[Federal Register Volume 85, Number 139 (Monday, July 20, 2020)]
[Notices]
[Pages 43900-43904]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-15552]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89309; File No. SR-NASDAQ-2020-002]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing of Proposed Rule Change To Amend the Procedures
Governing the Introduction of Legal Arguments and Material Information
by Companies in a Proceeding Before a Hearings Panel
July 14, 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 July 2, 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 amend the procedures governing the
introduction of legal arguments and material information by companies
in a proceeding before a Hearings Panel.
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
[[Page 43901]]
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
A company may, within seven calendar days of the date of a staff
delisting determination notification, public reprimand letter, or
written denial of a listing application, request a written or oral
hearing before a Hearings Panel to review the staff delisting
determination, public reprimand letter, or written denial of a listing
application.\3\ The Hearings Department will then schedule a hearing to
take place before a Hearings Panel, generally within 45 days of the
request for a hearing.\4\ The Hearings Department will send written
acknowledgment of the company's hearing request and inform the company
of the date, time, and location of the hearing, and the deadlines for
written submissions to the Hearings Panel.\5\ A company may waive its
right to an oral hearing and instead seek a decision by the Hearings
Panel based solely on its written submissions. To improve the hearings
process, the Exchange is proposing to revise the procedures governing
the introduction of legal arguments and material information by
companies in a written or oral hearing before a Hearings Panel.
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\3\ See Listing Rule 5815(a)(1)(A).
\4\ See Listing Rule 5815(a)(4). Under that rule, the company
will be provided at least ten calendar days' notice of the hearing
unless the company waives such notice.
\5\ Id.
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Specifically, the Exchange is proposing to revise, as discussed
below, Listing Rule 5815(a)(5), which currently provides that a company
may submit to the Hearings Department a written plan of compliance and
request that the Hearings Panel grant an exception to the listing
standards for a limited time period, or may set forth specific grounds
for the company's contention that the issuance of a staff delisting
determination, public reprimand letter, or denial of a listing
application, was in error, and may also submit public documents or
other written material in support of its position, including any
information not available at the time of the staff determination. The
Exchange is also proposing to revise Listing Rule 5815(a)(6), which
currently provides that at an oral hearing, the company may make such
presentation as it deems appropriate, and the Hearings Panel may
question any representative appearing at the hearing. To improve the
efficient and effective functioning of the hearings process in
connection with the company's appeal of a delisting determination,
public reprimand letter, or denial of a listing application, the
Exchange proposes amending Listing Rule 5815(a)(5) and (a)(6) to: (1)
Establish a requirement, and set forth the process, for a company to
provide a written submission and written update in connection with
either a written or oral hearing; (2) prohibit a company from
introducing in a written update or during an oral hearing before a
Hearings Panel any legal arguments that were not previously raised; and
(3) prohibit a company from introducing during an oral hearing before a
Hearings Panel any material information unless the material information
was previously raised by the company in writing or was solicited by the
Hearings Panel, or the company can show that the material information
did not earlier exist or exceptional or unusual circumstances are
present.
The proposed revisions to Listing Rule 5815 would contain an
express requirement that for both oral and written hearings a company
must state in writing with specificity the grounds upon which it is
seeking review in advance of a hearing (the ``Written Submission'').\6\
This requirement will ensure that a company makes a Written Submission.
In addition, the requirement that a company state ``with specificity''
the grounds on which is it seeking review will ensure that the Written
Submission includes sufficient detail to be useful in the Hearings
Panel's review of the record before the hearing.
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\6\ As noted above, the Hearings Department generally calendars
a hearing within 45 days of the request for a hearing and will
establish deadlines for written submissions to the Hearings Panel.
See Listing Rule 5815(a)(4). As determined by the Hearings
Department, both oral and written hearing matters are generally
considered on Thursdays, and the company's written submission is
typically due on the third Friday before the hearing. The Hearings
Department will generally establish the Thursday before the Hearing
as the deadline for Nasdaq staff to respond in writing.
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The proposed revisions to Listing Rule 5815 will clarify the
ability of Nasdaq staff to respond in writing to a company's Written
Submission. The proposed revisions to Listing Rule 5815 would also
provide a company with the option to supplement the company's Written
Submission by providing a written update to the Hearings Department no
later than two business days in advance of the hearing, briefing the
Hearings Panel on any new material information that has transpired
since its Written Submission (the ``Written Update'').\7\ The Exchange
believes that allowing for a Written Update will improve the hearings
process by allowing a company to provide updated information about
fast-moving transactions, thereby enabling the Hearings Panel to
prepare for the hearing with the most current data available on the
company's steps toward achieving or maintaining compliance.
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\7\ Because one of the purposes of the Written Update is to
allow a company to supplement its Written Submission, a company
would be permitted to submit a Written Update even if Nasdaq staff
does not respond in writing to the company's Written Submission.
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To ensure that companies provide the requisite information in a
Written Submission or a Written Update, the Exchange proposes including
certain evidentiary standards in proposed Listing Rule 5815. Under the
proposed revisions to Listing Rule 5815, legal arguments are only
permitted in the Written Submission, and the company must include in
the Written Submission all legal arguments on which it intends to rely.
A company that does not raise with specificity a legal argument in its
Written Submission will be prohibited from introducing a new legal
argument in the Written Update or during the hearing before the
Hearings Panel.\8\ The Hearings Panel will determine that a company has
raised a legal argument with specificity if the legal argument includes
sufficient detail to be useful in the Hearings Panel's review of the
record before the hearing.
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\8\ There is precedent for the requirement that an appellant
include all legal arguments in an opening brief, such as the Written
Submission, in the SEC Rules of Practice and by the Federal Rules of
Appellate Procedure. See, e.g., SEC Rules of Practice 420, 17 CFR
201.420(c) (governing appeals to the Commission of determinations by
Self-Regulatory Organizations, which requires that an application
for review ``set forth in summary form a brief statement of alleged
errors in the determination and supporting reasons therefor'' and
that any exception to a determination ``not supported in an opening
brief'' may ``be deemed to have been waived''). See also SEC Rules
of Practice Rule 222, 17 CFR 201.222(a) (governing prehearing
submissions, which allows a hearing officer, on his or her own
motion, or at the request of a party or other participant, to order
any party to furnish information including ``an outline or narrative
summary of its case or defense'' and ``the legal theories upon which
it will rely''). See, e.g., Barna v. Bd. of Sch. Dirs. of the
Panther Valley Sch. Dist., 877 F.3d 136, 145-46 (3d Cir. 2017)
(noting that Fed. R. App. P. 28 requires an appellant's opening
brief to set forth and address each argument the appellant wishes to
pursue in an appeal and that the court will not ``reach arguments
raised for the first time in a reply brief or at oral argument'').
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Otherwise, when a company raises a legal argument during a hearing
or right before the hearing that was not
[[Page 43902]]
contained in its Written Submission, it deprives Nasdaq staff of the
opportunity to provide a thorough response to the legal argument and it
deprives the Hearings Panel the benefit of Nasdaq staff's views and
perspective. As a result, the Hearings Panel would not be able to
properly adjudicate the legal issue. While new legal arguments are not
permitted in the Written Update, the Exchange does not believe that any
prejudice will result to a company from this requirement because the
Exchange believes a company would have developed its legal arguments
early in the hearings process as part of formulating its Written
Submission. The Written Update is solely intended to give a company the
additional opportunity to provide an update on any new material
information that has transpired since its Written Submission and to
reply to Nasdaq staff's response.\9\
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\9\ Nasdaq has observed that companies are primarily seeking to
introduce material information such as a new equity offering or
merger, as opposed to legal arguments, at the hearing; thus, the
Written Update will provide companies with an opportunity to update
the Hearings Panel with material information closer in time to the
hearing, but far enough in advance that the Hearings Panel has
adequate time to consider such information.
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In addition, under the proposed revisions to Listing Rule 5815, a
company that fails to raise with specificity any material information
relating to its appeal of a delisting determination, public reprimand
letter, or denial of a listing application in either its Written
Submission or Written Update (``New Material Information''), with
certain exceptions, will be prohibited from introducing such
information during the oral hearing before the Hearings Panel.
Information would not be considered New Material Information if, in the
Hearings Panel's opinion, the company had previously included
information with sufficient detail to be useful in the Hearings Panel's
review of the record before the hearing. This revision is intended to
improve the Hearings Panel's timely access to material information, and
the proposed Listing Rule 5815 includes certain safeguards to ensure
such access.
New Material Information would be permitted in three situations.
First, the prohibition on introducing New Material Information during
the hearing only applies absent solicitation from the Hearings Panel.
This is to ensure that the Hearings Panel is not restricted or limited
in its ability to ask questions of a company and has the latitude
needed to receive answers to its inquiries during the oral hearing.
Second, if the Hearings Panel determines that the company has shown
that the New Material Information did not exist at the time the company
was permitted to submit a Written Update, i.e., the information is
truly new, then the company will be permitted to introduce such
evidence at the hearing. For example, where a key component of a
company's compliance plan is a merger, and the company obtains a fully
executed version of the merger agreement the day before the hearing,
the executed merger agreement would constitute information that did not
exist at the time the company was permitted to submit a Written Update.
However, the fact that the company was pursuing a merger, the potential
merger parties, and the material terms of the contemplated merger,
should have been previously disclosed by the company, as some or all of
such information likely existed at the time the company was permitted
to submit a Written Update.
Third, if the Hearings Panel determines that the company has shown
that ``exceptional or unusual circumstances'' exist that warrant
consideration of the New Material Information, then the company will be
permitted to introduce such evidence at the oral hearing. As stated in
the proposed revisions to Listing Rule 5815, ``exceptional or unusual
circumstances'' would include, but are not necessarily limited to,
material information that was not earlier discoverable by the listed
company despite all reasonable measures having been taken.\10\ This is
intended to provide a prudent safety valve for companies that have
otherwise exercised due diligence in providing timely information to
the Hearings Panel, yet it is circumscribed to the degree necessary to
avoid becoming an exception that swallows the general standard.
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\10\ Cf. SEC Rules of Practice 452, 17 CFR 201.452 (a party may
file a motion for leave to adduce additional evidence prior to the
issuance of a decision by the Commission upon a ``show[ing] with
particularity that such additional evidence is material and that
there were reasonable grounds for failure to adduce such evidence
previously'').
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Where a Hearings Panel permits a company to introduce New Material
Information, the proposed revisions to Listing Rule 5815 also provides
Nasdaq staff an opportunity to respond in writing to the New Material
Information within up to three business days, or such shorter time as
the Hearings Panel requests, following the oral hearing. Because the
company had the opportunity to present its view on the New Material
Information at the oral hearing, the company may respond to the staff's
submission only if the Hearings Panel requests it do so. This approach
balances the company's need to introduce new information during a
hearing; the Nasdaq staff's ability to provide a fulsome review of such
information to benefit the Hearings Panel's ultimate consideration of
an issue; and the interest in timely resolving a matter after a
hearing.
The proposed changes to Listing Rule 5815 will be operative for any
company that requests a hearing to review a staff delisting
determination, public reprimand letter, or written denial of a listing
application after the date of an SEC approval of the proposed rule
change.\11\
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\11\ Companies that have requested a written or oral hearing
before a Hearings Panel to review the staff delisting determination,
public reprimand letter, or written denial of a listing application
prior to the date of SEC approval of the proposed rule change will
be subject to the rule text in Listing Rule 5815(a)(5)-(6) that was
effective prior to the date of such SEC approval. For such
companies, the online rulebook will contain a hyperlink to the older
version of the rule.
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The Exchange believes that the above-mentioned revisions to Listing
Rule 5815 will enhance the hearings process by providing the Hearings
Panel with the most developed record in as timely a manner as possible.
The Exchange further believes that the proposed revisions will avoid
situations that Nasdaq staff has observed where, in advance of a
hearing, companies provide little information about their plan to
achieve or regain compliance or regarding their appeal of a public
reprimand letter or denial of an initial listing application, and
instead present such information for the first time during the hearing.
When companies belatedly provide information to the Hearings Panel,
Nasdaq staff has observed that it does not provide the Hearings Panel
with adequate time to prepare for and consider the information in
advance of the hearing. Similarly, where companies belatedly provide
legal arguments to the Hearings Panel, Nasdaq staff is unable to
adequately brief the Hearings Panel concerning its response to the
legal argument and, as a result, the Hearings Panel does not have
adequate time to prepare for and consider the legal argument in advance
of the hearing and thus cannot properly adjudicate the issue.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\12\ in general, and furthers the objectives of
Sections 6(b)(5) and 6(b)(7) of the Act,\13\ in particular, in that it
is designed to promote just and equitable principles of trade, to
remove
[[Page 43903]]
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, by preventing companies from engaging in gamesmanship
in the hearings process while affording companies a fair process and
reasonable opportunity to present material arguments and evidence to
the Hearings Panel at an appropriate time in the hearings process.
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\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5) and (7).
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Specifically, this proposal will prevent companies from providing
substantive information for the first time during a hearing, after
having provided the Hearings Panel either no written compliance plan
before the hearing or little detail regarding their compliance plan or
appeal of a public reprimand letter or denial of an initial listing
application before the hearing. In such circumstances, a Hearings Panel
has little or no opportunity to review material information regarding a
company's compliance plan or a company's appellate position, or to
formulate questions to ask the company, in advance of the hearing. As a
result, the Hearings Panel may need more time or information to fully
consider the matter following the hearing. In the Exchange's view,
these current practices effectively reward a company that withholds
information by extending the time it remains listed pending a Hearings
Panel decision.\14\
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\14\ Generally, a timely request for a hearing stays the
suspension and delisting action pending the issuance of a written
Panel Decision. Listing Rule 5815(a)(1)(B).
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Likewise, when companies withhold legal arguments from their
Written Submissions regarding a compliance plan or their appellate
position, Nasdaq staff may be unable to fully develop legal arguments
or advise the Hearings Panel effectively regarding a company's request
for relief. As a result, the Hearings Panel would not be able to
properly adjudicate the legal issue during the hearing. While legal
arguments are not permitted in the Written Update, the Exchange does
not believe that any prejudice will result to a company because the
Exchange believes a company would have developed its legal arguments
early in the hearings process as part of formulating its Written
Submission.
The Exchange believes that this proposal is in keeping with the
principles described in Sections 6(b)(5) and 6(b)(7) because it will
ensure that the hearings process operates effectively and efficiently,
allowing companies the opportunity to present information and legal
arguments about their appellate position or ability to achieve and
maintain compliance, while also affording the Hearings Panel an
opportunity to review that information or legal argument and benefit
from Nasdaq staff's views about the information presented. As such, the
Exchange believes that this proposal will strengthen the integrity and
transparency of the hearings process. Furthermore, the Exchange
believes that the proposed changes to the hearings process
appropriately balance the potential harm of a delisting decision or a
denial of initial listing to the company and its current investors with
the expectations of prospective investors, who are entitled to believe
that a company listed on Nasdaq satisfies all of Nasdaq's listing
requirements.\15\ Likewise, the Exchange believes that the proposed
changes to the hearings process appropriately balance the potential
harm to companies issued a public reprimand letter with an improved
opportunity to adequately develop the record in advance of the oral
hearing.
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\15\ See In re Tassaway, Securities Exchange Act Release No.
11291, 45 S.E.C. 706, 709, 1975 SEC LEXIS 2057, at *6 (Mar. 13,
1975) (``[P]rimary emphasis must be placed on the interests of
prospective future investors . . . [who are] entitled to assume that
the securities in [Nasdaq] meet [Nasdaq's] standards. Hence the
presence in [Nasdaq] of non-complying securities could have a
serious deceptive effect.'').
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The Exchange believes that the proposed process is fair because
companies retain the ability to introduce all relevant information
before a Hearings Panel, and the proposed changes require that they do
so in a more efficient way that helps to minimize the length of time a
Hearings Panel needs to make a decision. The Exchange further believes
that the proposed process limiting legal arguments to the Written
Submission is fair because the Exchange believes a company would have
developed its legal arguments early in the hearings process as part of
formulating its Written Submission. In addition, building in time for
Nasdaq staff to provide a thorough response to the legal argument in
advance of the hearing allows the Hearings Panel to properly adjudicate
a legal issue with the benefit of having fully considered the company's
and Nasdaq staff's views in advance of the hearing.
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 seeking review of
a delisting determination, public reprimand letter, or denial of an
initial listing application before a Hearings Panel would be affected
in the same manner by this change. Moreover, as described above, Nasdaq
believes that the proposed rule change is necessary to enhance investor
protection from companies that withhold material information or legal
arguments from the Hearings Panel until the day of the hearing. This
conduct may result in the Hearings Panel's need for additional time to
review the information and, thus, potentially unqualified companies
remaining listed longer pending a Hearings Panel decision.
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 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-2020-002 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-2020-002. This
file number should be included on the
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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-2020-002 and should be submitted on or before August 10, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-15552 Filed 7-17-20; 8:45 am]
BILLING CODE 8011-01-P