar with these responsibilities, or an advisor
to guide the company in fulfilling these obligations, in order to
protect investors and the public interest.
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\3\ See, e.g., SEC Chairman Jay Clayton, PCAOB Chairman William
D. Duhnke III, SEC Chief Accountant Sagar Teotia, SEC Division of
Corporation Finance Director William Hinman, SEC Division of
Investment Management Director Dalia Blass, Emerging Market
Investments Entail Significant Disclosure, Financial Reporting and
Other Risks; Remedies are Limited (April 21, 2020), available at
https://www.sec.gov/news/public-statement/emerging-market-investments-disclosure-reporting (``Emerging Market Risks
Statement'') (``Management is responsible for the preparation of the
financial statements, including responsibility for establishing and
maintaining disclosure controls and procedures (``DCP'') and
internal control over financial reporting (``ICFR''), and for
maintaining accountability for the company's assets, among other
things . . . Management . . . must determine that the financial
statements, and other financial information included in the report
filed with the SEC, fairly present in all material respects the
financial condition, results of operations and cash flows of the
company.'') See also Section 404(b) of the Sarbanes Oxley Act, 15
U.S.C. 7262(b).
\4\ For example, Nasdaq Rules require prompt notification to
Nasdaq after an executive officer of the company, or a person
performing an equivalent role, becomes aware of any noncompliance
with Nasdaq's corporate governance requirements. Rule 5625.
Similarly, SEC rules and the Sarbanes-Oxley Act impose a heightened
obligation on the CEO and CFO of a public company, including the
requirement to certify the company's periodic financial statements.
See, e.g., Section 302 of the Sarbanes Oxley Act, Public Law 107-
204, 116 Stat. 745 (2002), and Rules 13a-14 and 15d-14 under the
Act, 17 CFR 240.13a-14 and 240.15d-14. See also Section 906 of the
Sarbanes Oxley Act.
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Accordingly, Nasdaq has observed instances where it appears that
management lacked familiarity with the requirements to be a Nasdaq-
listed public company in the U.S. or was otherwise unprepared for the
rigors of operating as a public company. The risks arising from these
situations are heightened when a company's business is principally
administered in a jurisdiction that has secrecy laws, blocking
statutes, national security laws or other laws or regulations
restricting access to information by regulators of U.S.-listed
companies in such jurisdiction (a ``Restrictive Market'').\5\
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\5\ See Emerging Market Risks Statement (``As a result, in many
emerging markets, including China, there is substantially greater
risk that disclosures will be incomplete or misleading and, in the
event of investor harm, substantially less access to recourse, in
comparison to U.S. domestic companies.'')
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Accordingly, Nasdaq proposes to adopt a new listing standard in
Rule 5210(c) to require that listing applicants from Restrictive Market
countries have, and certify to Nasdaq that they will continue to have,
a member of senior management or a director with relevant past
employment experience at a U.S.-listed public company or other
experience, training or background which results in the individual's
general familiarity with the regulatory and reporting requirements
applicable to a U.S.-listed public company under Nasdaq rules and
federal securities laws. Alternatively, in the absence of such an
individual, the company could retain on an ongoing basis an advisor or
advisors, acceptable to Nasdaq, that will provide such guidance to the
company.
It is expected that the member of senior management, director or
advisor would be a resource to the company on matters such as the
Nasdaq corporate governance requirements, disclosure of material
information, SEC reporting obligations including financial reporting
obligations, internal controls over financial reporting, related party
transactions, insider trading restrictions, whistleblower protections
and investor communications. As such, Nasdaq expects this proposed
requirement will heighten compliance by companies from Restrictive
Markets and enhance investor protection. The proposed requirement is
similar to the requirements of other global markets, which also include
qualification requirements for management.\6\
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\6\ For example, the Toronto Stock Exchange requires management
to have ``adequate public company experience which demonstrates that
they are able to satisfy all of their reporting and public company
obligations.'' See Section 311 of the TSX Company Manual. The Hong
Kong Stock Exchange requires business experience and management
continuity, which can achieve similar objectives to the proposed
requirement. See Rule 8.05A of the Hong Kong Stock Exchange Main
Board Listing Rules. Nasdaq's main markets in the Nordics require
management to be familiar with the way the company has structured
its internal reporting lines, the management pertaining to financial
reporting, its investor relation management and its procedures for
disclosing ad hoc and regular information to the stock market. See
Section 2.15.2 of the Nordic Main Market Rulebook for Issuers of
Shares.
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[[Page 35968]]
In determining whether a company's business is principally
administered in a Restrictive Market, Nasdaq may consider the
geographic locations of the company's: (a) Principal business segments,
operations or assets; (b) board and shareholders' meetings; (c)
headquarters or principal executive offices; (d) senior management and
employees; and (e) books and records.\7\ For example, a company's
headquarters could be located in Country A, while the majority of its
senior management, employees, assets, operations and books and records
are located in Country B, which is a Restrictive Market. In this case,
Nasdaq would consider the company's business to be principally
administered in Country B, which is a Restrictive Market, and Nasdaq
would require the company to meet the criteria set forth in Rule
5210(c).
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\7\ This threshold would capture both foreign private issuers
based in Restrictive Markets and companies based in the U.S. or
another jurisdiction that principally administer their businesses in
Restrictive Markets. The factors that Nasdaq would consider when
determining whether a business is principally administered in a
Restrictive Market is supported by SEC guidance regarding foreign
private issuer status, which suggests that a foreign company may
consider certain factors including the locations of: The company's
principal business segments or operations; its board and
shareholders' meetings; its headquarters; and its most influential
key executives (potentially a subset of all executives). See
Division of Corporation Finance of the SEC, Accessing the U.S.
Capital Markets--A Brief Overview for Foreign Private Issuers
(February 13, 2013), available at https://www.sec.gov/divisions/corpfin/internatl/foreign-private-issuers-overview.shtml#IIA2c.
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Once listed, a company subject to proposed Rule 5210(c) will be
subject to proposed Rule 5250(g). This rule will contain the continuing
obligations for a Restricted Market Company listed on Nasdaq to have at
least one member of senior management or director who has relevant past
employment experience at a U.S.-listed public company or other
experience, training or background which results in the individual's
general familiarity with the regulatory and reporting requirements
applicable to a U.S.-listed public company under Nasdaq rules and
federal securities laws or, in the absence of such an individual, to
retain on an ongoing basis an advisor or advisors, acceptable to
Nasdaq, that will provide such guidance to the Company.
Nasdaq proposes changes to Rule 5810 to allow a company from a
Restrictive Market that is subject to, but does not maintain compliance
with, this requirement to provide Nasdaq Staff with a plan to regain
compliance. Based on its review of the company's plan, Nasdaq Staff
generally would be able to allow the company up to 180 days to regain
compliance.\8\ Companies would be required under Rule 5810(b) to
disclose that they do not meet this requirement, which would alert
investors to the heightened risk during this time.
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\8\ See Rule 5810(c)(2)(B). Staff cannot grant additional time
if the company is currently under review by an Adjudicatory Body for
a Staff Delisting Determination.
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\9\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\10\ in particular, in that it is designed to
prevent fraudulent and manipulative acts and practices, 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. Further,
the Exchange believes that this proposal is not designed to permit
unfair discrimination between customers, issuers, brokers, or dealers.
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\9\ 15 U.S.C. 78f(b).
\10\ 15 U.S.C. 78f(b)(5).
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Nasdaq believes that requiring applicants from Restrictive Market
countries to satisfy the proposed requirement will help ensure that the
company has at least one member of senior management or director or an
advisor who serves as a resource for the company to assist in
compliance with the company's reporting and public company obligations
in the U.S. on an ongoing basis. This will better enable the company to
satisfy the regulatory and reporting requirements applicable to a U.S.-
listed public company under Nasdaq rules and federal securities laws,
which will enhance investor protection and the public interest.
The proposed rule changes would apply to companies from Restrictive
Market countries that apply to list on Nasdaq after the date of
effectiveness, but would not apply to companies from other countries or
to companies already listed on Nasdaq. Notwithstanding, the Exchange
believes that the proposal does not unfairly discriminate among
companies. With respect to the discrimination between companies from
Restrictive Markets and other companies, Nasdaq believes that the
distinction is fair because Nasdaq and the SEC have identified
additional concerns around companies from Restrictive Markets,\11\
which the proposed rule change is designed to address. With respect to
the discrimination between newly listing companies from Restrictive
Markets and companies from Restrictive Markets that are already listed
before this rule is effective, Nasdaq believes that this is an
appropriate distinction because this requirement was not in place when
the later group of companies listed and these companies have structured
alternative mechanisms to comply with the requirements to be a U.S-
listed public company. To the extent there are future concerns about
such a listed company that arise from an apparent unfamiliarity with
the requirements to be a U.S.-listed public company, however, Nasdaq
would exercise its regulatory authority and could consider that lack of
familiarity when determining whether to allow the company to remain
listed.
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\11\ See Emerging Market Risks Statement, supra note 3.
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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. While the proposed rule change
will apply only to companies from Restrictive Markets, Nasdaq and the
SEC have identified specific concerns with such companies that make the
imposition of a heightened requirement on such companies appropriate to
enhance investor protection, which is a central purpose of the Act. Any
impact on competition, either among listed companies or between
exchanges, is incidental to that purpose.
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 will: (a) By order approve
or disapprove such proposed rule change, or (b) institute proceedings
to determine
[[Page 35969]]
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 [email protected]. Please include
File Number SR-NASDAQ-2020-026 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-2020-026. 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-2020-026 and should be submitted
on or before July 6, 2020.
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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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-12686 Filed 6-11-20; 8:45 am]
BILLING CODE 8011-01-P