Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Order Instituting Proceedings To Determine Whether To Disapprove Proposed Rule Change, as Modified by Amendment No. 1, To Create a Listing Market on the Exchange, 77036-77041 [2010-31078]

Download as PDF 77036 Federal Register / Vol. 75, No. 237 / Friday, December 10, 2010 / Notices 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 (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 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 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; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR– NASDAQ–2010–158 and should be submitted on or before January 3, 2011. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.11 Florence E. Harmon, Deputy Secretary. [FR Doc. 2010–31051 Filed 12–9–10; 8:45 am] SECURITIES AND EXCHANGE COMMISSION [Release No. 34–63448; File No. SR–BX– 2010–059] Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Order Instituting Proceedings To Determine Whether To Disapprove Proposed Rule Change, as Modified by Amendment No. 1, To Create a Listing Market on the Exchange mstockstill on DSKH9S0YB1PROD with NOTICES December 7, 2010. I. Introduction On August 20, 2010, NASDAQ OMX BX (‘‘BX’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act CFR 200.30–3(a)(12). VerDate Mar<15>2010 18:39 Dec 09, 2010 Jkt 223001 II. Description of the Proposal 7 The Exchange proposes to create a new listing market, to be called the ‘‘BX Venture Market.’’ 8 The Exchange has stated that it expects that the securities listed on BX would not be classified as national market system (‘‘NMS’’) securities.9 As a result, BX-listed securities would not be subject to an NMS plan and would not be subject to Regulation NMS under the Act.10 BXlisted securities would trade on the Exchange and also could trade over-thecounter (‘‘OTC’’).11 Further, BX-listed 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 62818 (September 1, 2010), 75 FR 54665 (‘‘Notice’’). 4 See Letters to Elizabeth M. Murphy, Secretary, Commission, from Tom A. Alberg, Managing Director and Founder, Madrona Venture Group, dated December 1, 2010 (‘‘Madrona Letter’’); Michael R. Trocchio, Bingham McCutchen LLP, dated October 3, 2010 (‘‘Pink OTC Markets Letter’’); and William F. Galvin, Secretary of the Commonwealth, Commonwealth of Massachusetts, dated September 28, 2010 (‘‘MSD Letter’’). 5 See Securities Exchange Act Release No. 63105 (October 14, 2010), 75 FR 64772 (October 20, 2010). 6 See infra Section II for a description of Amendment No. 1. 7 This description does not review every rule proposed by BX that has been filed as part of its proposed rule change; rather, it focuses on the most prominent rules considered in review of the BX’s proposal. See Notice, supra note 3, for a description of the proposed rule change. See also Exhibit 5 to the Form 19b–4 for all the rules proposed by BX, available at https://www.sec.gov/rules/sro/bx/2010/ 34-62818-ex5.pdf. 8 See Amendment No. 1. As originally proposed, the proposed rule change provided that a BX-listed company should refer to its listing as on the ‘‘BX.’’ 9 See Notice, supra note 3. 10 See 17 CFR 242.600 et seq. 11 OTC trades of BX-listed securities would be reported to the Financial Industry Regulatory 2 17 BILLING CODE 8011–01–P 11 17 of 1934 (‘‘Act’’ or ‘‘Exchange Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to create a new listing market. The proposed rule change was published for comment in the Federal Register on September 8, 2010.3 The Commission received three comments on the proposal.4 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, 2010.5 On December 6, 2010, BX submitted Amendment No. 1 to the proposed rule change.6 This order institutes proceedings to determine whether to disapprove the proposed rule change, as modified by Amendment No. 1. Institution of disapproval proceedings, however, does not indicate that the Commission has formulated any conclusions with respect to any of the issues involved. PO 00000 Frm 00087 Fmt 4703 Sfmt 4703 securities would be considered penny stocks under Exchange Act Rule 3a51– 1, unless they qualify for an exemption from the definition of a penny stock.12 No ‘‘blue sky’’ exemption would be available under Section 18 of the Securities Act of 1933 or the rule adopted thereunder,13 so companies would be required to satisfy state law registration requirements and other state laws that regulate the sale and offering of securities. In addition, BX would not list any company that meets the quantitative (e.g., financial) requirements for listing on The NASDAQ Stock Market LLC (‘‘Nasdaq’’). To qualify for initial listing on BX, a company must be registered under Section 12(b) of the Act 14 and be current in its periodic filings with the Commission. The company would also be required to have a fully independent audit committee comprised of at least three members and comply with the requirements of Rule 10A–3 under the Exchange Act.15 The company would be required to have its independent directors make compensation decisions for executive officers (either by having the independent directors meet in executive session or by having them sit on a compensation committee), and independent directors would be required to meet on a regular basis in executive sessions.16 The company’s Authority (‘‘FINRA’’) OTC Reporting Facility. See Notice, supra note 3. 12 See 17 CFR 240.3a51–1. 13 15 U.S.C. 77r; Securities Act Rule 146. In addition, some state laws and regulations may provide an exemption from certain registration or ‘‘blue sky’’ requirements for companies listed on the Boston Stock Exchange, based on the higher listing standards previously applied by the former Boston Stock Exchange. The proposed listing rules would provide that the Exchange will take action to delist any company listed on BX that attempts to rely on such an exemption. Companies would also agree not to rely on any such exemption as a provision of the BX Listing Agreement. 14 15 U.S.C. 78l(b). 15 17 CFR 240.10A–3. Certain companies listing on BX 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. 16 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 OTC 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. E:\FR\FM\10DEN1.SGM 10DEN1 Federal Register / Vol. 75, No. 237 / Friday, December 10, 2010 / Notices mstockstill on DSKH9S0YB1PROD with NOTICES audit committee would be required to have a charter setting out its responsibilities. The audit committee, or another independent body of the board, would also be required to conduct appropriate review and oversight of any related party transactions. BX has proposed the following quantitative listing standards for the initial listing of securities that were not previously listed on a national securities exchange: (1) $1 million of stockholders’ equity or $5 million total assets; (2) 200,000 publicly held shares; (3) 200 public shareholders, at least 100 of which must be round lot holders; (4) $2 million market value of listed securities; (5) $1.00 minimum bid price per share; (6) one year operating history; and (7) two registered and active market makers. In addition, the company would also be required to demonstrate that it has a plan to maintain sufficient working capital for its planned business for at least twelve months after the first day of listing. BX has proposed the following quantitative listing standards for the initial listing of securities that have previously been listed on a national securities exchange: (1) 200,000 publicly held shares; (2) 200 public shareholders, at least 100 of which must be round lot holders; (3) $2 million market value of listed securities; (4) $0.25 minimum bid price per share; and (5) two registered and active market makers. A company would be considered to have been previously listed on another national securities exchange if it was listed on such exchange at any time during the three months before its listing on BX, or, until September 30, 2011, if the company was listed on another national securities exchange at any time between January 1, 2008 and September 30, 2011.17 The Exchange would have the discretionary authority to deny listing to any otherwise qualified security when it is necessary to preserve and strengthen the quality of, and public confidence in, its market.18 The Exchange would conduct a public interest review of the company and significant persons 17 See Amendment No. 1. As originally proposed, a company would be considered to have been previously listed on another national securities exchange if it was listed on such exchange at any time during the three months before its listing on BX, or until March 31, 2011, if the company was listed on another national securities exchange at any time between January 1, 2008 and March 31, 2011. 18 See infra Section II for examples of circumstances under which the Exchange would exercise such discretionary authority, as set out in Amendment No. 1. VerDate Mar<15>2010 18:39 Dec 09, 2010 Jkt 223001 associated with it.19 In that regard, the Exchange stated that it intends to conduct background investigations of officers and directors and other significant people associated with a company in connection with its review of applications for initial listing.20 In addition, the Exchange would not approve for listing or allow the continued listing of ‘‘shell’’ companies. For continued listing on BX, a security would be required to satisfy the following listing standards: (1) At least 200,000 publicly held shares; (2) at least 200 public shareholders; (3) market value of listed securities of at least $1 million; (4) minimum bid price of at least $0.25 21 per share; and (5) at least two registered and active market makers. If the security does not maintain the minimum $0.25 per share bid price for twenty consecutive trading days,22 Exchange staff would issue a Staff Delisting Determination and the security would be suspended from trading on BX. A company could appeal that determination to a Hearings Panel; however, such an appeal would not stay the suspension of the security. During the Hearings Panel process, the security could regain compliance by achieving a $0.25 23 per share minimum bid price while trading on another venue, such as the OTC market, for ten consecutive days. However, if the company has received three or more Staff Delisting Determinations for failure to comply with the minimum bid price requirement in the prior twelve months, the company could only regain compliance by achieving a closing bid price of $0.25 per share or more for at least twenty consecutive trading days.24 Description of Amendment No. 1 Amendment No. 1 makes the following modifications to the proposed rule change: 19 See infra Section II for a more detailed discussion of public interest reviews, as set out in Amendment No. 1. 20 See id. 21 See Amendment No. 1. As originally proposed, a BX-listed company would have been required to maintain a minimum bid price of at least $0.05 per share. 22 See Amendment No. 1. As originally proposed, if a BX-listed security does not maintain a minimum bid price of $0.05 per share for ten consecutive trading days, Exchange staff would issue a Staff Delisting Determination and the security would be suspended from trading on BX. 23 See Amendment No. 1. As originally proposed, a BX-listed company could regain compliance by achieving a $0.05 per share minimum bid price while trading on another venue for ten consecutive trading days. 24 See Amendment No. 1. As originally proposed, a BX-listed company could only regain compliance by achieving a closing bid price of $0.25 per share for at least ten consecutive trading days. PO 00000 Frm 00088 Fmt 4703 Sfmt 4703 77037 • Renames the market from ‘‘BX’’ to ‘‘BX Venture Market’’ to distinguish the BX Venture Market from Nasdaq, provides that the Exchange will monitor press releases issued by BX-listed companies and annually review their Web sites to determine how a company is referring to its listing, and provides that the Exchange will include information on its Web site describing the differences between the BX Venture Market and other national securities exchanges, including Nasdaq; • Provides that BX will disseminate quotation and transaction information about BX-listed securities and that this information will include a market center identifier; • Provides that BX will require data vendors to identify when the BX Venture Market is the listing market for a security and clearly differentiate those securities from securities listed on Nasdaq or other exchanges or traded OTC when displaying information to external users on their single security quotation screens; • States that listings and delistings will be processed by the staff in Nasdaq’s Listing Qualifications Department, who, according to the Exchange, are extremely experienced in regulatory analysis; states that BX will hire additional staff if the workload from the new BX Venture Market proves ‘‘sufficiently high’’; and notes that the staff within the Listing Qualifications Department 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 BX’s Regulatory Oversight Committee; • Prohibits the initial or continued listing of a company if any executive officer or director was involved in any event that occurred during the prior five years that is required to be disclosed under Items 401(f)(2)–(8) of Regulation S–K and that, in the case of a listed company, the company would be provided 30 days to remove the executive officer or director or be issued a delisting notification; • Provides that the Exchange would use its discretionary authority, where appropriate, to deny initial or continued listing in cases where: (1) An executive officer or director has reported misconduct that occurred between five and ten years before the disclosure or misconduct not required to be disclosed under Item 401 of Regulation S–K; or (2) an individual who is not an executive officer or director, but who has significant influence or importance to the company such as a control person or significant shareholder, has a history of regulatory misconduct; E:\FR\FM\10DEN1.SGM 10DEN1 mstockstill on DSKH9S0YB1PROD with NOTICES 77038 Federal Register / Vol. 75, No. 237 / Friday, December 10, 2010 / Notices • Indicates that in connection with initial listing applications and when a new executive officer or director becomes associated with a BX-listed company, BX will conduct background investigations of executive officers, directors, and other significant associated people using public databases, and will retain outside firms to assist it in its review as needed, including investigative, accounting, and law firms, and provides that BX’s listing application will solicit information about certain legal or administrative proceedings against the company and its officers, directors, and 10% or greater shareholders; • Provides that the head of the Exchange’s Listing Department will be involved in all decisions concerning whether to permit or deny listing to a company based on a public interest concern and that the Exchange’s Chief Regulatory Officer will be required to approve the initial or continued listing of any company that has disclosed information about an executive officer, director, or control person under Items 401(f)(2)–(8) of Regulation S–K that does not trigger the automatic bar described above; • Increases the continued listing price from $0.05 to $0.25 per share and provides that the Exchange will issue a Staff Delisting Determination and suspend a BX-listed security from trading on the Exchange if such security does not maintain the minimum continued listing price of $0.25 per share for twenty consecutive trading days, rather than for the originally proposed ten consecutive trading days; • Shortens the periods that a noncompliant company may remain listed by, for example, providing that 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 and providing that 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 Nasdaqlisted company; • Undertakes to provide the Commission with: (1) Monthly reports describing developments on the BX Venture Exchange, including a list of companies added or removed from the market; and (2) quarterly reports from the Exchange’s Chief Regulatory Officer describing the listing and surveillance activities of the Exchange; • Requires listed companies to provide the Exchange with copies of any ‘‘blue sky memoranda’’ prepared in connection with the issuance of shares, VerDate Mar<15>2010 18:39 Dec 09, 2010 Jkt 223001 provides that BX will review these memoranda to assure that the company is not inappropriately relying on such a state blue sky exemption, agrees to take action to delist any BX-listed company that attempts to rely on such an exemption, and provides that companies will agree to not rely on any such exemption as a provision of the BX listing agreement; • Represents that FINRA will regulate market activity on the BX and that FINRA will enhance its review process by calibrating its surveillance patterns to detect potential issues that may arise in low priced stocks, noting that FINRA’s review will include the trading of BX-listed securities on the OTC market and that FINRA will review activity of its member firms quoting on the BX when conducting reviews of these firms, which will include ‘‘focused exams’’ concentrated on sales practices and firm oversight; • States that the SMARTS Group, a Nasdaq OMX company, will create a new suite of quoting and trading patterns to detect suspicious activity in low priced and less widely traded securities; and • Provides that BX will disseminate quotation and transaction information about BX-listed securities via several market data products to ensure broad dissemination of quotation and last sale information, and states that it is committed to ensuring that quotations and transaction information from BX are consolidated with similar information from OTC quotation and trading supervised by FINRA. III. Comment Letters The Commission received three comment letters on the proposal. The Massachusetts Securities Division (‘‘MSD’’) noted in its letter that, although BX proposes qualitative listing standards that resemble those of Nasdaq, the proposed quantitative listing standards will be far lower.25 MSD then noted that the laws of Massachusetts and 11 other states exempt securities listed on the ‘‘Boston Stock Exchange’’ from their securities laws registration requirements.26 MSD stated its belief that these exemptions were predicated on exchange-listed companies having met certain minimum quality criteria.27 MSD noted that the proposed rule change states that the BX market is not among the national securities exchanges enumerated in Section 18(b) of the Securities Act of 1933 and that the securities listed on BX 25 See MSD Letter, supra note 4, at p. 2. id. 27 See id. 26 See PO 00000 Frm 00089 Fmt 4703 Sfmt 4703 will not be preempted securities under that section.28 MSD also noted that the Exchange will require its listed companies to agree not to claim any state’s exchange-listing exemption for their securities and will delist securities of companies that claim such exemption.29 However, MSD expressed concern that these requirements will not prevent unscrupulous penny stock promoters or boiler room brokerages from asserting that the securities they are offering and selling are exempt from state registration because the securities are listed on the Exchange.30 MSD expressed further concern that because the Exchange is owned by and is under the supervision of the parent company of Nasdaq, the BX listing market will inappropriately borrow some of the prestige of Nasdaq, despite the steps that Nasdaq may take to promote BX as a separate listing market.31 Pink OTC Markets Inc. (‘‘Pink OTC’’) noted that there may be investor confusion with respect to the differences between Nasdaq-listed securities and BX-listed securities.32 Pink OTC further stated its belief that it is important that market data relative to BX-listed securities be disseminated in a manner that makes clear that BX-listed securities are not NMS securities, nor do they meet the normally higher listing standards for exchange-listed securities, including those of Nasdaq.33 To alleviate investor confusion, Pink OTC suggested that ticker symbols for BXlisted securities should differentiate such securities from other securities that meet the higher listing standards typically associated with listing on a national securities exchange.34 Pink OTC also stated its belief that quotation and transaction reports for BX-listed securities should not be disseminated under any NMS plan, nor commingled with NMS data by an NMS plan processor.35 In particular, Pink OTC stated its belief that Nasdaq should not be permitted to disseminate BXlisted securities market data commingled with the Nasdaq market data it disseminates under the Nasdaq UTP Plan.36 With respect to the BX’s proposed listing standards, Pink OTC argued that BX should not be permitted to allow phase-in compliance with the independent director requirements of 28 See id. id. 30 See id. 31 See id. at p. 3. 32 See Pink OTC Letter, supra note 4. 33 See id. at p. 2. 34 See id. 35 See id. at p. 3. 36 See id. 29 See E:\FR\FM\10DEN1.SGM 10DEN1 Federal Register / Vol. 75, No. 237 / Friday, December 10, 2010 / Notices mstockstill on DSKH9S0YB1PROD with NOTICES the audit and compensation committees for certain companies.37 Finally, Pink OTC recommended that the Commission consider requiring BX to conduct background checks and other similar reviews of potential listed companies and not merely rely on the documents presented by an issuer during the listing process.38 On the other hand, Madrona Venture Group noted that the BX listing market will have listing requirements and costs that are tailored to the economic reality of smaller companies, and that this market would be extremely helpful to young, high growth emerging companies by offering an alternative listing market for companies that wish to make an initial public offering, but do not meet the initial quantitative listing standards of the other national securities exchanges.39 Madrona Venture Group also stated its belief that the BX listing market could bolster capital markets and provide opportunities for small companies to transition from private to public ownership, to expand their financial resources, and to raise the capital they need for continued growth.40 Additionally, Madrona Venture Group stated its belief that the BX listing market would attract companies and capital that would otherwise be drawn to foreign markets, where regulatory costs and litigation risks are lower.41 IV. Proceedings To Determine Whether To Disapprove SR–BX–2010–059 and Grounds for Disapproval Under Consideration The Exchange’s proposal is presented as providing a transparent, wellregulated marketplace for the listing of companies that are being delisted from another national securities exchange for failure to meet quantitative listing standards (including price or other market value measures) and for companies with smaller market capitalization contemplating an initial exchange listing. The Exchange believes that a BX listing could help such companies raise capital, and in turn promote job creation within the United States. The Exchange also believes that there are benefits from exchange trading and surveillance. For example, the Exchange believes that a BX listing would allow the securities of companies that are being delisted from another national securities exchange for failure to meet that 37 See id. at p. 6. id. at p. 6–7. 39 See Madrona Letter, supra note 4, at p. 1. 40 See id. 41 See id. at p. 1–2. 38 See VerDate Mar<15>2010 18:39 Dec 09, 2010 Jkt 223001 exchange’s quantitative listing requirements to continue to trade on a national securities exchange. This may enable some institutional investors to continue their ownership stake in those companies, which in turn could provide greater stability to the companies’ shareholder base.42 In addition, the Exchange believes that companies currently traded OTC could view the BX Venture Market as an aspirational step towards a listing on another national securities exchange and that the agreement of such companies to comply with the Exchange’s corporate governance standards along with the application of the Exchange’s public interest authority will provide additional protections to their investors. Finally, the Exchange believes that the BX Venture Market will be a more attractive alternative for domestic companies that might otherwise have considered a listing on non-U.S. junior markets which, according to the Exchange, generally have less vigorous listing requirements. The proposed BX listing standards discussed above, however, are significantly lower than the listing standards for other exchange-listed securities.43 These lower listing standards on BX may raise issues as to whether the proposed rule change is consistent with the Act. Among other things, listing standards must be designed to assure that there is sufficient liquidity for trading on an exchange and to reduce the likelihood of manipulation and fraud.44 The Commission believes that the development and enforcement of adequate standards governing the initial and continued listing of securities on an exchange are activities of critical importance to the financial markets and 42 According to the Exchange, 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 OTC market. See Notice, supra note 3. 43 For example, BX would require a BX-listed company to have only 200,000 publicly held shares, which is significantly lower than the number of publicly held shares required by exchanges with active listing programs today. See, e.g., NYSE Amex Company Guide Section 102(a) (requiring a minimum public distribution of 500,000 shares and 800 public shareholders, or a minimum public distribution of 1 million shares and 400 public shareholders); NASDAQ Stock Market Rule 5505(a)(2) (requiring a minimum of 1 million publicly held shares); and NYSE Listed Company Manual Section 102.01A (requiring a minimum of 1.1 million publicly held shares). Even ‘‘Tier II’’ listing standards require listed companies to have at least 250,000 publicly held shares. See, e.g., CBOE Rule 31.6(3) (requiring at least 1 million publicly held shares for initial listing of research and development type issuers). 44 See, e.g., Exchange Act Section 6(b)(5). PO 00000 Frm 00090 Fmt 4703 Sfmt 4703 77039 the investing public.45 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.46 Adequate standards are especially important given the expectations of investors regarding exchange trading and the imprimatur of listing on a particular market.47 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. The Commission notes that the Exchange has submitted Amendment No. 1 in an effort to address certain potential concerns with the proposed rule change. However, at this time and for the reasons noted below, the Commission is instituting proceedings pursuant to Section 19(b)(2)(B) of the Act 48 to determine whether the proposed rule change should be disapproved. Institution of such proceedings appears appropriate at this time in view of the legal and policy issues raised by the proposal. Institution of the proceedings, however, does not indicate that the Commission has formulated any conclusions with respect to any of the issues involved. Rather, as described in greater detail below, the Commission seeks and encourages interested persons to comment on the proposed rule change. The section of the Act applicable to the proposed rule change that provides the grounds for the disapproval (or approval) under consideration is Section 6(b)(5),49 which requires that the rules of an exchange be designed, among other things, 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. Specifically, the 45 See, e.g., Securities Exchange Act Release No. 61912 (April 15, 2010), 75 FR 21094, 21094 (April 22, 2010) (SR–NYSE–2010–15). 46 See id. 47 See id. 48 15 U.S.C. 78s(b)(2)(B). 49 15 U.S.C. 78f(b)(5). E:\FR\FM\10DEN1.SGM 10DEN1 77040 Federal Register / Vol. 75, No. 237 / Friday, December 10, 2010 / Notices Exchange is proposing initial and continued listing standards that are significantly lower than those of other exchanges with active listing markets.50 Among other things, this raises issues as to whether BX-listed securities could be more prone to manipulation by an individual or a few shareholders who acquire a dominant interest in the publicly-held shares compared to other exchange-listed securities. This issue is particularly pronounced with smaller company stocks, which historically have been the targets of manipulative schemes.51 The proposed rule change also raises issues as to whether investors will understand that BX-listed securities are very different from other exchangelisted securities, and could pose substantially more investment risk than those listed on other markets due, for example, to their size, financial condition, or limited operational history. This potential for investor confusion may be compounded because, as exchange-listed securities, other exchanges could trade them on an unlisted trading privileges (‘‘UTP’’) basis.52 Because the smaller BX-listed securities may be traded UTP on the same platform as larger companies listed by the primary listings markets, this raises issues as to whether investors could have even more difficulty distinguishing between BX-listed securities and other exchange-listed securities. At the same time, as noted above, the Commission acknowledges that the BX listing market would be an alternative to the OTC market and could provide important benefits to this market segment, including enhanced regulation and increased price transparency. In particular, BX’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, but only requires issuers 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 50 See supra note 43. e.g., Securities Act Release No. 8878 (December 19, 2007), 72 FR 73534, 73536 (December 27, 2007) (S7–10–07) (stating that ‘‘[i]t has been observed that the securities of smaller public companies are comparatively more vulnerable to price manipulation than the securities of larger public companies’’). 52 Under Exchange Act Section 12(f)(1)(A) and Rule 12f–5 thereunder, a national securities exchange may trade exchange-listed securities on a UTP basis. See 15 U.S.C. 78l(f)(1)(A) and 17 CFR 240.12f–5. Accordingly, other national securities exchanges would be able to trade BX-listed securities, without obtaining additional Commission approval. mstockstill on DSKH9S0YB1PROD with NOTICES 51 See, VerDate Mar<15>2010 18:39 Dec 09, 2010 Jkt 223001 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. The Commission also notes that trading in BX-listed securities would be subject to regulation through BX’s trading rules and surveillance authority. Additionally, the BX listing market could make it easier for companies with smaller market capitalization to raise capital, thereby promoting job creation. Finally, permitting companies with smaller market capitalization to list on BX could provide them with a viable alternative for U.S. listing to listing on non-U.S. markets that may be equivalent to the proposed BX market. V. Procedure: Request for Written Comments The Commission requests that interested persons provide written submissions of their views, data and arguments with respect to the issues identified above, as well as any others they may have identified with the proposal. In particular, the Commission invites the written views of interested persons concerning whether the proposed rule change is inconsistent with Section 6(b)(5) or any other provision of the Act, or the rules and regulations thereunder. Although there do not appear to be any issues relevant to approval or disapproval which would be facilitated by an oral presentation of views, data, and arguments, the Commission will consider, pursuant to Rule 19b-4, any request for an opportunity to make an oral presentation.53 Interested persons are invited to submit written data, views and arguments regarding whether the proposed rule change should be disapproved by January 24, 2011. Any person who wishes to file a rebuttal to any other person’s submission must file that rebuttal by February 8, 2011. The Commission is asking that commenters address the merit of BX’s statements in support of the proposal, in addition to any other comments they may wish to submit about the proposed rule change. Specifically, the 53 Section 19(b)(2) of the Act, as amended by the Securities Acts Amendments of 1975, Public Law 94–29, 89 Stat. 97 (1975), grants the Commission flexibility to determine what type of proceeding— either oral or notice and opportunity for written comments—is appropriate for consideration of a particular proposal by a self-regulatory organization. See Securities Acts Amendments of 1975, Report of the Senate Committee on Banking, Housing and Urban Affairs to Accompany S. 249, S. Rep. No. 75, 94th Cong., 1st Sess. 30 (1975). PO 00000 Frm 00091 Fmt 4703 Sfmt 4703 Commission is requesting comment on the following: • Do commenters agree with BX’s belief that the proposed BX listing market will provide a transparent, wellregulated marketplace for companies with smaller market capitalization contemplating an initial exchange listing and companies delisted from another national securities exchange for failure to meet quantitative listing standards? Why or why not? • Is the proposed vetting and due diligence process of prospective issuers on the BX listing market sufficient to prevent companies that might erode investor confidence (due to potential fraud) in the market from listing? Why or why not? • Given that BX-listed companies are likely to be smaller than listed companies on other exchanges, should BX undertake any additional measures (including additional surveillances) to reduce the risk of fraudulent and manipulative behavior with respect to the listing and/or trading of BX-listed securities? Why or why not? • Do commenters believe there is any likelihood of investor confusion regarding the BX listing market? Would investors be inclined to believe that a BX-listed company is listed on Nasdaq? Are the Exchange’s proposed actions to reduce or avoid investor confusion sufficient? Why or why not? If not, what additional measures should the Exchange undertake? • Do the proposed initial and continued listing standards for the BX listing market assure sufficient liquidity in listed securities? Why or why not? Are there other listing criteria that commenters would suggest to better assure sufficient liquidity in listed securities? • Are the proposed initial and continued listing standards for the BX listing market sufficiently designed to reduce the risk that an individual or small group of shareholders will be in a position to manipulate the listed security? Why or why not? • Are the proposed initial and continued listing standards and the delisting process for the BX listing market sufficiently designed to prevent stocks that are of a type that historically have been prone to fraudulent schemes from being listed? Why or why not? • Do commenters believe that the proposed delisting and appeals procedures and timeframes are sufficient and appropriate? Are the timeframes too long or too short? Why or why not? • Are the proposed corporate governance standards for the BX listing market sufficiently designed to assure E:\FR\FM\10DEN1.SGM 10DEN1 Federal Register / Vol. 75, No. 237 / Friday, December 10, 2010 / Notices an appropriate level of corporate governance? Why or why not? • Do commenters agree with the Exchange’s belief that a BX listing could help companies raise capital and thus promote job creation within the United States? Why or why not? • Has BX sufficiently addressed how quotations and transactions reports relating to BX-listed securities will be disseminated? Will this result in fragmentation of pricing information relating to these securities? Will this undermine the ability of investors to receive best execution? Why or why not? Comments may be submitted by any of the following methods: mstockstill on DSKH9S0YB1PROD with NOTICES Electronic Comments • Use the Commission’s Internet comment form https://www.sec.gov/ rules/sro.shtml; or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–BX–2010–059 on the subject line. publicly available. All submissions should refer to File Number SR–BX– 2010–059 and should be submitted on or before January 24, 2011. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.54 Florence E. Harmon, Deputy Secretary. [FR Doc. 2010–31078 Filed 12–9–10; 8:45 am] BILLING CODE 8011–01–P DEPARTMENT OF STATE [Public Notice: 7251] 60-Day Notice of Proposed Information Collections: Two Information Collections Notice of request for public comments. ACTION: The Department of State is seeking Office of Management and Budget (OMB) approval for the information collections described Paper Comments below. The purpose of this notice is to • Send paper comments in triplicate allow 60 days for public comment in the to Elizabeth M. Murphy, Secretary, Federal Register preceding submission Securities and Exchange Commission, to OMB. We are conducting this process Station Place, 100 F Street, NE., in accordance with the Paperwork Washington, DC 20549–1090. Reduction Act of 1995. • Title of Information Collection: All submissions should refer to File Brokering Prior Approval (License). Number SR–BX–2010–059. This file • OMB Control Number: 1405–0142. number should be included on the • Type of Request: Extension of subject line if e-mail is used. To help the Currently Approved Collection. Commission process and review your • Originating Office: Bureau of comments more efficiently, please use only one method. The Commission will Political-Military Affairs, Directorate of post all comments on the Commission’s Defense Trade Controls, PM/DDTC. • Form Number: None. Internet Web site (https://www.sec.gov/ • Respondents: Business and rules/sro.shtml). Copies of the Nonprofit Organizations. submission, all subsequent • Estimated Number of Respondents: amendments, all written statements 1,515. with respect to the proposed rule • Estimated Number of Responses: change that are filed with the 150. Commission, and all written • Average Hours per Response: 2 communications relating to the hours. proposed rule change between the • Total Estimated Burden: 300 hours. Commission and any person, other than • Frequency: On Occasion. those that may be withheld from the • Obligation to Respond: Required to public in accordance with the Obtain Benefits. provisions of 5 U.S.C. 552, will be • Title of Information Collection: available for Web site viewing and Annual Brokering Report. printing in the Commission’s Public • OMB Control Number: 1405–0141. Reference Room, 100 F Street, NE., • Type of Request: Extension of Washington, DC 20549, on official Currently Approved Collection. business days between the hours of 10 • Originating Office: Bureau of a.m. and 3 p.m. Copies of such filing Political-Military Affairs, Directorate of also will be available for inspection and Defense Trade Controls, PM/DDTC. copying at the principal office of the • Form Number: None. Exchange. All comments received will • Respondents: Business and be posted without change; the Nonprofit Organizations. Commission does not edit personal • Estimated Number of Respondents: identifying information from 1,515. submissions. You should submit only 54 17 CFR 200.30–3(a)(57). information that you wish to make VerDate Mar<15>2010 18:39 Dec 09, 2010 Jkt 223001 SUMMARY: PO 00000 Frm 00092 Fmt 4703 Sfmt 4703 77041 • Estimated Number of Responses: 1,515. • Average Hours Per Response: 2 hours. • Total Estimated Burden: 3,030 hours. • Frequency: On Occasion. • Obligation to Respond: Mandatory. DATES: The Department will accept comments from the public up to 60 days from December 10, 2010. ADDRESSES: Comments and questions should be directed to Nicholas Memos, Office of Defense Trade Controls Policy, Department of State, who may be reached via the following methods: • E-mail: memosni@state.gov. • Mail: Nicholas Memos, SA–1, 12th Floor, Directorate of Defense Trade Controls, Bureau of Political-Military Affairs, U.S. Department of State, Washington, DC 20522–0112. • Fax: 202–261–8199. You must include the information collection title in the subject lines of your message/letter. FOR FURTHER INFORMATION CONTACT: Direct requests for additional information regarding the collection listed in this notice, including requests for copies of the information collection and supporting documents, to Nicholas Memos, PM/DDTC, SA–1, 12th Floor, Directorate of Defense Trade Controls, Bureau of Political-Military Affairs, U.S. Department of State, Washington, DC, 20522–0112, who may be reached via phone at (202) 663–2804, or via e-mail at memosni@state.gov. SUPPLEMENTARY INFORMATION: We are soliciting public comments to permit the Department to: • Evaluate whether the proposed collection of information is necessary for the proper performance of our functions. • Evaluate the accuracy of our estimate of the burden of the proposed collection, including the validity of the methodology and assumptions used. • Enhance the quality, utility, and clarity of the information to be collected. • Minimize the reporting burden on those who are to respond, including the use of automated collection techniques or other forms of technology. Abstract of proposed collection: The export, temporary import, temporary export and brokering of defense articles, defense services and related technical data are licensed by the Directorate of Defense Trade Controls in accordance with the International Traffic in Arms Regulations (22 CFR parts 120–130) and Section 38 of the Arms Export Control Act. Those of the public who manufacture or export defense articles, E:\FR\FM\10DEN1.SGM 10DEN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 75, Number 237 (Friday, December 10, 2010)]
[Notices]
[Pages 77036-77041]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-31078]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63448; File No. SR-BX-2010-059]


Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Order 
Instituting Proceedings To Determine Whether To Disapprove Proposed 
Rule Change, as Modified by Amendment No. 1, To Create a Listing Market 
on the Exchange

December 7, 2010.

I. Introduction

    On August 20, 2010, NASDAQ OMX BX (``BX'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission''), pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'' or 
``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule 
change to create a new listing market. The proposed rule change was 
published for comment in the Federal Register on September 8, 2010.\3\ 
The Commission received three comments on the proposal.\4\ 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.\5\ On December 6, 2010, BX 
submitted Amendment No. 1 to the proposed rule change.\6\ This order 
institutes proceedings to determine whether to disapprove the proposed 
rule change, as modified by Amendment No. 1. Institution of disapproval 
proceedings, however, does not indicate that the Commission has 
formulated any conclusions with respect to any of the issues involved.
---------------------------------------------------------------------------

    \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 Letters to Elizabeth M. Murphy, Secretary, Commission, 
from Tom A. Alberg, Managing Director and Founder, Madrona Venture 
Group, dated December 1, 2010 (``Madrona Letter''); Michael R. 
Trocchio, Bingham McCutchen LLP, dated October 3, 2010 (``Pink OTC 
Markets Letter''); and William F. Galvin, Secretary of the 
Commonwealth, Commonwealth of Massachusetts, dated September 28, 
2010 (``MSD Letter'').
    \5\ See Securities Exchange Act Release No. 63105 (October 14, 
2010), 75 FR 64772 (October 20, 2010).
    \6\ See infra Section II for a description of Amendment No. 1.
---------------------------------------------------------------------------

II. Description of the Proposal \7\
---------------------------------------------------------------------------

    \7\ This description does not review every rule proposed by BX 
that has been filed as part of its proposed rule change; rather, it 
focuses on the most prominent rules considered in review of the BX's 
proposal. See Notice, supra note 3, for a description of the 
proposed rule change. See also Exhibit 5 to the Form 19b-4 for all 
the rules proposed by BX, available at https://www.sec.gov/rules/sro/bx/2010/34-62818-ex5.pdf.
---------------------------------------------------------------------------

    The Exchange proposes to create a new listing market, to be called 
the ``BX Venture Market.'' \8\ The Exchange has stated that it expects 
that the securities listed on BX would not be classified as national 
market system (``NMS'') securities.\9\ As a result, BX-listed 
securities would not be subject to an NMS plan and would not be subject 
to Regulation NMS under the Act.\10\ BX-listed securities would trade 
on the Exchange and also could trade over-the-counter (``OTC'').\11\ 
Further, BX-listed securities would be considered penny stocks under 
Exchange Act Rule 3a51-1, unless they qualify for an exemption from the 
definition of a penny stock.\12\ No ``blue sky'' exemption would be 
available under Section 18 of the Securities Act of 1933 or the rule 
adopted thereunder,\13\ so companies would be required to satisfy state 
law registration requirements and other state laws that regulate the 
sale and offering of securities. In addition, BX would not list any 
company that meets the quantitative (e.g., financial) requirements for 
listing on The NASDAQ Stock Market LLC (``Nasdaq'').
---------------------------------------------------------------------------

    \8\ See Amendment No. 1. As originally proposed, the proposed 
rule change provided that a BX-listed company should refer to its 
listing as on the ``BX.''
    \9\ See Notice, supra note 3.
    \10\ See 17 CFR 242.600 et seq.
    \11\ OTC trades of BX-listed securities would be reported to the 
Financial Industry Regulatory Authority (``FINRA'') OTC Reporting 
Facility. See Notice, supra note 3.
    \12\ See 17 CFR 240.3a51-1.
    \13\ 15 U.S.C. 77r; Securities Act Rule 146. In addition, some 
state laws and regulations may provide an exemption from certain 
registration or ``blue sky'' requirements for companies listed on 
the Boston Stock Exchange, based on the higher listing standards 
previously applied by the former Boston Stock Exchange. The proposed 
listing rules would provide that the Exchange will take action to 
delist any company listed on BX that attempts to rely on such an 
exemption. Companies would also agree not to rely on any such 
exemption as a provision of the BX Listing Agreement.
---------------------------------------------------------------------------

    To qualify for initial listing on BX, a company must be registered 
under Section 12(b) of the Act \14\ and be current in its periodic 
filings with the Commission. The company would also be required to have 
a fully independent audit committee comprised of at least three members 
and comply with the requirements of Rule 10A-3 under the Exchange 
Act.\15\ The company would be required to have its independent 
directors make compensation decisions for executive officers (either by 
having the independent directors meet in executive session or by having 
them sit on a compensation committee), and independent directors would 
be required to meet on a regular basis in executive sessions.\16\ The 
company's

[[Page 77037]]

audit committee would be required to have a charter setting out its 
responsibilities. The audit committee, or another independent body of 
the board, would also be required to conduct appropriate review and 
oversight of any related party transactions.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78l(b).
    \15\ 17 CFR 240.10A-3. Certain companies listing on BX 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.
    \16\ 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 OTC 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.
---------------------------------------------------------------------------

    BX has proposed the following quantitative listing standards for 
the initial listing of securities that were not previously listed on a 
national securities exchange: (1) $1 million of stockholders' equity or 
$5 million total assets; (2) 200,000 publicly held shares; (3) 200 
public shareholders, at least 100 of which must be round lot holders; 
(4) $2 million market value of listed securities; (5) $1.00 minimum bid 
price per share; (6) one year operating history; and (7) two registered 
and active market makers. In addition, the company would also be 
required to demonstrate that it has a plan to maintain sufficient 
working capital for its planned business for at least twelve months 
after the first day of listing.
    BX has proposed the following quantitative listing standards for 
the initial listing of securities that have previously been listed on a 
national securities exchange: (1) 200,000 publicly held shares; (2) 200 
public shareholders, at least 100 of which must be round lot holders; 
(3) $2 million market value of listed securities; (4) $0.25 minimum bid 
price per share; and (5) two registered and active market makers. A 
company would be considered to have been previously listed on another 
national securities exchange if it was listed on such exchange at any 
time during the three months before its listing on BX, or, until 
September 30, 2011, if the company was listed on another national 
securities exchange at any time between January 1, 2008 and September 
30, 2011.\17\
---------------------------------------------------------------------------

    \17\ See Amendment No. 1. As originally proposed, a company 
would be considered to have been previously listed on another 
national securities exchange if it was listed on such exchange at 
any time during the three months before its listing on BX, or until 
March 31, 2011, if the company was listed on another national 
securities exchange at any time between January 1, 2008 and March 
31, 2011.
---------------------------------------------------------------------------

    The Exchange would have the discretionary authority to deny listing 
to any otherwise qualified security when it is necessary to preserve 
and strengthen the quality of, and public confidence in, its 
market.\18\ The Exchange would conduct a public interest review of the 
company and significant persons associated with it.\19\ In that regard, 
the Exchange stated that it intends to conduct background 
investigations of officers and directors and other significant people 
associated with a company in connection with its review of applications 
for initial listing.\20\ In addition, the Exchange would not approve 
for listing or allow the continued listing of ``shell'' companies.
---------------------------------------------------------------------------

    \18\ See infra Section II for examples of circumstances under 
which the Exchange would exercise such discretionary authority, as 
set out in Amendment No. 1.
    \19\ See infra Section II for a more detailed discussion of 
public interest reviews, as set out in Amendment No. 1.
    \20\ See id.
---------------------------------------------------------------------------

    For continued listing on BX, a security would be required to 
satisfy the following listing standards: (1) At least 200,000 publicly 
held shares; (2) at least 200 public shareholders; (3) market value of 
listed securities of at least $1 million; (4) minimum bid price of at 
least $0.25 \21\ per share; and (5) at least two registered and active 
market makers. If the security does not maintain the minimum $0.25 per 
share bid price for twenty consecutive trading days,\22\ Exchange staff 
would issue a Staff Delisting Determination and the security would be 
suspended from trading on BX. A company could appeal that determination 
to a Hearings Panel; however, such an appeal would not stay the 
suspension of the security. During the Hearings Panel process, the 
security could regain compliance by achieving a $0.25 \23\ per share 
minimum bid price while trading on another venue, such as the OTC 
market, for ten consecutive days. However, if the company has received 
three or more Staff Delisting Determinations for failure to comply with 
the minimum bid price requirement in the prior twelve months, the 
company could only regain compliance by achieving a closing bid price 
of $0.25 per share or more for at least twenty consecutive trading 
days.\24\
---------------------------------------------------------------------------

    \21\ See Amendment No. 1. As originally proposed, a BX-listed 
company would have been required to maintain a minimum bid price of 
at least $0.05 per share.
    \22\ See Amendment No. 1. As originally proposed, if a BX-listed 
security does not maintain a minimum bid price of $0.05 per share 
for ten consecutive trading days, Exchange staff would issue a Staff 
Delisting Determination and the security would be suspended from 
trading on BX.
    \23\ See Amendment No. 1. As originally proposed, a BX-listed 
company could regain compliance by achieving a $0.05 per share 
minimum bid price while trading on another venue for ten consecutive 
trading days.
    \24\ See Amendment No. 1. As originally proposed, a BX-listed 
company could only regain compliance by achieving a closing bid 
price of $0.25 per share for at least ten consecutive trading days.
---------------------------------------------------------------------------

Description of Amendment No. 1

    Amendment No. 1 makes the following modifications to the proposed 
rule change:
     Renames the market from ``BX'' to ``BX Venture Market'' to 
distinguish the BX Venture Market from Nasdaq, provides that the 
Exchange will monitor press releases issued by BX-listed companies and 
annually review their Web sites to determine how a company is referring 
to its listing, and provides that the Exchange will include information 
on its Web site describing the differences between the BX Venture 
Market and other national securities exchanges, including Nasdaq;
     Provides that BX will disseminate quotation and 
transaction information about BX-listed securities and that this 
information will include a market center identifier;
     Provides that BX will require data vendors to identify 
when the BX Venture Market is the listing market for a security and 
clearly differentiate those securities from securities listed on Nasdaq 
or other exchanges or traded OTC when displaying information to 
external users on their single security quotation screens;
     States that listings and delistings will be processed by 
the staff in Nasdaq's Listing Qualifications Department, who, according 
to the Exchange, are extremely experienced in regulatory analysis; 
states that BX will hire additional staff if the workload from the new 
BX Venture Market proves ``sufficiently high''; and notes that the 
staff within the Listing Qualifications Department 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 BX's 
Regulatory Oversight Committee;
     Prohibits the initial or continued listing of a company if 
any executive officer or director was involved in any event that 
occurred during the prior five years that is required to be disclosed 
under Items 401(f)(2)-(8) of Regulation S-K and that, in the case of a 
listed company, the company would be provided 30 days to remove the 
executive officer or director or be issued a delisting notification;
     Provides that the Exchange would use its discretionary 
authority, where appropriate, to deny initial or continued listing in 
cases where: (1) An executive officer or director has reported 
misconduct that occurred between five and ten years before the 
disclosure or misconduct not required to be disclosed under Item 401 of 
Regulation S-K; or (2) an individual who is not an executive officer or 
director, but who has significant influence or importance to the 
company such as a control person or significant shareholder, has a 
history of regulatory misconduct;

[[Page 77038]]

     Indicates that in connection with initial listing 
applications and when a new executive officer or director becomes 
associated with a BX-listed company, BX will conduct background 
investigations of executive officers, directors, and other significant 
associated people using public databases, and will retain outside firms 
to assist it in its review as needed, including investigative, 
accounting, and law firms, and provides that BX's listing application 
will solicit information about certain legal or administrative 
proceedings against the company and its officers, directors, and 10% or 
greater shareholders;
     Provides that the head of the Exchange's Listing 
Department will be involved in all decisions concerning whether to 
permit or deny listing to a company based on a public interest concern 
and that the Exchange's Chief Regulatory Officer will be required to 
approve the initial or continued listing of any company that has 
disclosed information about an executive officer, director, or control 
person under Items 401(f)(2)-(8) of Regulation S-K that does not 
trigger the automatic bar described above;
     Increases the continued listing price from $0.05 to $0.25 
per share and provides that the Exchange will issue a Staff Delisting 
Determination and suspend a BX-listed security from trading on the 
Exchange if such security does not maintain the minimum continued 
listing price of $0.25 per share for twenty consecutive trading days, 
rather than for the originally proposed ten consecutive trading days;
     Shortens the periods that a non-compliant company may 
remain listed by, for example, providing that 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 and providing that 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-listed company;
     Undertakes to provide the Commission with: (1) Monthly 
reports describing developments on the BX Venture Exchange, including a 
list of companies added or removed from the market; and (2) quarterly 
reports from the Exchange's Chief Regulatory Officer describing the 
listing and surveillance activities of the Exchange;
     Requires listed companies to provide the Exchange with 
copies of any ``blue sky memoranda'' prepared in connection with the 
issuance of shares, provides that BX will review these memoranda to 
assure that the company is not inappropriately relying on such a state 
blue sky exemption, agrees to take action to delist any BX-listed 
company that attempts to rely on such an exemption, and provides that 
companies will agree to not rely on any such exemption as a provision 
of the BX listing agreement;
     Represents that FINRA will regulate market activity on the 
BX and that FINRA will enhance its review process by calibrating its 
surveillance patterns to detect potential issues that may arise in low 
priced stocks, noting that FINRA's review will include the trading of 
BX-listed securities on the OTC market and that FINRA will review 
activity of its member firms quoting on the BX when conducting reviews 
of these firms, which will include ``focused exams'' concentrated on 
sales practices and firm oversight;
     States that the SMARTS Group, a Nasdaq OMX company, will 
create a new suite of quoting and trading patterns to detect suspicious 
activity in low priced and less widely traded securities; and
     Provides that BX will disseminate quotation and 
transaction information about BX-listed securities via several market 
data products to ensure broad dissemination of quotation and last sale 
information, and states that it is committed to ensuring that 
quotations and transaction information from BX are consolidated with 
similar information from OTC quotation and trading supervised by FINRA.

III. Comment Letters

    The Commission received three comment letters on the proposal. The 
Massachusetts Securities Division (``MSD'') noted in its letter that, 
although BX proposes qualitative listing standards that resemble those 
of Nasdaq, the proposed quantitative listing standards will be far 
lower.\25\ MSD then noted that the laws of Massachusetts and 11 other 
states exempt securities listed on the ``Boston Stock Exchange'' from 
their securities laws registration requirements.\26\ MSD stated its 
belief that these exemptions were predicated on exchange-listed 
companies having met certain minimum quality criteria.\27\ MSD noted 
that the proposed rule change states that the BX market is not among 
the national securities exchanges enumerated in Section 18(b) of the 
Securities Act of 1933 and that the securities listed on BX will not be 
preempted securities under that section.\28\ MSD also noted that the 
Exchange will require its listed companies to agree not to claim any 
state's exchange-listing exemption for their securities and will delist 
securities of companies that claim such exemption.\29\ However, MSD 
expressed concern that these requirements will not prevent unscrupulous 
penny stock promoters or boiler room brokerages from asserting that the 
securities they are offering and selling are exempt from state 
registration because the securities are listed on the Exchange.\30\ MSD 
expressed further concern that because the Exchange is owned by and is 
under the supervision of the parent company of Nasdaq, the BX listing 
market will inappropriately borrow some of the prestige of Nasdaq, 
despite the steps that Nasdaq may take to promote BX as a separate 
listing market.\31\
---------------------------------------------------------------------------

    \25\ See MSD Letter, supra note 4, at p. 2.
    \26\ See id.
    \27\ See id.
    \28\ See id.
    \29\ See id.
    \30\ See id.
    \31\ See id. at p. 3.
---------------------------------------------------------------------------

    Pink OTC Markets Inc. (``Pink OTC'') noted that there may be 
investor confusion with respect to the differences between Nasdaq-
listed securities and BX-listed securities.\32\ Pink OTC further stated 
its belief that it is important that market data relative to BX-listed 
securities be disseminated in a manner that makes clear that BX-listed 
securities are not NMS securities, nor do they meet the normally higher 
listing standards for exchange-listed securities, including those of 
Nasdaq.\33\ To alleviate investor confusion, Pink OTC suggested that 
ticker symbols for BX-listed securities should differentiate such 
securities from other securities that meet the higher listing standards 
typically associated with listing on a national securities 
exchange.\34\
---------------------------------------------------------------------------

    \32\ See Pink OTC Letter, supra note 4.
    \33\ See id. at p. 2.
    \34\ See id.
---------------------------------------------------------------------------

    Pink OTC also stated its belief that quotation and transaction 
reports for BX-listed securities should not be disseminated under any 
NMS plan, nor commingled with NMS data by an NMS plan processor.\35\ In 
particular, Pink OTC stated its belief that Nasdaq should not be 
permitted to disseminate BX-listed securities market data commingled 
with the Nasdaq market data it disseminates under the Nasdaq UTP 
Plan.\36\
---------------------------------------------------------------------------

    \35\ See id. at p. 3.
    \36\ See id.
---------------------------------------------------------------------------

    With respect to the BX's proposed listing standards, Pink OTC 
argued that BX should not be permitted to allow phase-in compliance 
with the independent director requirements of

[[Page 77039]]

the audit and compensation committees for certain companies.\37\ 
Finally, Pink OTC recommended that the Commission consider requiring BX 
to conduct background checks and other similar reviews of potential 
listed companies and not merely rely on the documents presented by an 
issuer during the listing process.\38\
---------------------------------------------------------------------------

    \37\ See id. at p. 6.
    \38\ See id. at p. 6-7.
---------------------------------------------------------------------------

    On the other hand, Madrona Venture Group noted that the BX listing 
market will have listing requirements and costs that are tailored to 
the economic reality of smaller companies, and that this market would 
be extremely helpful to young, high growth emerging companies by 
offering an alternative listing market for companies that wish to make 
an initial public offering, but do not meet the initial quantitative 
listing standards of the other national securities exchanges.\39\ 
Madrona Venture Group also stated its belief that the BX listing market 
could bolster capital markets and provide opportunities for small 
companies to transition from private to public ownership, to expand 
their financial resources, and to raise the capital they need for 
continued growth.\40\ Additionally, Madrona Venture Group stated its 
belief that the BX listing market would attract companies and capital 
that would otherwise be drawn to foreign markets, where regulatory 
costs and litigation risks are lower.\41\
---------------------------------------------------------------------------

    \39\ See Madrona Letter, supra note 4, at p. 1.
    \40\ See id.
    \41\ See id. at p. 1-2.
---------------------------------------------------------------------------

IV. Proceedings To Determine Whether To Disapprove SR-BX-2010-059 and 
Grounds for Disapproval Under Consideration

    The Exchange's proposal is presented as providing a transparent, 
well-regulated marketplace for the listing of companies that are being 
delisted from another national securities exchange for failure to meet 
quantitative listing standards (including price or other market value 
measures) and for companies with smaller market capitalization 
contemplating an initial exchange listing. The Exchange believes that a 
BX listing could help such companies raise capital, and in turn promote 
job creation within the United States. The Exchange also believes that 
there are benefits from exchange trading and surveillance.
    For example, the Exchange believes that a BX listing would allow 
the securities of companies that are being delisted from another 
national securities exchange for failure to meet that exchange's 
quantitative listing requirements to continue to trade on a national 
securities exchange. This may enable some institutional investors to 
continue their ownership stake in those companies, which in turn could 
provide greater stability to the companies' shareholder base.\42\ In 
addition, the Exchange believes that companies currently traded OTC 
could view the BX Venture Market as an aspirational step towards a 
listing on another national securities exchange and that the agreement 
of such companies to comply with the Exchange's corporate governance 
standards along with the application of the Exchange's public interest 
authority will provide additional protections to their investors. 
Finally, the Exchange believes that the BX Venture Market will be a 
more attractive alternative for domestic companies that might otherwise 
have considered a listing on non-U.S. junior markets which, according 
to the Exchange, generally have less vigorous listing requirements.
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    \42\ According to the Exchange, 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 OTC market. See 
Notice, supra note 3.
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    The proposed BX listing standards discussed above, however, are 
significantly lower than the listing standards for other exchange-
listed securities.\43\ These lower listing standards on BX may raise 
issues as to whether the proposed rule change is consistent with the 
Act. Among other things, listing standards must be designed to assure 
that there is sufficient liquidity for trading on an exchange and to 
reduce the likelihood of manipulation and fraud.\44\ The Commission 
believes that the development and enforcement of adequate 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.\45\ 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.\46\ Adequate standards are especially important given 
the expectations of investors regarding exchange trading and the 
imprimatur of listing on a particular market.\47\ 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.
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    \43\ For example, BX would require a BX-listed company to have 
only 200,000 publicly held shares, which is significantly lower than 
the number of publicly held shares required by exchanges with active 
listing programs today. See, e.g., NYSE Amex Company Guide Section 
102(a) (requiring a minimum public distribution of 500,000 shares 
and 800 public shareholders, or a minimum public distribution of 1 
million shares and 400 public shareholders); NASDAQ Stock Market 
Rule 5505(a)(2) (requiring a minimum of 1 million publicly held 
shares); and NYSE Listed Company Manual Section 102.01A (requiring a 
minimum of 1.1 million publicly held shares). Even ``Tier II'' 
listing standards require listed companies to have at least 250,000 
publicly held shares. See, e.g., CBOE Rule 31.6(3) (requiring at 
least 1 million publicly held shares for initial listing of research 
and development type issuers).
    \44\ See, e.g., Exchange Act Section 6(b)(5).
    \45\ See, e.g., Securities Exchange Act Release No. 61912 (April 
15, 2010), 75 FR 21094, 21094 (April 22, 2010) (SR-NYSE-2010-15).
    \46\ See id.
    \47\ See id.
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    The Commission notes that the Exchange has submitted Amendment No. 
1 in an effort to address certain potential concerns with the proposed 
rule change. However, at this time and for the reasons noted below, the 
Commission is instituting proceedings pursuant to Section 19(b)(2)(B) 
of the Act \48\ to determine whether the proposed rule change should be 
disapproved. Institution of such proceedings appears appropriate at 
this time in view of the legal and policy issues raised by the 
proposal. Institution of the proceedings, however, does not indicate 
that the Commission has formulated any conclusions with respect to any 
of the issues involved. Rather, as described in greater detail below, 
the Commission seeks and encourages interested persons to comment on 
the proposed rule change.
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    \48\ 15 U.S.C. 78s(b)(2)(B).
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    The section of the Act applicable to the proposed rule change that 
provides the grounds for the disapproval (or approval) under 
consideration is Section 6(b)(5),\49\ which requires that the rules of 
an exchange be designed, among other things, 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. Specifically, the

[[Page 77040]]

Exchange is proposing initial and continued listing standards that are 
significantly lower than those of other exchanges with active listing 
markets.\50\ Among other things, this raises issues as to whether BX-
listed securities could be more prone to manipulation by an individual 
or a few shareholders who acquire a dominant interest in the publicly-
held shares compared to other exchange-listed securities. This issue is 
particularly pronounced with smaller company stocks, which historically 
have been the targets of manipulative schemes.\51\
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    \49\ 15 U.S.C. 78f(b)(5).
    \50\ See supra note 43.
    \51\ See, e.g., Securities Act Release No. 8878 (December 19, 
2007), 72 FR 73534, 73536 (December 27, 2007) (S7-10-07) (stating 
that ``[i]t has been observed that the securities of smaller public 
companies are comparatively more vulnerable to price manipulation 
than the securities of larger public companies'').
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    The proposed rule change also raises issues as to whether investors 
will understand that BX-listed securities are very different from other 
exchange-listed securities, and could pose substantially more 
investment risk than those listed on other markets due, for example, to 
their size, financial condition, or limited operational history. This 
potential for investor confusion may be compounded because, as 
exchange-listed securities, other exchanges could trade them on an 
unlisted trading privileges (``UTP'') basis.\52\ Because the smaller 
BX-listed securities may be traded UTP on the same platform as larger 
companies listed by the primary listings markets, this raises issues as 
to whether investors could have even more difficulty distinguishing 
between BX-listed securities and other exchange-listed securities.
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    \52\ Under Exchange Act Section 12(f)(1)(A) and Rule 12f-5 
thereunder, a national securities exchange may trade exchange-listed 
securities on a UTP basis. See 15 U.S.C. 78l(f)(1)(A) and 17 CFR 
240.12f-5. Accordingly, other national securities exchanges would be 
able to trade BX-listed securities, without obtaining additional 
Commission approval.
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    At the same time, as noted above, the Commission acknowledges that 
the BX listing market would be an alternative to the OTC market and 
could provide important benefits to this market segment, including 
enhanced regulation and increased price transparency. In particular, 
BX'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, but only requires issuers 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. The Commission 
also notes that trading in BX-listed securities would be subject to 
regulation through BX's trading rules and surveillance authority. 
Additionally, the BX listing market could make it easier for companies 
with smaller market capitalization to raise capital, thereby promoting 
job creation. Finally, permitting companies with smaller market 
capitalization to list on BX could provide them with a viable 
alternative for U.S. listing to listing on non-U.S. markets that may be 
equivalent to the proposed BX market.

V. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data and arguments with respect to the 
issues identified above, as well as any others they may have identified 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposed rule change 
is inconsistent with Section 6(b)(5) or any other provision of the Act, 
or the rules and regulations thereunder. Although there do not appear 
to be any issues relevant to approval or disapproval which would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\53\
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    \53\ Section 19(b)(2) of the Act, as amended by the Securities 
Acts Amendments of 1975, Public Law 94-29, 89 Stat. 97 (1975), 
grants the Commission flexibility to determine what type of 
proceeding--either oral or notice and opportunity for written 
comments--is appropriate for consideration of a particular proposal 
by a self-regulatory organization. See Securities Acts Amendments of 
1975, Report of the Senate Committee on Banking, Housing and Urban 
Affairs to Accompany S. 249, S. Rep. No. 75, 94th Cong., 1st Sess. 
30 (1975).
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    Interested persons are invited to submit written data, views and 
arguments regarding whether the proposed rule change should be 
disapproved by January 24, 2011. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
February 8, 2011.
    The Commission is asking that commenters address the merit of BX's 
statements in support of the proposal, in addition to any other 
comments they may wish to submit about the proposed rule change. 
Specifically, the Commission is requesting comment on the following:
     Do commenters agree with BX's belief that the proposed BX 
listing market will provide a transparent, well-regulated marketplace 
for companies with smaller market capitalization contemplating an 
initial exchange listing and companies delisted from another national 
securities exchange for failure to meet quantitative listing standards? 
Why or why not?
     Is the proposed vetting and due diligence process of 
prospective issuers on the BX listing market sufficient to prevent 
companies that might erode investor confidence (due to potential fraud) 
in the market from listing? Why or why not?
     Given that BX-listed companies are likely to be smaller 
than listed companies on other exchanges, should BX undertake any 
additional measures (including additional surveillances) to reduce the 
risk of fraudulent and manipulative behavior with respect to the 
listing and/or trading of BX-listed securities? Why or why not?
     Do commenters believe there is any likelihood of investor 
confusion regarding the BX listing market? Would investors be inclined 
to believe that a BX-listed company is listed on Nasdaq? Are the 
Exchange's proposed actions to reduce or avoid investor confusion 
sufficient? Why or why not? If not, what additional measures should the 
Exchange undertake?
     Do the proposed initial and continued listing standards 
for the BX listing market assure sufficient liquidity in listed 
securities? Why or why not? Are there other listing criteria that 
commenters would suggest to better assure sufficient liquidity in 
listed securities?
     Are the proposed initial and continued listing standards 
for the BX listing market sufficiently designed to reduce the risk that 
an individual or small group of shareholders will be in a position to 
manipulate the listed security? Why or why not?
     Are the proposed initial and continued listing standards 
and the delisting process for the BX listing market sufficiently 
designed to prevent stocks that are of a type that historically have 
been prone to fraudulent schemes from being listed? Why or why not?
     Do commenters believe that the proposed delisting and 
appeals procedures and timeframes are sufficient and appropriate? Are 
the timeframes too long or too short? Why or why not?
     Are the proposed corporate governance standards for the BX 
listing market sufficiently designed to assure

[[Page 77041]]

an appropriate level of corporate governance? Why or why not?
     Do commenters agree with the Exchange's belief that a BX 
listing could help companies raise capital and thus promote job 
creation within the United States? Why or why not?
     Has BX sufficiently addressed how quotations and 
transactions reports relating to BX-listed securities will be 
disseminated? Will this result in fragmentation of pricing information 
relating to these securities? Will this undermine the ability of 
investors to receive best execution? Why or why not?
    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 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, Station Place, 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 (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 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 January 24, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\54\
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    \54\ 17 CFR 200.30-3(a)(57).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-31078 Filed 12-9-10; 8:45 am]
BILLING CODE 8011-01-P

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