Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Order Granting Approval of Proposed Rule Change and Amendment No. 1 Thereto and Notice of Filing and Order Granting Accelerated Approval to Amendment No. 2 Thereto To Create a Listing Market on the Exchange, 27710-27730 [2011-11610]
Download as PDF
<![CDATA[
27710
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Notices
necessary or appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
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 (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) By order approve or disapprove
such proposed rule change, or
(B) Institute proceedings to determine
whether the proposed rule change
should be disapproved.
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 NYSE
Amex. 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–NYSEAmex–2011–32 and
should be submitted on or before June
2, 2011.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.10
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011–11612 Filed 5–11–11; 8:45 am]
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–NYSEAmex–2011–32 on
the subject line.
wwoods2 on DSK1DXX6B1PROD with NOTICES_PART 1
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:
Self-Regulatory Organizations;
NASDAQ OMX BX, Inc.; Order Granting
Approval of Proposed Rule Change
and Amendment No. 1 Thereto and
Notice of Filing and Order Granting
Accelerated Approval to Amendment
No. 2 Thereto To Create a Listing
Market on the Exchange
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–NYSEAmex–2011–32. 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
May 6, 2011.
VerDate Mar<15>2010
14:49 May 11, 2011
Jkt 223001
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–64437; File No. SR–BX–
2010–059]
On August 20, 2010, NASDAQ OMX
BX, Inc. (the ‘‘Exchange’’ or ‘‘BX’’) filed
with the Securities and Exchange
Commission (the ‘‘Commission’’),
pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a
proposed rule change to create a listing
market on the Exchange, called ‘‘The BX
Venture Market’’ (‘‘BX Venture Market’’).
The proposed rule change was
published for comment in the Federal
Register on September 8, 2010.3 The
Commission subsequently extended the
time period in which to either approve
10 17
CFR 200.30–3(a)(12).
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’’).
1 15
PO 00000
Frm 00078
Fmt 4703
Sfmt 4703
the proposed rule change, disapprove
the proposed rule change, or institute
proceedings to determine whether to
disapprove the proposed rule change, to
December 7, 2010.4 The Commission
received three comments in response to
the Notice.5
On December 6, 2010, the Exchange
submitted Amendment No. 1 to the
proposed rule change.6 On December 7,
2010, the Commission instituted
proceedings to determine whether to
disapprove the proposed rule change, as
modified by Amendment No. 1.7 The
Commission thereafter received eight
comments on the proposal.8 The
Exchange submitted a response letter to
the comments on February 17, 2011.9
On March 3, 2011, the Commission
issued a notice of designation of longer
period for Commission action on
proceedings to determine whether to
disapprove the proposed rule change, as
modified by Amendment No. 1.10 On
May 4, 2011, the Exchange submitted
Amendment No. 2 to 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
4 See Securities Exchange Act Release No. 63105
(October 14, 2010), 75 FR 64772 (October 20, 2010).
5 See Letters to Elizabeth M. Murphy, Secretary,
Commission, from William F. Galvin, Secretary of
the Commonwealth, Commonwealth of
Massachusetts, dated September 28, 2010 (‘‘MSD
Letter’’); Michael R. Trocchio, Bingham McCutchen
LLP, on behalf of Pink OTC Markets Inc., dated
October 3, 2010 (‘‘Pink OTC Markets Letter’’); and
Tom A. Alberg, Managing Director and Founder,
Madrona Venture Group, dated December 1, 2010
(‘‘Madrona Letter’’).
6 See Securities Exchange Act Release No. 63597
(December 22, 2010), 75 FR 82098 (December 29,
2010).
7 See Securities Exchange Act Release No. 63448
(December 7, 2010), 75 FR 77036 (December 10,
2010) (‘‘Order Instituting Proceedings’’).
8 See Letters to Elizabeth M. Murphy, Secretary,
Commission, from James J. Angel, Ph.D., CFA,
dated January 14, 2011 (‘‘Angel Letter’’); K. Richard
B. Niehoff, Chairman and CEO, United States OTC
Markets, Inc., dated January 20, 2011 (‘‘Niehoff
Letter’’); Mark G. Heesen, President, National
Venture Capital Association, dated January 21, 2011
(‘‘NVCA Letter’’); Alan F. Eisenberg, Executive Vice
President, Emerging Companies and Business
Development, Biotechnology Industry Organization,
dated January 24, 2011 (‘‘BIO Letter’’); Michael R.
Trocchio, Bingham McCutchen LLP, on behalf of
OTC Markets Group Inc., dated January 24, 2011
(‘‘OTC Markets Group Letter’’); Rey Ramsey,
President and CEO, TechNet, dated January 24,
2011 (‘‘TechNet Letter’’); William F. Galvin,
Secretary of the Commonwealth, Commonwealth of
Massachusetts, dated January 26, 2011 (‘‘MSD Letter
II’’); and James McCarthy, Co-Founder, the US
Venture Exchange, dated April 19, 2011 (‘‘McCarthy
Letter’’).
9 See Letter to Elizabeth M. Murphy, Secretary,
Commission, from Joan C. Conley, Senior Vice
President and Corporate Secretary, The NASDAQ
OMX Group, dated February 17, 2011 (‘‘BX
Response Letter’’).
10 See Securities Exchange Act Release No. 64028
(March 3, 2011), 76 FR 13010 (March 9, 2011).
E:\FR\FM\12MYN1.SGM
12MYN1
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Notices
comments on Amendment No. 2 from
interested persons and is approving the
proposed rule change, as modified by
Amendment Nos. 1 and 2, on an
accelerated basis.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
Amendment No. 2 to the Proposed Rule
Change
The Exchange proposes to create a
listing market, which will be called ‘‘the
BX Venture Market.’’ Following
Commission approval, the Exchange
will announce the operational date of
the new market in an Equity Trader
Alert and press release. The proposed
rules will become effective on the
operational date.
The text of the proposed rule change
is available at https://
nasdaqomxbx.cchwallstreet.com, at
BX’s principal office, and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in Sections A, B, and C below, of
the most significant aspects of such
statements.
wwoods2 on DSK1DXX6B1PROD with NOTICES_PART 1
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
In connection with the acquisition of
the former Boston Stock Exchange by
The NASDAQ OMX Group, Inc., the
Exchange discontinued its listing
marketplace and delisted all securities
previously listed on the Exchange.11
Since January 2009, the Exchange has
operated as a trading venue only,
allowing market participants to trade
securities listed on other national
securities exchanges pursuant to
unlisted trading privileges. The
Exchange is proposing to begin listing
securities again, through the creation of
a new listing market, to be called ‘‘The
BX Venture Market.’’ The BX Venture
11 See Securities Exchange Act Release No. 59265
(January 16, 2009), 74 FR 4790 (January 27, 2009)
(approving SR–BSE–2008–36 relating to the
delisting of all securities from the Exchange in
connection with the Exchange’s discontinuation of
trading).
VerDate Mar<15>2010
14:49 May 11, 2011
Jkt 223001
Market will have minimal quantitative
listing standards, but will have
qualitative requirements that are, in
many respects, similar to those required
for listing on The NASDAQ Stock
Market (‘‘NASDAQ’’) and other national
securities exchanges.12 The Exchange
believes that the name BX Venture
Market will appropriately convey the
lower financial standards required for
listing on this market and distinguish
the BX Venture Market from other
national securities exchanges. The term
‘‘venture’’ is already used to designate
the junior market in Canada, the TSX
Venture Market. Moreover, ‘‘venture’’ by
definition broadly connotes an
undertaking involving some uncertainty
or risk in return for the hope of profit,
rather than referring solely to companies
that are backed by venture capital. It is
thus a familiar term for a venue
designed to provide an attractive
alternative to companies being delisted
from another national securities
exchange for failure to meet quantitative
listing standards (including price or
other market value measures), as well as
smaller companies contemplating an
initial exchange listing. The Exchange
further believes that the proposed listing
venue will provide a transparent, wellregulated marketplace for these
companies and their investors.13
As discussed in more detail below,
the Exchange will operate and regulate
the BX Venture Market through
regulatory contracts with FINRA and the
NASDAQ Stock Market LLC, which will
be in place prior to the Market becoming
operational. While the Exchange will
retain all legal responsibility for and
control of the functions performed by
these entities, it will leverage FINRA’s
expertise overseeing the over-thecounter markets, surveillance
enhancements provided by the
SMARTS Group,14 and the deep
experience of the NASDAQ Listing
Qualifications Department to ensure
high quality oversight for market
activity and listed companies.
Moreover, the Exchange has proposed
rules to provide a clear signal to
investors that a company is listed on the
12 The Exchange notes that not all qualitative
requirements imposed by other exchanges would be
required. See Listing Requirements, infra, for a full
discussion of the proposed quantitative and
qualitative requirements for listing on BX.
13 The Exchange will propose in a separate rule
filing changes to the BX Equities Platform to govern
trading of, and reporting of transactions in, these
listed securities and introducing and modifying
market data products to permit dissemination of
accurate quotation information and reporting of
transactions.
14 SMARTS Group, a subsidiary of NASDAQ
OMX, is a leading technology provider of market
surveillance solutions to exchanges and regulators
around the world
PO 00000
Frm 00079
Fmt 4703
Sfmt 4703
27711
BX Venture Market and to distinguish
the BX Venture Market from NASDAQ
and other national securities exchanges.
These proposed rules also require a
rigorous vetting procedure before a
company may attain a listing, and
heightened scrutiny thereafter of listed
Companies. Finally, the Exchange will
not launch the BX Venture Market
before approval is obtained for an
arrangement between the Exchange and
FINRA to consolidate and disseminate
best quotation and last sale data for BX
Venture Market listed securities and
that arrangement is operational.15 All of
these matters are discussed more fully
below.
Listing Requirements
The BX Venture Market would list
Common Stock, Preferred Stock,
Ordinary Shares, Shares or Certificates
of Beneficial Interest of Trust, Limited
Partnership Interests, American
Depositary Receipts (ADR), American
Depositary Shares (ADS), Units, Rights
and Warrants. To be listed on the BX
Venture Market, companies will need to
meet the following qualitative listing
standards, each of which is equivalent
to the comparable listing standard of
NASDAQ or is derived from the Federal
securities laws:
(a) The company must be registered
under Section 12(b) of the Act 16 and
current in its periodic filings with the
Commission and, as a result, subject to
the requirements of the Sarbanes-Oxley
Act of 2002 17 (proposed Rule 5210(a)
and 5210(e));
(b) The company must have a fully
independent Audit Committee
comprised of at least three members and
comply with the requirements of SEC
Rule 10A–3, promulgated under the
Act 18 (proposed Rule 5605(c));
(c) The company must have
independent directors make
compensation decisions for executive
officers (proposed Rule 5605(d));
(d) The company will be prohibited
from taking any corporate action with
the effect of nullifying, restricting or
disparately reducing the per share
voting rights of holders of an
outstanding class of the company’s
common stock registered pursuant to
Section 12 of the Act (proposed Rule
5640);
(e) The company’s auditor will be
required to be registered with the Public
Company Accounting Oversight
15 The Commission notes that its order in Section
VI, infra, does not contain this condition.
16 15 U.S.C. 781(b).
17 15 U.S.C. 7201–7266.
18 17 CFR 240.10A–3.
E:\FR\FM\12MYN1.SGM
12MYN1
wwoods2 on DSK1DXX6B1PROD with NOTICES_PART 1
27712
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Notices
Board 19 (proposed Rules 5210(b) and
5250(c)(3));
(f) The company will be required to
hold an annual shareholders’ meeting
and solicit proxies for each
shareholders’ meeting (proposed Rule
5620);
(g) The company will be required to
obtain shareholder approval for the use
of equity compensation (proposed Rule
5635);
(h) The company will be required to
adopt a code of conduct, applicable to
all directors, officers and employees
(proposed Rule 5610);
(i) The company will be required to
conduct an appropriate review and
oversight of all related party
transactions, to address potential
conflict of interest situations (proposed
Rule 5630);
(j) The company will be required to
disclose material information through
any Regulation FD compliant method
(or combination of methods) (proposed
Rule 5250(b) and IM–5250–1);
(k) The listed securities must be
eligible for a Direct Registration Program
operated by a clearing agency registered
under Section 17A of the Act 20
(proposed Rules 5210(c) and 5255);
(l) Public ‘‘shells’’ would not be
allowed to list (proposed Rule 5103(b));
and
(m) The Exchange will conduct a
public interest review of the company
and significant persons associated with
it (proposed Rules 5205(c) and 5104 and
IM–5104–1). A company would not be
eligible for listing if any executive
officer, director, promoter, or control
person was involved in any event
described in Item 401(f)(2)–(8) of
Regulation S–K that occurred during the
prior five years (proposed Rule 5103(a)).
In addition, the BX Venture Market
would apply the following quantitative
listing standards, set out in proposed
Rules 5505 and 5506 (initial listing) and
5550 (continued listing), which are
designed to assure a minimum level of
trading consistent with a public market
for the securities:
(a) 200,000 publicly held shares;
(b) 200 public shareholders, at least
100 of which must be round lot holders
for initial listing, and 200 public
shareholders for continued listing;
(c) A market value of listed securities
of at least $2 million for initial listing
and $1 million for continued listing;
(d) Two market makers; and
(e) A minimum initial listing price of
$0.25 per share for securities previously
listed on a national securities exchange
19 See Section 102 of the Sarbanes-Oxley Act, 15
U.S.C. 7212.
20 15 U.S.C. 78q–1.
VerDate Mar<15>2010
14:49 May 11, 2011
Jkt 223001
and $1.00 per share for securities not
previously listed on a national securities
exchange. For continued listing,
securities will be required to maintain a
minimum $0.25 per share bid price.
Further, with respect to companies
not previously listed on a national
securities exchange, the BX Venture
Market will also require for initial
listing that the company have either $1
million stockholders’ equity or $5
million total assets, a one year operating
history, and a plan to maintain
sufficient working capital for the
company’s planned business for at least
twelve months after the first day of
listing.
The Exchange would also require that
rights and warrants will only be eligible
for initial and continued listing if the
underlying security is listed on the BX
Venture Market or is a covered security,
as described in Section 18(b) of the
Securities Act of 1933.21
The proposed listing standards are
designed to allow companies that are
being delisted from another national
securities exchange for failure to meet
that exchange’s quantitative listing
requirements the opportunity to provide
their investors with a better regulated,
more transparent trading environment
than may otherwise be available in the
over-the-counter markets. The Exchange
believes that allowing these companies
to continue trading on a national
securities exchange may enable some
institutional investors to continue their
ownership stake in the company, which
could provide greater stability to the
company’s shareholder base and
possibly avoid forced sales by such
investors.22 The Exchange also believes
that the BX Venture Market will provide
an opportunity for smaller, private,
venture-backed companies to expand
their capital financing opportunities and
go public, and at the same time,
encourage investment in early-stage
companies by providing private equity
and venture funders with an exit
strategy. In addition, companies
currently traded over-the-counter could
view this market as an aspirational step
towards a listing on another national
securities exchange. The Exchange
believes that the agreement of such
companies to comply with the
Exchange’s corporate governance
standards and the application of the
Exchange’s public interest authority will
provide additional protections to their
investors than would be available in
their present trading venue. Moreover,
the Exchange believes that a listing on
the BX Venture Market could help such
companies raise capital, in turn
promoting job creation within the
United States. Finally, the Exchange
believes that the BX Venture Market
will be a more attractive alternative to
domestic companies that might
otherwise have considered a listing on
non-U.S. junior markets, which
generally have lower listing
requirements.
Investor Protection Provisions
The Exchange recognizes that the
listing requirements for the BX Venture
Market will be lower than those of the
NASDAQ Stock Market and other
national securities exchanges, and that
the market will, therefore, attract
smaller, less liquid companies, which
may create higher risks for investors.
Mindful of these risks and the
Exchange’s objective to preserve the
quality of and public confidence in its
market, the Exchange has adopted rules
to preclude investor confusion about BX
Venture Market listings. The Exchange
will also subject companies and
associated individuals to a rigorous
review process before approving a
listing, and apply heightened regulatory
scrutiny to listed Companies.
References to Listing. To avoid
investor confusion, the listing rules of
the BX Venture Market specify that a BX
Venture Market-listed company must
refer to its listing as on the BX Venture
Market, unless otherwise required by
applicable rules or regulations. Staff
will review any failure of a company to
follow this requirement, and take
appropriate action pursuant to the Rule
5800 Series. A company that represents
itself as listed on the NASDAQ Stock
Market or refers to itself as a NASDAQ
listed company will be subject to
immediate delisting pursuant to
procedures in the Rule 5800 Series.23 To
enforce this prohibition, the Exchange
will monitor the press releases issued by
a BX Venture Market-listed company 24
and will annually review the company’s
Web site to determine how the company
is referring to its listing.
Similarly, in describing this listing
venue, the Exchange will refer to it as
the BX Venture Market and not as
NASDAQ OMX BX. The Exchange will
also prominently include information
on its Web site describing the
23 Proposed
21 15
U.S.C. 77r(b).
22 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 over-the-counter market.
PO 00000
Frm 00080
Fmt 4703
Sfmt 4703
Rule 5250(b)(4).
to Proposed Rule 5250, which
addresses disclosure obligations, a listed company
that issues a press release in satisfaction of its
disclosure obligations is required to disseminate the
press release over a national newswire service
acceptable to the Exchange.
24 Pursuant
E:\FR\FM\12MYN1.SGM
12MYN1
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Notices
differences between the BX Venture
Market and other national securities
exchanges, including NASDAQ.25 For
example, it will inform users that BX
Venture Market-listed stocks are not
‘‘blue sky’’ exempt, are not NMS
securities, and are not subject to the
trade-through rule, and provide side-byside comparisons of BX Venture Market
and NASDAQ Stock Market features.
Marketing materials for the BX Venture
Market will also include a prominent
disclaimer explaining that the BX
Venture Market is separate from, and
not a tier of, the NASDAQ Stock Market.
Finally, as required by proposed Rule
5106 and discussed in more detail later
in this filing, the Exchange will require
data vendors to identify when the BX
Venture Market is the listing market for
a security with a unique market center
identifier, so as to clearly differentiate
those securities from securities listed on
NASDAQ or other exchanges or traded
over-the-counter.
Automatic Bars to Listing. Proposed
Rule 5103 provides for certain
automatic bars to listing. Under that
Rule, the Exchange will not approve for
listing or allow the continued listing of
‘‘shell’’ Companies.26 This prohibition is
based on concerns that the investors in
shell companies are unaware of the
ultimate business in which they are
investing and that trading in such
securities is more susceptible to market
manipulation. The Exchange will also
decline to list any company, and will
delist any listed company, that attempts
to rely on an exemption from state
securities registration which otherwise
may be available under state law to
Companies listed on the Exchange.
Finally, the Exchange will not approve
for listing or allow the continued listing
of a company if any executive officer,
director, promoter, or control person
was involved in any event that occurred
during the prior five years described
under Item 401(f)(2)—(8) of Regulation
S–K under the Act. Such events include
criminal convictions and pending
charges, violations of securities laws,
and court or administrative actions
barring or limiting the individual from
certain security related activities.27
wwoods2 on DSK1DXX6B1PROD with NOTICES_PART 1
25 Rule
5106.
Rule 5103(b) sets forth a number of
factors that the Exchange will consider in
determining whether a Company is a shell,
including whether the Company is considered a
‘‘shell company’’ as defined in Rule 12b–2 under the
Act, 17 CFR 240.12b–2.
27 If a listed Company discloses an event
involving an executive officer, director, promoter,
or control person described under Item 401(f)(2)–(8)
of Regulation S–K, the Exchange would provide the
Company with thirty days to remove the executive
officer, director, promoter, or control person. If the
26 Proposed
VerDate Mar<15>2010
14:49 May 11, 2011
Jkt 223001
27713
To enforce these automatic bars, and
to identify other public interest
concerns that, while not triggering an
automatic bar, may call for the use of
the Exchange’s discretionary authority
to disapprove a listing, the Exchange
will engage in a rigorous review of
listing applications, which will include
background checks of individuals
associated with the company and the
assistance of independent qualified
third-party investigators.
Application and Public Interest
Review. The listing application will
require provision to the Exchange, and
Staff review, of all reports and
documents required to be filed with the
Commission or other regulatory
authority, as well as any other
information or documentation, public or
non-public, Staff determines is
necessary for its review. Companies
must also provide detailed descriptions
and supporting documentation of all
pending or prior inquiries,
investigations, lawsuits, litigation,
arbitration, hearings or any other legal
or administrative proceedings involving
the company, its executive officers,
directors, promoters, and ten percent or
greater shareholders of the company.28
The company must, in addition,
disclose any events described under
Item 401(f) of Regulation S–K involving
officers, directors, promoters, or control
persons; describe all bridge financings,
shelf registrations, Regulation S
offerings or private placements
consummated in the prior six months;
and provide copies of any blue sky
memoranda.
Staff will also review the company’s
proxy disclosures to screen for events
described pursuant to Item 401(f) of
Regulation S–K under the Act.
Moreover, it will conduct background
checks of the company and affiliated
individuals. This background
investigation will be conducted by Staff
members experienced in such reviews
and will make use of public databases
and other resources, such as LexisNexis, the Web-CRD regulatory
database, and web-based search engines,
such as Google.29 Finally, the Exchange
will request review of a company by an
independent qualified third-party
investigative firm in appropriate
circumstances, as discussed in more
detail below.
If the Exchange identifies a regulatory
issue that triggers an automatic bar the
application will be disapproved. If the
Exchange identifies a regulatory event
described pursuant to Item 401(f)(2)–(8)
of Regulation S–K about an officer,
director, promoter, or control person
that occurred more than five years prior;
or a history of regulatory misconduct by
a person that is not an officer, director,
promoter, or control person of the
company but who has significant
influence on or importance to the
company, it will ordinarily exercise its
discretionary authority to deny listing.
However, if the Exchange determines
that the information identified may not
rise to the level requiring denial of the
listing, or if it identifies any issue that
raises potential public interest concerns
about which it seeks additional
information (such as, for example,
media accounts of criminal allegations
or improper business practices, or any
indication of financial improprieties) it
will refer the company to an
independent qualified third party
investigative firm for review. Any
decision to list a company that has been
referred to an independent investigative
review based on the regulatory history
of an associated individual that does not
trigger an automatic bar, must be
approved in writing by the Chief
Regulatory Officer (‘‘CRO’’) of the
Exchange. The CRO must also approve
the listing of any company with an
officer, director, promoter, or control
person who has described a bankruptcy
under Item 401(f)(1) of Regulation S–K.
Finally, whenever Staff has identified a
past violation or evasion of a corporate
governance standard pursuant to its
review of a formerly exchange-listed
company’s past corporate governance
activities, but decides not to exercise its
discretionary authority to deny listing,
the listing must be approved in writing
by the CRO. Documentation of the
CRO’s approvals will be maintained
with the Exchange’s listing file for the
company.
Independent Investigative Assistance.
The Exchange will retain a qualified
independent third party investigative
firm to assist in its public interest
review process. Staff will make random,
regular referrals to such a firm of at least
10% of applicant companies that were
not previously listed on a national
securities exchange.30 In addition, Staff
Company does not do so, the Exchange would send
a delisting notification to the Company.
28 A ten year history of such inquiries,
investigations, and proceedings involving the
company will be required; there is no time limit on
the history required for executive officers, directors,
promoters, or controlling shareholders.
29 Proposed Rule 5205(c)(1).
30 Proposed Rule 5205(d). While the Exchange
expects to refer between 10–20% of such applicant
companies, this ratio could change upon evaluation
of the findings provided by the investigative firms.
The Exchange does not expect that random referrals
of companies that have previously been listed on
a national securities exchange will be necessary, but
PO 00000
Frm 00081
Fmt 4703
Sfmt 4703
E:\FR\FM\12MYN1.SGM
Continued
12MYN1
27714
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Notices
will utilize an investigative firm when
it would be impractical to research a
regulatory history occurring outside the
United States. Finally, Staff will seek
review of a company when its internal
review has uncovered a regulatory issue
or potential public interest concern that
does not trigger an automatic bar and
Staff has not made a determination to
disapprove the application. While the
scope of investigations will vary based
on the reasons for review, they generally
will focus on criminal history,
government sanctions and watchlists,
and will also include online and onsite
checks of court records, searches of
relevant state and country criminal
databases, and searches of global risk
compliance databases covering
government prohibited and barred
persons. In appropriate circumstances,
such as where questions are raised
related to the legitimacy or
appropriateness of an applicant’s
business practices, customers, or
suppliers, whether through whistle
blower complaints or otherwise, the
outside firm would be asked to make
inquiries with respect to those matters.
These procedures and determinations
shall be followed, as applicable,
whenever a listed company names a
new officer, director, promoter, or
control person or describes an event
pursuant to Item 401(f) of Regulation S–
K under the Act, and whenever Staff, in
the course of its on-going monitoring of
listed Companies, identifies a potential
public interest concern. These
background procedures would also
apply when a listed company combines
or reverse-merges with a non-listed
entity, resulting in a ‘‘change of control’’
transaction pursuant to Listing Rule
5110.31
wwoods2 on DSK1DXX6B1PROD with NOTICES_PART 1
Oversight of Listings and Delistings
Pursuant to an intercompany
regulatory services agreement that will
be in place before the BX Venture
Market is operational, Staff in
NASDAQ’s Listing Qualifications
Department will be responsible for
processing listings, conducting on-going
compliance monitoring of listed
companies, and implementing
delistings. Notwithstanding the
will reevaluate that assumption on an on-going
basis.
31 If a listed Company combines or reverse merges
with a non-listed entity, resulting in a change of
control, the post-merger company must apply for
and meet all initial listing requirements before
listing on the Exchange. Delisting proceedings will
be initiated if an application for listing of the new
entity has not been approved before consummation
of the transaction. Rule 5110 includes a nonexclusive list of considerations to be used for
determining whether a change of control has
occurred.
VerDate Mar<15>2010
14:49 May 11, 2011
Jkt 223001
contractual arrangement, the Exchange
retains ultimate legal responsibility for,
and control of, these functions. The
NASDAQ Listing Qualifications
Department is presently comprised of 33
individuals, which include 13
continued listing analysts, four initial
listing analysts, and an investigations
group. This Staff is extremely
experienced in regulatory analysis: the
average person has over ten years of
experience at NASDAQ and several
have extensive backgrounds outside
NASDAQ in investigating alleged
violations of the Federal securities laws.
The sophisticated technology used by
this Department enables Staff to
efficiently review public filings and
identify and prioritize issues that may
raise concerns under the listing
standards, including public interest
concerns. Among other things, this
system is programmed to identify any
quantitative deficiencies arising from
the filings or from trading data,
immediately notify the appropriate
Staff, and keep an auditable record of
how Staff treated the deficiency.
The proposed rules require, moreover,
that the listing process will at all times
be supervised by at least one person
with substantial prior experience
supervising such a program at a national
securities exchange with a currently
active listing program. The head of the
Exchange’s Listing Department, who
will have no marketing responsibilities
and will report to NASDAQ OMX’s
Chief Regulatory Officer, will be
involved in all decisions concerning
whether to permit or deny listing to a
company based on a public interest
concern. In addition, the investigations
group must be supervised by at least one
person with substantial prior regulatory
experience at another national securities
exchange or with an organization, such
as the SEC’s Enforcement Division or
FINRA, which has securities-related
enforcement responsibilities. Finally,
the Exchange’s Chief Regulatory Officer
will be required to have had substantial
prior regulatory experience with a
national securities exchange or
equivalent experience.32 This person
will be required to approve the listing
of any company where potential
regulatory concerns have been
identified, including cases where the
company has disclosed information
about an executive officer, director,
promoter, or control person involving
an event described under Item 401(f) of
Regulation S–K that does not trigger the
automatic bar described above.33
32 Proposed
33 Proposed
PO 00000
Rule 5102.
IM 5104–1.
Frm 00082
Fmt 4703
Sfmt 4703
Should the workload resulting from
the new BX Venture Market prove
sufficiently high, the Exchange and
NASDAQ have each committed to
hiring additional staff, as necessary. In
that regard, the staffing within Listing
Qualifications 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 the Exchange’s Regulatory
Oversight Committee.
Quantitative Listing Standards
The Exchange proposes that any
company that meets the quantitative
(e.g., financial) requirements for listing
on NASDAQ will not be approved for
listing on the BX Venture Market. This
will assure that such companies only
become listed on the exchange with
higher listing standards.
Given that the Exchange expects to
list companies that do not meet the
quantitative listing requirements of the
primary existing national securities
exchanges, it is expected that BX
Venture Market-listed companies will
include smaller companies and
companies facing business or other
challenges. Thus, the proposed
quantitative standards for the BX
Venture Market were deliberately
structured to be lower than those of the
other primary exchanges. In that regard,
the minimum price requirement for
listing on the BX Venture Market will be
$0.25 per share for a security previously
listed on another national securities
exchange and $1.00 per share for a
security previously quoted in the overthe-counter market or listing in
connection with its initial public
offering. Until September 30, 2011, the
Exchange would consider any company
that was listed on another national
securities exchange at any time since
January 1, 2010, to be eligible to list
with a $0.25 per share price. The
Exchange believes it appropriate to
consider a company delisted since
January 1, 2010, as previously listed on
another national securities exchange
because the BX Venture Market would
not have been available to such
companies when they were delisted. A
number of companies were delisted
during 2010 as a result of difficulties
arising from the financial crisis and this
look-back will also allow these
companies, which may have recovered
but not yet meet the initial listing
requirements of another exchange, to
list on the BX Venture Market.
Furthermore, the Exchange believes it is
appropriate to continue this treatment
until September 30, 2011, to assure that
such companies have an adequate
opportunity to learn about the BX
E:\FR\FM\12MYN1.SGM
12MYN1
wwoods2 on DSK1DXX6B1PROD with NOTICES_PART 1
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Notices
Venture Market and sufficient time to
complete their application and have that
application processed by the Exchange.
After September 30, 2011, a company
will be considered to have been
previously listed on a national securities
exchange, and therefore eligible to list
with a $0.25 per share price, only if it
was listed on such an exchange at any
time during the three months prior to its
listing on the BX Venture Market. The
Exchange believes that this three month
period will allow the company
sufficient time to apply for listing on the
BX Venture Market and have its
application processed.
For continued listing, a security will
be required to maintain a minimum
$0.25 per share bid price.34 If the
security does not maintain a minimum
$0.25 per share bid price for 20
consecutive trading days, Exchange
Staff would issue a Staff Delisting
Determination and the security would
be suspended from trading on the BX
Venture Market.35 A company could
appeal that determination to a Hearings
Panel, however such an appeal would
not stay the suspension of the
security.36 During the Hearings Panel
process, the security could regain
compliance by achieving a $0.25 per
share minimum bid price while trading
on another venue, such as the over-thecounter market, for ten consecutive
days. However, if the company has
received three or more Staff Delisting
Determinations for failure to comply
with minimum price requirement in the
prior 12 months, the company could
only regain compliance by achieving a
closing bid price of $0.25 per share or
more for at least 20 consecutive trading
days. The Exchange believes that this
higher requirement for companies that
were previously non-compliant is
appropriate to reduce the likelihood of
future instances of non-compliance and
the concomitant investor confusion
concerning the ability of the company to
remain listed. If the Hearings Panel
determines that the security has
satisfied the applicable standard to
regain compliance, the trading halt
would be terminated and the security
would resume trading on the Exchange.
To be eligible for initial listing, a
company not previously listed on a
national securities exchange must have
at least a one year operating history, a
minimum of either $1 million in
34 The Exchange notes there is also no price
requirement for initial or continued listing on the
National Stock Exchange or for continued listing on
NYSE Amex and therefore that the proposed
continued listing requirement exceeds the
requirement of those exchanges.
35 Proposed Rule 4120(a)(12).
36 Proposed Rule 5815(a)(1)(C).
VerDate Mar<15>2010
14:49 May 11, 2011
Jkt 223001
stockholders’ equity or $5 million in
total assets, and demonstrate that it has
a plan to maintain sufficient working
capital for its business for at least twelve
months after the first day of listing. The
Exchange believes that these
requirements will help assure that a
company that was not previously
subject to exchange regulation
nonetheless has a credible and
sustainable business.
The Exchange believes that the
proposed public float, holder and
market maker requirements, together
with the minimum market value of
listed securities requirement, will assure
sufficient liquidity in listed securities.
In that regard, the Exchange notes that
the shareholder and publicly held
shares requirements are comparable to,
or higher than, requirements for listing
a preferred stock or secondary class of
common stock on the NASDAQ Capital
Market, which require 100 round lot
shareholders and 200,000 publicly held
shares. The Exchange is not aware of
any difficulties in the trading in
securities meeting these requirements.
Further, requiring two market makers
will assure competing quotations for
potential buyers and sellers of the
securities listed on the BX Venture
Market. Finally, the Exchange believes
that the minimum market value of listed
securities requirement will help assure
that the company issuing the securities
is of a sufficient size to generate interest
from investors and market participants.
While these proposed standards may be
lower than those of other exchanges,
investors will be protected by the fact
that securities listed on the BX Venture
Market would be considered penny
stocks under Exchange Act Rule 3a51–
1, unless they qualify for an exemption
from the definition of a penny stock.37
As such, broker-dealers would be
required to pre-approve their customers
for trading in penny stocks and
investors will obtain the disclosures
required to be made by broker-dealers in
connection with penny stock
transactions, providing them with trade
and market information prior to
effecting a transaction. Further, there
will be no ‘‘blue sky’’ exemption
available under Section 18 of the
37 17 CFR 240.3a51–1. The Exchange is not
seeking an exemption from the penny stock rules
for securities listed on BX, however a security may
be excluded from the definition of a penny stock
as a result of the security having a price in excess
of $5 or its issuer having net tangible assets in
excess of $2 million (if the issuer has been in
continuous operation for at least three years) or $5
million (if the issuer has been in continuous
operation for less than three years) or average
revenue of at least $6 million for the last three
years. Rule 3a51–1(d) and (g), 17 CFR 240.3a51–1(d)
and (g).
PO 00000
Frm 00083
Fmt 4703
Sfmt 4703
27715
Securities Act of 1933,38 so companies
will be required to satisfy state law
registration requirements and other state
laws that regulate the sale and offering
of securities. Because some state laws
and regulations may provide an
exemption from certain registration or
‘‘blue sky’’ requirements for companies
listed on the former Boston Stock
Exchange, based on the higher listing
standards previously applied by that
Exchange, proposed Rule 5103(c) would
provide that the Exchange will take
action to delist any company listed on
the BX Venture Market that attempts to
rely on such an exemption.39
Companies will also agree not to rely on
any such exemption as a provision of
the BX Venture Market Listing
Agreement. Listed companies will be
required to represent to the Exchange
that they are not relying on any such
exemption in connection with any
securities offering and will be required
to provide the Exchange with copies of
any ‘‘blue sky memoranda’’ prepared in
connection with the issuance of
shares.40 These steps will allow the
Exchange to assure that the company is
not inappropriately relying on such an
exemption.
Qualitative Listing Standards
The BX Venture Market corporate
governance requirements are generally
comparable to those of the other
exchanges. The Exchange would require
that a listed company have an audit
committee comprised of at least three
independent directors that also meet the
requirements of SEC Rule 10A–3.41 For
a director to be considered an
independent director, the company’s
board would have to determine that the
individual does not have a relationship
which, in the board’s opinion, would
interfere with the exercise of
independent judgment in carrying out
the responsibilities of a director.42 The
board would be precluded from finding
a director independent based on certain
relationships, including if that director
38 15
U.S.C. 77r.
Exchange notes that the Massachusetts
Securities Division has requested comment on a
proposed change to its regulations to eliminate its
exemption from the registration requirement for
securities listed on the BX Venture Market. See
https://www.sec.state.ma.us/sct/sctnewregs/
newregsidx.htm#hearing.
40 Proposed Rule 5250(e)(7). The Exchange has
proposed to add these requirements in response to
comments submitted on the original proposal.
41 17 CFR 240.10A–3. See proposed Rule
5605(c)(2). Companies may be eligible for a phasein or cure period with respect to certain of these
requirements.
42 Proposed Rule 5605(a)(2) and IM–5605–1. The
proposed definition of an independent director is
identical to NASDAQ’s definition of an
independent director.
39 The
E:\FR\FM\12MYN1.SGM
12MYN1
27716
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Notices
is currently an employee of the
company or was employed by the
company during the prior three years
(including as an executive officer),
accepted certain compensation or
payments from the company during the
prior three years, or had a family
member with certain affiliations with
the company.43
The audit committee would be
required to have a charter setting out its
responsibilities, including the
committee’s purpose of overseeing the
accounting and financial reporting
processes of the company and the audits
of the company’s financial statements
and the responsibilities and authority
necessary to comply with SEC Rule
10A–3.44 The audit committee, or
another independent body of the board,
will also be required to conduct an
appropriate review and oversight of any
related party transaction.45 The
Exchange believes that this requirement
will limit the potential for self-dealing
in connection with any related party
transactions.
The Exchange would also require that
independent directors make
compensation decisions concerning the
chief executive officer and other
executive officers.46 Independent
directors would be required to meet on
a regular basis in executive sessions.47
These requirements for audit
committees, compensation decisions,
and executive sessions are identical to
those of NASDAQ and substantially
similar to those of the other national
securities exchanges and the Exchange
believes they will serve to empower the
independent directors of its listed
companies.
While the Exchange would require
that a listed company have at least three
independent directors to satisfy the
audit committee requirement described
above, it would not require that a
43 Id.
44 Proposed
Rule 5605(c)(1).
Rule 5630.
46 Proposed Rule 5605(d) and IM–5605–6. A
company can satisfy this requirement by having
their independent directors make these decisions in
executive session, or by having independent
directors sit on a compensation committee. If the
company chooses to use a compensation committee
and the committee is comprised of at least three
members, one director who is not independent as
defined in Rule 5605(a)(2) and is not a current
officer or employee or a Family Member of an
officer or employee, may be appointed to the
compensation committee under exceptional and
limited circumstances, provided the company
makes appropriate disclosure. Of course the
Exchange will adopt rules required by Section 952
of the Dodd-Frank Wall Street Reform and
Consumer Protection Act following the necessary
SEC rulemaking related to that provision. See
Listing Standards for Compensation Committees,
Release No. 33–9199 (April 6, 2011) (76 FR 18966).
47 Proposed Rule 5605(b).
wwoods2 on DSK1DXX6B1PROD with NOTICES_PART 1
45 Proposed
VerDate Mar<15>2010
14:49 May 11, 2011
Jkt 223001
majority of the company’s board of
directors be independent or an
independent nomination committee
because the Exchange believes those
requirements could impose significant
additional costs on these smaller
companies and therefore discourage
companies from pursuing an otherwise
beneficial listing. In that regard, given
the significant responsibilities imposed
on audit and compensation committee
members, directors who serve on these
committees are sometimes reluctant to
serve on other committees. As such, if
the BX Venture Market were to also
require an independent nominations
committee, companies may have to
increase the size of their boards and add
additional independent directors.
Similarly, requiring that independent
directors comprise a majority of a
company’s board could also require
companies to add additional
independent directors. In each case, the
need to add independent directors
would impose additional costs on the
company.48 Moreover, nothing in the
Commission’s rules or the Act mandate
these requirements.49 However, the
Exchange believes that the requirement
for executive sessions of the
independent directors will provide a
forum for the independent directors to
consider whether the governance
structure of the company is appropriate
and raise any concerns, notwithstanding
the lack of a majority independence and
nominations committee requirement.
Companies listing on the BX Venture
Market 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. For
this purpose, a company will be
considered to be listing in conjunction
with an initial public offering only if it
meets the conditions in SEC Rule 10A–
48 The 2008–2009 Director Compensation Report
prepared by the National Association of Corporate
Directors (available from https://
www.nacdonline.org/) found that the median total
direct compensation per director was $78,060 for
smaller companies (defined as companies with
annual revenues of $50 to $500 million).
49 See, e.g., Item 407(a) of Regulation S–K, which
requires disclosure of non-independent directors
who serve on nomination committees, implicitly
allowing such service.
PO 00000
Frm 00084
Fmt 4703
Sfmt 4703
3(b)(1)(iv)(A), namely that the company
was not, immediately prior to the
effective date of its registration
statement, required to file reports with
the Commission pursuant to Section
13(a) or 15(d) of the Act.
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 over-thecounter 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. For this purpose, a company
will be considered to be listing in
conjunction with an initial public
offering if immediately prior to listing it
does not have a class of common stock
registered under the Act.
A company that transfers to the BX
Venture Market from another national
securities exchange with a substantially
similar requirement will be immediately
subject to the audit and compensation
committee requirements, provided that
the company will be afforded the
balance of any grace period afforded by
the other market.
The Exchange will require companies
to adopt a code of conduct applicable to
all directors, officers and employees.50
Any waivers of the code for directors or
executive officers must be approved by
the board and disclosed. The Exchange
believes that this requirement will help
promote the ethical behavior of
individuals associated with companies
listed on the BX Venture Market.
In addition, the Exchange will require
shareholder approval when a company
adopts or materially amends a stock
option or purchase plan or other equity
compensation arrangement pursuant to
which stock may be acquired by
officers, directors, employees, or
consultants.51 The Exchange would not
require shareholder approval for other
share issuances, however, given that the
companies expected to list on the
Exchange may have a greater need to
issue shares more frequently or more
quickly, due to their expected smaller
size and the business challenges they
may be facing. As such, the Exchange
believes that the cost and delay
associated with seeking approval for
share issuances would discourage
companies from pursuing an otherwise
50 Proposed
51 Proposed
E:\FR\FM\12MYN1.SGM
Rule 5610.
Rule 5635.
12MYN1
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Notices
beneficial listing.52 Nonetheless, the
Exchange will require listed Companies
to provide notice of any 5% change in
its shares outstanding and any capital
raising transactions,53 and the Exchange
Staff will review such issuances for
public interest concerns, such as
issuances significantly below the market
price or for the benefit of related parties.
Appeal Process
wwoods2 on DSK1DXX6B1PROD with NOTICES_PART 1
Companies denied initial listing or
delisted by the Exchange would be
afforded an appeal process similar to
that contained in the existing Rule 4800
Series of the Exchange’s rules, which
was modeled on the process available to
companies listed on NASDAQ.54 The
Exchange’s Listing Qualifications Staff
only will be able to allow time-limited
exceptions for certain deficiencies from
the continued listing standards, such as
the failure to file periodic reports,
certain of the corporate governance
requirements and any quantitative
deficiency which does not contain a
compliance period.55 Other of the
continued listing requirements would
provide for automatic compliance
periods, including the market maker,
market value of listed securities, and
audit committee requirements, and a
determination that an officer, director,
promoter, or control person of a
company was involved in any event that
occurred during the prior five years
described in Item 401(f)(2)–(8) of
Regulation S–K under the Act.56 If the
company fails to timely solicit proxies
or hold its annual meeting or fails to
meet the minimum price requirement,
or if Staff has public interest concerns
in connection with the company, or if
a company represents itself as listed on
the NASDAQ Stock Market or refers to
itself as a NASDAQ listed-company, or
attempts to rely on an exemption from
state securities registration that
otherwise may be available under state
law to companies listed on the
Exchange, the Listing Qualifications
Staff will issue an immediate delisting
letter to the company.57 Any other
deficiency would result in the Listing
Qualifications Staff issuing a Public
Reprimand Letter or a delisting
notification.58 Hearings Panels
52 In this regard, the proposed rules are
comparable to the rules of the National Stock
Exchange, which require shareholder approval for
equity compensation issuances but not for other
share issuances. See National Stock Exchange Rule
15.6.
53 Proposed Rules 5250(e)(1) and (e)(7).
54 Nasdaq Listing Rules 5800–5899.
55 Proposed Rule 5810(c)(2).
56 Proposed Rule 5810(c)(3).
57 Proposed Rule 5810(c)(1).
58 Proposed Rule 5810(c).
VerDate Mar<15>2010
14:49 May 11, 2011
Jkt 223001
27717
Oversight of Market Activity
The Exchange represents that it will
have in place before the BX Venture
Market is operational a contractual
arrangement with FINRA to regulate
market activity on the BX Venture
Market, as it does today for NASDAQ.
FINRA’s oversight will include review
of trading that takes place on the overthe-counter market in securities listed
on the BX Venture Market. Based on its
breadth of experience overseeing the
over-the-counter markets and advanced
technology, FINRA will implement
electronic surveillance patterns
designed to detect a wide range of
potential issues, including, for example,
insider trading, front-running, fraud,
auto-execution manipulation, mid-point
cross manipulation, wash sales,
layering, open/close marking, and Reg
SHO clearing fails. FINRA intends to
revise a number of its existing
automated surveillance patterns to
incorporate NASDAQ OMX BX trading
activity and over-the-counter trading
activity in issues eligible for trading on
The BX Venture Market, and will
develop and implement specific
automated surveillance patterns to
address any rule and functionality
changes resulting from The BX Venture
Market initiative. FINRA will enhance
its review process by calibrating
surveillance patterns to detect potential
issues that may arise particularly in low
priced, less liquid stocks. In addition,
the Exchange and FINRA will leverage
the expertise of SMARTS Group, a
leading technology provider of market
surveillance solutions to exchanges and
regulators around the world,60 in
creating a new suite of quoting and
trading patterns to detect suspicious
activity in low priced and less widely
traded securities. Further, FINRA will
review the activity of firms on the BX
Venture Market when conducting their
reviews of these firms. This review will
include ‘‘focused exams’’ concentrated
on sales practices and firm oversight.
The review will include any other
activities required to effectively regulate
the Market.
The Exchange represents that an
agreement with FINRA for these
activities will be in place before the BX
Venture Market begins operations.
Notwithstanding the contractual
arrangement with FINRA, the Exchange
retains ultimate legal responsibility for
and control of all regulatory functions
for the Exchange.
The Exchange will monitor real-time
trading of securities listed on the BX
Venture Market, and plans to implement
a broad suite of realtime surveillance
patterns and functional analysis tools
based on the most up-to-date technology
solution, SMARTS.
The Exchange will provide a monthly
report to the Directors of the Division of
Trading and Markets and the Office of
Compliance, Inspections and
Examinations describing any significant
developments on the BX Venture
Market, including companies added or
removed from the market during that
period. In addition, the Exchange’s
Chief Regulatory Officer will provide
quarterly reports to the Directors of the
Division of Trading and Markets and the
Office of Compliance, Inspections and
Examinations describing the regulatory
activities of the Exchange and FINRA
during the prior quarter. The Exchange
will also provide copies of the Listing
Department’s procedures manuals and
surveillance procedures used by FINRA
and the Exchange to the Commission’s
Office of Compliance, Inspections and
Examinations. Finally, before the BX
Venture Market is operational, the
Exchange will represent, in a letter to
the Staff in the Commission’s Office of
Compliance Inspections and
Examinations, that it and FINRA have
adequate regulatory procedures and
programs in place to effectively regulate
the BX Venture Market and its listing
59 Section 6.1 of the By-Laws on NASDAQ OMX
BX, Inc.
60 SMARTS Group is a subsidiary of NASDAQ
OMX.
composed of individuals not affiliated
with the Exchange would be permitted
to grant additional, but limited time to
companies that received a delisting
notification, or to reverse a denial of
initial listing. A company could appeal
a decision of the Hearings Panel to the
Listing and Hearing Review Council,
which is a committee appointed by the
Exchange’s Board to act for the Board
with respect to listing decisions.59 The
Listing and Hearing Review Council
decision would be final, unless it is
called for a discretionary review by the
Exchange Board. The compliance
periods and discretion to allow a noncompliant company to remain listed are
generally shorter on the BX Venture
Exchange than would be allowed an
equivalent company listed on NASDAQ.
For example, 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. Similarly, 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 company.
PO 00000
Frm 00085
Fmt 4703
Sfmt 4703
E:\FR\FM\12MYN1.SGM
12MYN1
27718
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Notices
program, and adequate procedures and
programs in place to effectively process
trades and maintain the confidentiality,
integrity, and availability of the
Exchange’s systems.
wwoods2 on DSK1DXX6B1PROD with NOTICES_PART 1
Market Data
The Exchange has committed to broad
dissemination of quotation and last sale
information about BX Venture Market
listed securities to ensure that public
investors and all market participants
have all the information needed to make
informed investing and trading
decisions. Information about securities
listed on the BX Venture Market will be
disseminated via several mechanisms.
First, BX Venture Market listed
securities will have real-time
consolidated market data for both
quotes and trades consistent with that
provided by the network processors for
national market system securities. The
Exchange notes that operation of the BX
Venture Market will be conditioned by
the Commission upon approval and
operation of an arrangement by the
Exchange and FINRA to consolidate and
disseminate the best quotation and last
sale data for BX Venture Market listed
securities that is made available by BX
and FINRA.61 The consolidated market
data for BX Venture Market listed
securities will be made available at no
charge for the foreseeable future.62
Second, the Exchange will disseminate
real-time last sale data, tick-by-tick
details, and best bid and offer
quotations and trade data from the BX
execution system.63
Market data regarding BX Venture
Market listed securities will be
disseminated in a manner that facilitates
adoption and use of the new data
provided, in that the Exchange will
ensure ease and efficiency for market
data vendors and potential recipients.
Specifically, consolidated data will
leverage the widespread distribution
network and administrative operations
that the Exchange already employs
including existing market data
contracts, connectivity ports,
transmission lines, network operations,
data message specifications, billing and
auditing. By leveraging existing data
technology and administration, data
regarding BX Venture Market listed
securities will become instantly
61 The Commission notes that its order in Section
VI, infra, does not contain this condition.
62 The Exchange will, as always, be required to
file a proposed rule change in order to assess a fee
for this data in the future.
63 BX Last Sale provides real-time last sale data
from the BX execution systems. BX TotalView
provides tick-by-tick details for all displayable
orders in the BX Execution systems, and BX Basic
provides best bid and offer quotations and trade
data from the BX execution system.
VerDate Mar<15>2010
14:49 May 11, 2011
Jkt 223001
available through hundreds of market
data distributors reaching an audience
of millions of potential users via
multiple distribution channels.
Further, the Exchange is committed to
ensuring that BX Venture Market
securities are clearly distinguished, and
distinguishable, from securities listed
on the traditional exchanges on those
data products and to end-users of the
data. To that end, all market data for BX
Venture Market securities will include a
unique data identifier in the ‘‘Market
Center’’ field to distinguish the security
from those listed on other exchanges
and the over-the-counter markets. This
Market Center identifier is already
utilized by the Exchange and network
processors on every consolidated and
proprietary data feed supplied by the
network processors and by NASDAQ
and other national securities exchanges.
The Market Center identifier is utilized
by the network processors to demarcate,
for example, NASDAQ (‘‘Q’’), NYSE
(‘‘N’’), Amex (‘‘A’’), Arca (‘‘P’’), and OTC
stocks. BX Venture Market listed
securities would be identified with its
own unique Market Center identifier ‘‘B’’
on any new BX consolidated data feeds
and in the BX Venture Market Daily List
data product.64 The Daily List data
product will be adopted through an
amendment to Rule 7022 in a separate
filing with the Commission.
The Exchange will require market
data distributors, through distribution
agreements and by amendments to its
global data policy document to
prominently identify the BX Venture
Market as the listing market, and, where
the display of text is not consistent with
the display methodology or user needs
of the distributor, to use the Market
Center identifier ‘‘B’’ to prominently
display the listing market with
quotation and last sale information for
BX Venture Market-listed securities.
Every market data vendor that
distributes BX Venture Market data to
users must sign a data distribution
agreement. These agreements bind the
data vendor to abide by the terms and
conditions of data purchase and usage,
including conditions governing data
display within the global data policy
document. The requirement to
prominently display the listing market
will be a legal obligation backed by
contractual sanctions including
64 At the request of Commission staff, the
Exchange assessed the feasibility of adopting a
multi-character market center identifier, and it
concluded that this proposal is infeasible. Singlecharacter market center identifiers are hard-coded
into a worldwide network of market data
distributors and cannot be modified. The Exchange
also investigated without success adopting other
options including root symbol modifiers and
lengthy security symbols.
PO 00000
Frm 00086
Fmt 4703
Sfmt 4703
termination of the distribution
agreement. These agreements have been
used effectively in the past to require
the display of key data elements to
customers. The Exchange represents
that these agreements will be in place
before the BX Venture Market begins
operations, and that the Market Center
identifier will be distributed and
required to be displayed upon the
launch of the market.
Market data distributors and data
users, including retail investors, are
already familiar with this approach.
Data distributors such as Bloomberg and
Thompson Reuters, Internet portals
such as Google and Yahoo, mutual fund
complexes and brokers such as
Vanguard, Schwab, and E*Trade, all
currently use Market Center identifiers
to understand where a security is listed
and display that information on their
Web sites and portals, typically next to
the company name. For example, on
Yahoo’s Web site, ‘‘NasdaqGS’’ is
currently displayed next to the name of
all companies listed on The NASDAQ
Global Select Market; that display
would read, for BX Venture Market
companies, ‘‘BX Venture’’ or ‘‘BX
Venture Market.’’ The requirement that
the Market Center identifier for BX
Venture Market listed securities be
prominently displayed by all of these
market participants will mean that
investors viewing a quotation or last
sale report will be able to clearly
distinguish a stock listed on the BX
Venture Market from those listed on
NASDAQ or other markets.
The Exchange will, in connection
with the launch of the BX Venture
Market, proactively review the displays
of prominent data distributors and
require immediate compliance if they
fail to meet the requirements of the
market data agreements. Following the
launch of the BX Venture Market, the
Exchange will conduct periodic audits
of all market data vendors to ensure
compliance. If a market data vendor
does not satisfy the Exchange’s display
requirements, the Exchange will take
action against the vendor, up to and
including terminating the vendor’s
ability to receive data from the
Exchange. The Exchange is committed
to working with market participants and
the Commission to evaluate, on an ongoing basis, whether this display
requirement is effective in
distinguishing BX Venture Market-listed
securities from other national exchangelisted securities in order to reduce
investor confusion.
Symbology
The assignment of symbols for
companies listed on the BX Venture
E:\FR\FM\12MYN1.SGM
12MYN1
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Notices
wwoods2 on DSK1DXX6B1PROD with NOTICES_PART 1
Market will be governed by the existing
National Market System Plan for the
Selection and Reservation of Securities
Symbols, which is the exclusive means
of allocating and using trading symbols.
Pursuant to that Plan, securities listed
on the BX Venture Market, like every
other national securities exchange
today, are eligible to have a trading
symbol of one to five characters. This
eligibility is important because the BX
Venture Market is intended to afford a
listing venue for companies formerly
listed on other national securities
exchanges, which will want to retain
their symbols.65 In approving the
symbology Plan, the Commission
distinguished securities listed on an
exchange, which can trade with a
symbol of one to five characters, from
those trading over the counter, which
can trade only with a four or five
character symbol, noting that
‘‘[e]xchange listing standards are
approved by the Commission and must
include corporate governance
requirements that comply with Rule
10A–3 under the Exchange [sic] Act.
Issuers traded on over-the-counter
equity venues (including the OTCBB
and Pink Sheets) are not subject to such
listing standards.’’66
Although all BX Venture Market
listed companies are subject to listing
standards approved by the Commission,
and must meet corporate governance
requirements similar to those required
for listing on other national securities
exchanges, the Exchange will require
Companies not previously listed on a
national securities exchange to adopt a
four or five character ticker symbol as a
prerequisite to listing on the BX Venture
Market. Companies that list on the BX
Venture Market following a delisting
from another national securities
exchange and that traded on that
exchange with a one, two, or three
character ticker symbol, will be
65 The Commission found that allowing all
exchanges to utilize from one to five characters
minimizes investor confusion when a company
changes its listing from one venue to another.
Securities Exchange Act Release No. 58904
(November 6, 2008), 73 FR 67218 at 67227
(November 13, 2008) (‘‘The Commission finds that
allowing the automatic portability of a symbol in
the event that an issuer transfers its listing to
another exchange will further the purposes of the
Act and should reduce investor confusion by
allowing the symbol already associated with the
issuer to continue to be used by the issuer on the
new exchange.’’). The Commission also noted that
the portability feature of the plan would promote
‘‘competition among listing markets, including
potential new listing markets.’’ Id. at 67224
(emphasis added).
66 Id. at 67225 (footnotes omitted). The Exchange
notes that it will have listing standards approved
by the Commission, including corporate governance
requirements that comply with Rule 10A–3, and go
far beyond those requirements.
VerDate Mar<15>2010
14:49 May 11, 2011
Jkt 223001
permitted to retain their ticker symbol
when listing on the BX Venture Market,
provided that the company must, prior
to listing on the BX Venture Market,
issue a press release announcing its
delisting from the other exchange and
comply with the disclosure
requirements of Item 3.01 of Form 8–
K.67
Fees
Companies would be required to
submit an application review fee of
$7,500 with their application for listing
on the BX Venture Market, and would
be required to pay a $15,000 annual fee
for the first class listed on the Exchange
and $5,000 for each additional class.
The annual fee would be pro-rated for
a company’s first year of their listing.
The application review fee will allow
the Exchange to recover some of the
costs associated with the initial review
of the company’s application, including
staff time and the systems supporting
the initial review process. The annual
fee would similarly offset the staff and
system costs of continued monitoring of
the company. The proposed application
and annual fees are substantially less
than those charged by other national
securities exchanges.68 Companies that
were previously listed on NASDAQ
would receive a credit, which can only
be used to offset the annual fee, for any
annual fees paid to NASDAQ during the
same calendar year that they initially
list on the BX Venture Market, for the
months following their delisting from
NASDAQ. The Exchange believes this
credit is a reasonable allocation of fees
under the Act because it will avoid a
double charge of a company that has
paid NASDAQ a non-refundable fee to
provide similar services as those that
will be provided by the Exchange under
its annual fee. As such, the Exchange
believes it would be inequitable to
charge the company a second fee in the
same year to support the provision of
those services. Companies eligible for a
credit would of course undergo the
same rigorous initial listing application
process to which all companies seeking
a listing on the Exchange are subject.
67 Proposed
Rule 5210(j).
example, the initial listing fees for listing
common stock on the NASDAQ Capital Market
range from $50,000 to $75,000 and the annual fees
are $27,500; the initial listing fees for listing
common stock on NYSE Amex range from $50,000
to $70,000 and the annual fees range from $27,500
to $40,000; the initial listing fees for listing
common stock on the New York Stock Exchange
range from $150,000 to $250,000 and the annual
fees range from $38,000 to $500,000. See Nasdaq
Rule 5920(a)(1) and (c)(1)(A), NYSE Amex Listed
Company Guide Sections 140 and 141, and NYSE
Listed Company Manual 902.03.
68 For
PO 00000
Frm 00087
Fmt 4703
Sfmt 4703
27719
Fees would also be assessed for
certain one-time events, such as a
$7,500 fee for substitution listing events,
a $2,500 fee for record-keeping changes,
and a $4,000 or $5,000 fee for a written
or oral hearing, respectively. These fees
are identical to those charged on
NASDAQ and are designed to recoup
the costs of making changes to the
Exchange’s systems and distributing
those changes to market data users.
Under Proposed Rule 5602, a
company considering a specific action
or transaction can request an
interpretation from the Exchange, and in
return, the Exchange will prepare a
responsive letter as to how the rules
apply to the proposed action or
transaction. No company is required to
request an interpretation, and Staff will
orally discuss the application of the
Exchange’s rules with companies
without any additional charge.
However, if the company seeks a written
response, the Exchange proposes to
charge a $15,000 fee to recoup the cost
of Staff’s time in reviewing and
responding to the request.69 The
Exchange believes that the fee is
appropriate, as the written response is
applicable only to the company that
requests it. The Exchange also believes
that the written interpretive process,
and the associated fee, will provide an
additional public benefit in that Staff
will prepare anonymous summaries of
interpretations, as well as frequently
asked questions based on requests
received from companies, including
those withdrawn before a written
response is issued. These summaries
and questions will be posted on the
Exchange’s Web site so that the general
public, practitioners, and other
companies can better understand how
the Exchange applies its rules and
policies. In this way, the overall need to
request such interpretations is
minimized, thus reducing burdens on
companies and Staff alike.
Other Changes
As part of the proposed rule change,
the Exchange is deleting portions of the
Rule 4000 Series related to the listing
and trading of securities eligible to be
listed on the BX Venture Market and
correcting cross-references to those
deleted sections. The Exchange is
maintaining those provisions of the Rule
4000 Series applicable to securities that
will not be eligible to be listed on the
BX Venture Market, such as Portfolio
Depository Receipts, Index Fund Shares,
69 No fee would be charged in connection with
requests involving a company’s initial listing
application given that the company will pay an
application fee.
E:\FR\FM\12MYN1.SGM
12MYN1
27720
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Notices
Trust Issued Receipts, Securities Linked
to the Performance of Indexes and
Commodities, and Managed Fund
Shares, to enable the continued trading
of such securities on the Exchange
pursuant to unlisted trading privileges.
The Exchange is deleting Rule 4430,
which provided listing criteria for
limited partnership rollup transactions
using language that was substantially
similar to language contained in FINRA
Rule 2310. Instead, the Exchange
addresses these issues in proposed Rule
5210(h). This rule adopts the same
approach taken by NASDAQ and NYSE
AMEX by incorporating the FINRA rule
by reference.70 In this manner, the
Exchange satisfies the requirement of
Section 6(b)(9) of the Act,71 which
requires that the rules of a national
securities exchange prohibit certain
limited partnership rollup transactions.
The Exchange is also moving the
additional requirements applicable to
the listing of securities issued by
NASDAQ OMX or its affiliates from
Rule 4370 to Rule 5701.
wwoods2 on DSK1DXX6B1PROD with NOTICES_PART 1
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
the provisions of Section 6 of the Act,72
in general and with Section 6(b)(5) of
the Act,73 in particular in that it is
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
regulating, clearing, settling, processing
information with respect to, and
facilitating transactions in securities, to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest. The proposed new
listing venue will advance these goals
by allowing qualified issuers to list on
a transparent, well-regulated
marketplace with increased
transparency about the trading of these
securities, thereby protecting investors
and the public interest and helping to
prevent fraudulent and manipulative
acts and practices.
In addition, the Exchange believes
that the proposed market is consistent
with Section 17B of the Act, which
codifies Congress’ findings that it is in
the public interest and appropriate for
the protection of investors and the
maintenance of fair and orderly markets
70 Nasdaq Rule 5210(h) and NYSE Amex Listed
Company Guide Section 126.
71 15 U.S.C. 78f(b)(9).
72 15 U.S.C. 78f.
73 15 U.S.C. 78f(b)(5).
VerDate Mar<15>2010
14:49 May 11, 2011
Jkt 223001
to improve significantly the information
available to brokers, dealers, investors,
and regulators with respect to
quotations for and transactions in penny
stocks and that a fully implemented
automated quotation system for penny
stocks would meet the information
needs of investors and market
participants and would add visibility
and regulatory and surveillance data to
that market. Section 17B further
instructs the Commission to facilitate
the widespread dissemination of
reliable and accurate last sale and
quotation information with respect to
penny stocks, as the Exchange will for
securities listed on the BX Venture
Market, through one or more automated
quotation systems operated by a
registered securities association or a
national securities exchange, providing
reliable pricing information and
reporting of transactions.
Finally, the Exchange believes the
fees proposed in this filing are
consistent with Section 6 of the Act,74
in general, and with Section 6(b)(4) of
the Act,75 in particular, in that they
provide for the equitable allocation of
reasonable dues, fees and other charges
among members and issuers and other
persons using any facility or system
which the Exchange operates or
controls. The application and listing
fees are substantially lower than
comparable fees on The NASDAQ Stock
Market and other national securities
exchanges, commensurate with the
smaller size and resources of the
companies the BX Venture Market will
attract. The application review fee and
annual fees will allow the Exchange to
recover some of the costs associated
with the initial review of the company’s
application and monitoring of the
company, including staff time and the
systems supporting the review and
monitoring. The fee schedule provides
for a credit to offset an annual fee paid
to NASDAQ for any company that lists
on the BX Venture Market after a
delisting from NASDAQ during the
same calendar year. The Exchange
believes this is a reasonable allocation
of fees under the Act because it would
be inequitable to charge a company a
second fee in the same year to support
services similar to those it had already
paid for previously.
Fees are proposed for certain one-time
events, such as substitution listings,
recordkeeping changes, and written or
oral hearings. These fees, which are the
same as those charged on NASDAQ,
offset some of the Exchange’s costs
associated with facilitating these events.
74 15
75 15
PO 00000
U.S.C. 78f.
U.S.C. 78f(b)(4).
Frm 00088
Fmt 4703
Sfmt 4703
Fees charged for a formal, written
interpretation of the application of the
Exchange’s rules to a specific
transaction or event similarly serve to
recoup the cost of staff’s time in
providing the interpretation. The
Exchange believes these fees are
reasonable and fairly allocated. Staff
will orally discuss the application of the
Exchange’s rules without any charge,
and the Exchange provides written
summaries of interpretations, the
answers to frequently asked questions,
and other guidance on its publicly
available Web site. If, however, a
company voluntarily requests a written
interpretation tailored its unique facts, it
is reasonable to recoup some cost of
Staff’s time for that process.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will result in
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act, as amended.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
Written comments were neither
solicited nor received.
III. Discussion
After careful review of the proposal
and consideration of the comment
letters,76 the Commission finds that the
proposed rule change to establish a new
listing market on the Exchange is
consistent with the requirements of the
Act and the rules and regulations
thereunder applicable to a national
securities exchange and, in particular,
the requirements of Section 6 of the
Act.77 Specifically, the Commission
finds that the proposal is consistent
with Section 6(b)(5) of the Act,78 which,
among other things, requires that rules
of a national securities exchange to be
designed to promote just and equitable
principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, to protect
investors and the public interest, and to
not permit unfair discrimination
between customers, issuers, brokers, or
76 The Commission received eleven comment
letters on the proposal. Of the comment letters
received, five supported the proposal (Madrona
Letter; Angel Letter; NVCA Letter; TechNet Letter;
and BIO Letter), one generally supported the
proposal but expressed several concerns (Niehoff
Letter), and five opposed the proposal (MSD Letter;
Pink OTC Markets Letter; OTC Markets Group
Letter; MSD Letter II; and McCarthy Letter).
77 15 U.S.C. 78f.
78 15 U.S.C. 78f(b)(5).
E:\FR\FM\12MYN1.SGM
12MYN1
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Notices
dealers.79 In addition, the Commission
finds that the proposed fees are
consistent with Section 6(b)(4) of the
Act,80 which requires that an exchange
have rules that provide for the equitable
allocation of reasonable dues, fees, and
other charges among its members and
issuers and other persons using its
facilities.
wwoods2 on DSK1DXX6B1PROD with NOTICES_PART 1
A. Benefits of the BX Venture Market
As noted above, the Exchange
believes that the BX Venture Market
will provide a transparent, wellregulated marketplace for companies
being delisted from another national
securities exchange for failure to meet
quantitative listing standards and for
smaller companies contemplating an
initial exchange listing.81 In addition,
the Exchange notes that the BX Venture
Market could make it easier for smaller,
private, venture-backed companies and
companies that currently trade in the
over-the-counter market to raise capital,
thereby, according to the Exchange,
promoting job creation.82
In the Order Instituting Proceedings,
the Commission asked whether
commenters agree with the Exchange’s
contention that a BX listing could help
companies raise capital and thus
promote job creation within the United
States. Five commenters supported this
statement,83 while one commenter
disagreed.84 Commenters in support
asserted that, because of the lower
listing standards of the BX Venture
Market, this market will be particularly
valuable to smaller and emerging
companies that wish to make a public
offering but are unable to meet the
quantitative listing standards of other
national securities exchanges.85 A few
commenters also expressed their belief
that the BX Venture Market would
attract companies and capital that might
otherwise be drawn to foreign
markets.86 Three commenters opined
79 In approving this proposed rule change, the
Commission notes that it has considered the
proposed rules’ impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
80 15 U.S.C. 78f(b)(4).
81 See Amendment No. 2.
82 Id.
83 See Madrona Letter, supra note 5 at 1–2;
TechNet Letter, supra note 8 at 1; BIO Letter, supra
note 8 at 2; NVCA Letter, supra note 8 at 2–3; and
Angel Letter, supra note 8 at 3–4. See also Niehoff
Letter, supra note 8 at 3.
84 See OTC Markets Group Letter, supra note 8.
85 See Madrona Letter, supra note 5 at 1; TechNet
Letter, supra note 8 at 1; BIO Letter, supra note 8
at 1–2; and NVCA Letter, supra note 8 at 1–2.
86 See Madrona Letter, supra note 5 at 2. See also
Angel Letter, supra note 8 at 8 (stating that
companies voluntarily ‘‘go dark’’ and that the SEC
has made it easier for foreign issuers to deregister
from U.S. markets) and Niehoff Letter, supra note
8 at 3 (stating that foreign second and third tier
VerDate Mar<15>2010
14:49 May 11, 2011
Jkt 223001
that the BX Venture Market would
attract companies that would otherwise
transfer to, or remain on, the Pink
Sheets or the OTC Bulletin Board,
where there is less regulation and
transparency.87 The commenter who
disagreed with the Exchange’s statement
believed that the over-the-counter
market currently provides a robust
solution for companies that are unable
to meet the listing standards of a
national securities exchange, and that
the BX Venture Market seeks to occupy
a niche that is already well-served by
the over-the-counter market.88
The Commission believes the BX
Venture Market could offer a number of
benefits to smaller issuers and those
who seek to invest in them. The BX
Venture Market would provide small
companies with an alternative to being
quoted on the over-the-counter market
by offering these companies the
opportunity to list their securities on an
exchange, in an environment that offers
the potential of enhanced liquidity,
transparency and oversight. Moreover,
providing an alternative to the over-thecounter market could also facilitate
competition for the quotation/listing of
securities of smaller issuers.89 The
availability of an exchange listing, and
the prospect of more efficient secondary
market trading in the securities of
smaller issuers, could facilitate their
ability to raise capital and invest in the
growth of their businesses.
As discussed more fully below,90 the
Commission believes the Exchange has
appropriately addressed the potential
risks associated with the listing of
smaller issuers on an exchange by,
among other things, providing for more
rigorous vetting of listing applicants,
enhanced surveillance of trading in BXlisted securities, and clear disclosure to
investors that BX-listed securities differ
from other exchange-listed securities.
markets have yielded positive acceptance and
economic results for U.S. issuers that have sought
foreign marketplaces for their listings).
87 See TechNet Letter, supra note 8 at 1. See also
NVCA Letter, supra note 8 at 3 and Angel Letter,
supra note 8 at 10. One commenter specifically
stated that the ‘‘Commission should quickly
approve experiments like [the BX Venture Market]
in the small-cap sector because of the crisis in
capital formation indicated by the dramatic drop in
the number of exchange-listed U.S. companies.’’
Angel Letter, supra note 8 at 1.
88 See OTC Markets Group Letter, supra note 8 at
2.
89 The Commission notes that such companies
could determine not to pursue a listing on the BX
Venture Market if they determine that the over-thecounter market better serves their needs. In
addition, the Commission notes that securities of
small companies could continue to be traded overthe-counter, even if listed on the BX Venture
Market.
90 See Section III.C, infra.
PO 00000
Frm 00089
Fmt 4703
Sfmt 4703
27721
B. Listing Standards
The Commission believes that, among
other things, listing standards must be
designed to assure that only bona fide
companies with substantial public float,
investor base, and trading interest will
be listed. The development and
enforcement of adequate listing
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.91 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.92 Adequate standards are
especially important given the
expectations of investors regarding
exchange trading and the imprimatur of
listing on a particular market.93 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.
While the BX Venture Market would
have quantitative listing standards that
are lower than those of any other
national securities exchange with an
active listings program, the Commission
notes that the Exchange proposes to
adopt a number of enhanced vetting,
surveillance/examination, and
disclosure requirements.94 As discussed
in more detail below, the Commission
views these enhanced requirements as
being a necessary and integral part of
the BX Venture Market proposal.95
Accordingly, for the reasons discussed
below, the Commission finds that the
BX Venture Market listing standards,
when viewed in conjunction with the
Exchange’s enhanced vetting,
surveillance/examination, and
disclosure requirements, are consistent
with the Act.
91 See, e.g., Securities Exchange Act Release No.
61912 (April 15, 2010), 75 FR 21094, 21094 (April
22, 2010) (SR–NYSE–2010–15).
92 See id.
93 See id.
94 See Section III.C, infra.
95 See id.
E:\FR\FM\12MYN1.SGM
12MYN1
wwoods2 on DSK1DXX6B1PROD with NOTICES_PART 1
27722
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Notices
1. Quantitative Standards
In the Order Instituting Proceedings,
the Commission asked whether the
proposed initial and continued listing
standards and the delisting process for
the BX listing market are sufficiently
designed to prevent the listing of stocks
that are of a type that historically have
been prone to fraudulent schemes. One
commenter stated that the BX Venture
Market will be a listing market for
penny stocks because of the proposed
minimum bid price requirements.96 In
its response, the Exchange noted that its
listed penny stocks will not be exempt
from the Commission’s penny stock
rules,97 and stated its belief that its
regulatory program will provide
appropriate and adequate oversight.98
Another commenter also expressed
concern regarding the level of certain
quantitative listing standards of the BX
Venture Market.99
The Commission believes that the
proposed quantitative listing standards,
while lower than those of any other
national securities exchange with an
active listings program, are reasonably
designed to help ensure that a fair and
orderly market be maintained. As
proposed, the minimum bid price per
share for the initial listing of securities
not previously listed on a national
securities exchange is $1.00,100 while
the minimum bid price for securities
previously listed on a national securities
exchange is $0.25.101 For purposes of
the initial bid price requirement, a
company will be considered to have
been previously listed on another
national securities exchange if it was
listed on such an exchange at any time
during the three months before its
listing on the BX Venture Market, or in
the case of a company that applies to list
prior to September 30, 2011, if it was
listed on another national securities
exchange at any time between January 1,
2010 and September 30, 2011.102
With respect to the definition of
‘‘previously listed on a national
securities exchange,’’ one commenter
stated that ‘‘[w]e do not understand why
the Exchange suggests a three year and
nine month look-back for initially
determining whether a security was
previously listed on another exchange,
and only a three-month look-back when
making such a determination after
96 See MSD Letter, supra note 5 at 2. See also
MSD Letter II, supra note 8 at 1–2.
97 See 15 U.S.C. 78o(h) and 17 CFR 240.15g–1–
100.
98 See BX Response Letter, supra note 9 at 4.
99 See McCarthy Letter, supra note 8 at 2.
100 See BX Rule 5505(a)(5).
101 See BX Rule 5506(a)(4).
102 See BX Rule 5506(b).
VerDate Mar<15>2010
14:49 May 11, 2011
Jkt 223001
September 30, 2011.’’ 103 The
Commission notes that, subsequent to
this comment, the Exchange shortened
the look-back period, which will now
begin on January 1, 2010. The Exchange
believes that this look-back period is
appropriate because the BX Venture
Market would not have been available to
such companies when they were
delisted.104 Further, the Exchange stated
that it is appropriate to continue this
treatment until September 30, 2011
because it will give such companies an
adequate opportunity to learn about the
BX Venture Market, complete their
applications, and have their
applications processed by the
Exchange.105 Additionally, the
Exchange stated that the three-month
look-back as period after September 30,
2011 is appropriate because it will allow
a company sufficient time to apply for
listing on the BX Venture Market and
have its application processed.106
For continued listing, all securities
will be required to maintain a minimum
bid price of at least $0.25 per share.107
With respect to the bid price
requirement for continued listing on the
Exchange, the Commission notes that if
the security does not maintain a
minimum $0.25 per share bid price for
20 consecutive trading days, Exchange
staff would issue a Staff Delisting
Determination to inform the company
that its securities are immediately
subject to suspension and delisting from
the Exchange.108 While a company
could appeal that determination to a
Hearings Panel,109 such an appeal
would not stay the suspension of the
security.110 The Hearings Panel may
determine that the company has
regained compliance if the security
maintains a closing bid price of $0.25
per share or more for at least 10
consecutive trading days on the overthe-counter market, prior to the
Hearings Panel’s Decision.111 In
addition, companies that have
previously failed to comply with the
103 OTC
Markets Letter, supra note 8 at 8.
Amendment No. 2. The Exchange also
stated that a number of companies were delisted in
2010 as a result of the financial crisis, and this lookback will allow these companies, which may have
recovered but not yet meet the initial listing
requirements of another exchange, to list on the BX
Venture Market. See id.
105 See id.
106 See id.
107 See BX Rule 5550(d).
108 See BX Rule 5810(c)(1).
109 The Hearings Panel is an independent panel
made up of at least two persons who are not
employees or otherwise affiliated with the
Exchange or its affiliates, and who have been
authorized by the Exchange’s Board of Directors.
See BX Rule 5805(d).
110 See BX Rule 5815(a)(1)(C).
111 See BX Rule 5815(c)(1)(F).
104 See
PO 00000
Frm 00090
Fmt 4703
Sfmt 4703
minimum bid price requirement would
have stricter requirements for achieving
compliance. Specifically, for a company
that has received three or more Staff
Delisting Determinations for failure to
comply with the minimum bid price
requirement in the prior 12 months, the
Hearings Panel would determine that
the company has regained compliance
only if the security maintains a closing
bid price of $0.25 per share or more for
at least 20 consecutive trading days
prior to the Hearings Panel’s
decision.112 The Commission believes
that this higher requirement for
companies that were previously noncompliant is appropriate to reduce the
likelihood of future instances of noncompliance and the potential investor
confusion concerning the ability of the
company to remain listed.
The Commission also notes that,
according to the Exchange, the
securities listed on the BX Venture
Market would be considered penny
stocks under Rule 3a51–1 under the Act,
unless they qualify for one of the
exceptions from the definition of a
penny stock as set forth in Rule 3a51–
1.113 As such, broker-dealers would be
required to pre-approve their customers
for trading in penny stocks and
investors will obtain the disclosures
required to be made by broker-dealers in
connection with penny stock
transactions, providing them with trade
and market information prior to
effecting a transaction.114 Further, there
will be no ‘‘blue sky’’ exemption
available under Section 18 of the
Securities Act of 1933 for BX Venture
Market-listed securities,115 so
companies will be required to satisfy
state law registration requirements and
other state laws that regulate the sale
and offering of securities. Because some
state laws and regulations may provide
an exemption from certain registration
or ‘‘blue sky’’ requirements for
companies listed on the former Boston
Stock Exchange, based on the higher
listing standards previously applied by
that Exchange, BX Rule 5103(c) would
provide that the Exchange will not list,
and will delist any BX Venture Market112 See
Id.
CFR 240.3a51–1. The Exchange noted that
it is not seeking an exemption from the penny stock
rules for securities listed on the BX Venture Market:
However, a security is not a penny stock if it has
a price in excess of $5 or if its issuer has net
tangible assets in excess of $2 million (if the issuer
has been in continuous operation for at least three
years) or $5 million (if the issuer has been in
continuous operation for less than three years) or
average revenue of at least $6 million for the last
three years. See Amendment No. 2 (citing Rule
3a51–1(d) and (g), 17 CFR 240.3a51–1(d) and (g)).
114 See Amendment No. 2.
115 15 U.S.C. 77r.
113 17
E:\FR\FM\12MYN1.SGM
12MYN1
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Notices
listed company that attempts to rely on
such an exemption. Finally, as
discussed in more detail below,116 the
Commission notes that the Exchange
will have in place enhanced vetting, due
diligence, and surveillance procedures
designed to limit the initial or
continued listing of companies that may
be more prone to manipulation or fraud.
Furthermore, the Commission notes
that the BX Venture Market would be an
alternative to the over-the-counter
market and could provide important
benefits to small companies who
otherwise would not qualify for an
exchange listing. In particular, the
Exchange’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,117 but only
requires companies 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.118 The Commission also
notes that trading in BX-listed securities
would be subject to regulation by the
Exchange through its trading rules and
surveillance authority.
wwoods2 on DSK1DXX6B1PROD with NOTICES_PART 1
2. Qualitative Listing Standards
In the Order Instituting Proceedings,
the Commission asked whether the
proposed corporate governance
standards for the BX listing market are
sufficiently designed to assure an
appropriate level of corporate
governance. One commenter expressed
support for the proposed corporate
governance rules for BX-listed
companies and stated that requiring
small and emerging companies to have
majority independent boards would be
inappropriate and impose unnecessary
costs upon these companies and their
shareholders.119 This commenter also
expressed support for not requiring
shareholder approvals for capital raising
activities and stated that small
companies frequently need to raise
money without the expense and delay
associated with a shareholder vote in
116 See
Section III.C, infra.
OTC Bulletin Board is not a registered
national securities exchange and is therefore not
subject to the requirements of Section 6 or Section
19 of the Act.
118 See Amendment No. 2.
119 See NVCA Letter, supra note 8 at 2.
117 The
VerDate Mar<15>2010
14:49 May 11, 2011
Jkt 223001
order to thrive and react to
opportunities.120
The Commission believes that the
proposed qualitative listing
requirements strike a reasonable balance
between protecting the interests of
investors and recognizing that smaller
and emerging companies, with fewer
resources, are likely to list on the BX
Venture Market. The Commission notes
that, although the Exchange would not
require that a majority of the company’s
board of directors be independent or an
independent nomination committee, the
Exchange’s listing rules impose
independence requirements designed to
help assure that certain key decisions of
smaller companies are made by
independent directors. Specifically, the
BX Rules provide the independent
directors with significant
responsibilities, as well as an
opportunity to meet separately from
other directors. For example,
independent directors must have
regularly scheduled meetings at which
only independent directors are present
(‘‘executive sessions’’).121 In addition,
the audit committee must be fully
independent,122 and compensation of
the executive officers of the company
must be determined, or recommended to
the board for determination, either by
independent directors constituting a
majority of the board’s independent
directors in a vote in which only
independent directors participate, or a
compensation committee comprised
solely of independent directors.123
These provisions are designed to help
lessen the potential of independent
directors being dominated or overly
influenced by other directors.
One commenter objected to the
proposed rules that allow BX Venture
Market-listed companies to phase-in
compliance with independent audit
committee and compensation committee
requirements.124 The commenter stated
120 See
id. at 2–3.
BX Rule 5605(b).
122 See BX Rule 5605(c)(2). In addition, BX Rule
5605(c)(2) requires that each member of the audit
committee must meet the criteria for independence
set forth in Rule 10A–3(b)(1) under the Act (subject
to the exemptions provided in Rule 10A–3(c) under
the Act). See id. BX Rule 5605(c)(2)(B), which is
identical to Nasdaq Capital Market Rule
5605(c)(2)(B), provides an exception to this
independence requirement under exceptional and
limited circumstances.
123 See BX Rule 5605(d). The chief executive
officer may not be present during the voting or
deliberations on the chief executive officer’s
compensation. See id. BX Rule 5605(d)(3), which is
identical to Nasdaq Capital Market Rule 5605(d)(3),
provides an exception to this independence
requirement under exceptional and limited
circumstances.
124 See Pink OTC Markets Letter, supra note 5 at
5–6 and OTC Markets Group Letter, supra note 8
at 6.
121 See
PO 00000
Frm 00091
Fmt 4703
Sfmt 4703
27723
that BX-listed companies should be
required to comply immediately with
the proposed independent director
requirements for the audit and
compensation committees and that the
Exchange’s failure to require full
compliance with these requirements
prior to listing will likely result in some
investors purchasing securities of
companies that have inadequate audit
standards or corporate governance
practices.125 In response, the Exchange
stated that the proposed phase-in
periods are identical to the rules of
other national securities exchanges 126
and were permitted by the
Commission’s rulemaking regarding
audit committees.127 The Exchange also
explained that the proposed phase-in
provisions acknowledge the difficulty
emerging companies have in recruiting
independent directors.128
The Commission notes that the phasein provisions for audit and
compensation committees are
substantially similar to those of Nasdaq
and other national securities
exchanges 129 and acknowledges the
difficulty emerging companies have in
recruiting independent directors. In
addition, the Commission notes that,
while the Exchange will require
shareholder approval when a company
adopts or materially amends a stock
option or purchase plan or other equity
compensation arrangement pursuant to
which stock may be acquired by
officers, directors, employees, or
consultants,130 the Exchange would not
require shareholder approval for other
share issuances. The Exchange believes
that the companies expected to list on
the Exchange may have a greater need
to issue shares more frequently or more
quickly, due to their expected smaller
size and the business challenges they
may be facing.131 However, the
Commission notes that the Exchange
will require listed Companies to provide
notice of any 5% change in its shares
outstanding and any capital raising
transactions,132 and the Exchange Staff
125 See
OTC Markets Group Letter, supra note 8
at 6.
126 See BX Response Letter, supra note 9 at 6
(citing Nasdaq Rule 5615(b) and NYSE Listed
Company Manual Section 303A.00).
127 See id. (referring to Rule 10A–3(b)(1)(iv)(A),
17 CFR 240.10A–3(b)(1)(iv)(A)).
128 See id.
129 See e.g., Nasdaq Rule 5615(b) and NYSE
Listed Company Manual Section 303A.00.
130 See BX Rule 5635.
131 See Amendment No. 2. The Exchange states
that the proposed rules are comparable to the rules
of the National Stock Exchange, which require
shareholder approval for equity compensation
issuances but not for other share issuances. See
National Stock Exchange Rule 15.6.
132 See BX Rule 5250(e)(1) and (7).
E:\FR\FM\12MYN1.SGM
12MYN1
27724
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Notices
will review such issuances for public
interest concerns, including issuances
significantly below the market price or
for the benefit of related parties.133
C. Enhanced Vetting, Surveillance/
Examinations, and Disclosure
1. Vetting of Prospective Issuers
The Commission believes that the
Exchange’s proposed vetting and due
diligence process of prospective issuers
are reasonably designed to reduce the
risk of listing companies that might be
more prone to fraud and manipulation
and that might erode investor
confidence in the market. The
Commission notes that the Exchange
will employ the staff in Nasdaq’s Listing
Qualifications Department to apply and
enforce its listing standards pursuant to
a regulatory contract 134 and that the
rules of the BX Venture Market require
capable, experienced persons to
supervise the staff in Nasdaq’s Listing
Qualifications Department.135 BX Rules
further require that the Exchange’s Chief
Regulatory Officer have substantial prior
regulatory experience with a national
securities exchange or equivalent
experience.136
In connection with the initial listing
process, the BX Rules would require
applicant companies to disclose, among
other things, current and past actions
and proceedings involving the
company, current executive officers,
directors, promoters, and ten percent or
greater shareholders,137 any events
described under Item 401(f) of
Regulation S–K involving officers,
directors, promoters and control
persons, and to furnish additional
documentation.138 The Exchange will
not approve for initial listing, or allow
the continued listing, of a company if an
executive officer, director, promoter, or
control person of the company was
involved in any event described under
133 See
Amendment No. 2.
BX Rule 5102. In addition to review of
companies seeking an initial listing, the Listing
Qualifications Department will also monitor
compliance with all listing standards on an ongoing basis through the regular review of public
filings, Form 8–K disclosures, press releases, market
data, and closing bid price. See id.
135 See id. Notwithstanding the contractual
agreement with Nasdaq, the Exchange stated that it
retains ultimate legal responsibility for, and control
of, these functions. See id.
136 See id.
137 See BX Rule 5205(b). BX Rules provide that
an applicant company must provide descriptions
and supporting documentations of all pending or
prior actions and proceedings involving current
executive officers, directors, promoters, and ten
percent or greater shareholders of the company, and
all actions and proceedings commenced within the
past 10 years involving the company, its
predecessors and subsidiaries. See id.
138 See id.
wwoods2 on DSK1DXX6B1PROD with NOTICES_PART 1
134 See
VerDate Mar<15>2010
14:49 May 11, 2011
Jkt 223001
Item 401(f)(2)–(8) of Regulation S–K 139
that occurred during the prior five years
(‘‘the automatic bar’’).140 The Exchange
also will not approve for initial listing,
or allow the continued listing, of shell
companies.141 Moreover, even if the
company satisfies the Exchange’s listing
requirements, the Exchange will still
have the discretionary authority to deny
listing to or to delist a security when
necessary to preserve and strengthen the
quality of and public confidence in its
market.142 The Commission notes that
the Exchange can use its discretionary
authority only to deny listing, apply
additional or more stringent criteria for
initial or continued listing, or suspend
or delist securities.143
The Commission emphasizes that the
Exchange does not have the
discretionary authority to approve the
initial listing of securities that do not
meet the enumerated listing standards,
or to maintain the listing of securities
that stay below the continued listing
standards.144 If the Exchange exercises
discretion to permit the listing of a
company after it has discovered that an
executive officer, director, promoter, or
control person of the company was
involved in an event described under
Item 401(f) of Regulation S–K that does
not rise to the level of an automatic bar
(such as if the event occurred more than
five years prior), or a past corporate
governance issue of the company,145 the
decision to list such a company must be
approved in writing by the Exchange’s
Chief Regulatory Officer.146
The Commission notes that one
commenter noted the importance of
screening prospective listed companies
in light of the failure of the former
American Stock Exchange Emerging
Company Marketplace.147 This
139 These events include criminal convictions and
pending charges, violations of securities laws, and
court or administrative actions barring or
suspending a person from engaging in certain
securities-related activities.
140 See BX Rule 5103(a).
141 See BX Rule 5103(b).
142 See BX Rule 5104.
143 See id.
144 See id.
145 The Exchange’s review for past corporate
governance issues may include activities taking
place while the company is listed on the Exchange
or an exchange that imposes corporate governance
requirements, as well as activities taking place after
a formerly listed company is no longer listed on the
Exchange or such an exchange. See BX Rule IM–
5104–3. The Exchange may take appropriate action
if it determines that there have been violations or
evasions of such corporate governance standards.
See id.
146 See BX Rule IM–5104–1 and 3.
147 See Pink OTC Markets Letter, supra note 5 at
6–7 (referring to the American Stock Exchange
Emerging Company Marketplace that the American
Stock Exchange operated from 1992 to 1995). See
also OTC Markets Letter, supra note 8 at 3.
PO 00000
Frm 00092
Fmt 4703
Sfmt 4703
commenter then suggested that the
Exchange should conduct background
checks and other similar review of
potential listing companies and not be
permitted to merely rely on the
documents presented by an issuer
during the listing process.148 As
discussed below, the Exchange will
review documents other than those
presented by an issuer during the listing
process. Specifically, the Exchange
would review the applicant company’s
public filings and proxy disclosures,
and conduct background investigations
of its executive officers, directors,
promoters, and control persons using
publicly available databases and other
public resources, such as Lexis-Nexis
and the Web-CRD regulatory database,
and web-based search engines.149
Moreover, the Exchange will engage
independent qualified third party
investigative firms when it uncovers a
regulatory issue or potential public
interest concern that does not trigger an
automatic bar to listing and the
Exchange has determined to not
exercise its discretionary authority to
deny the listing, or when it would be
impractical for the Exchange to research
a regulatory history that occurred
outside of the United States.150 For
example, if the Exchange becomes
aware of media accounts of criminal
allegations or improper business
practices, or indication of financial
impropriety, the Exchange will engage
an independent qualified third party
investigative firm.151 The Exchange also
will make random, regular referrals of at
least 10% of the applicants that were
not previously listed on a national
securities exchange to the independent
qualified third party investigative
firm.152 Any decision to list a company
that has been referred to third party
review must be approved in writing by
the Exchange’s Chief Regulatory
Officer.153
In sum, the Commission believes that
the proposed vetting and due diligence
measures are reasonably designed to
reduce the risk of fraudulent and
148 See
Pink OTC Markets Letter, supra note 5 at
6–7.
149 See
BX Rule 5205(c). The Exchange also will
conduct background investigations, as applicable,
whenever a new executive officer, director,
promoter, or control person becomes associated
with a BX Venture Market-listed company;
whenever a BX Venture Market-listed company
makes a disclosure of an event described under
Item 401(f) of Regulation S–K; and whenever the
staff in the Listing Qualifications Department, in the
course of its on-going monitoring of listed
companies, identifies a potential public interest
concern. See BX Rule 5205(e).
150 See BX Rule 5205(c) and (d).
151 See BX Rule 5205(c).
152 See BX Rule 5205(d).
153 See BX Rule 5205(c).
E:\FR\FM\12MYN1.SGM
12MYN1
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Notices
manipulative behavior with respect to
the listing and/or trading of BX-listed
securities.
wwoods2 on DSK1DXX6B1PROD with NOTICES_PART 1
given stock manipulators powerful tools
to distort the market and swindle retail
investors.159 As such, this commenter
stated that extreme caution is warranted
2. Surveillance/Examination
when any party proposes to establish a
The Commission believes that strong
new market to trade penny stocks.160
and effective surveillance and
The commenter also expressed concern
examination programs are vital,
that the proposed BX rules will not
particularly with respect to BX Venture
prevent penny stock promoters or boiler
Market-listed securities, which are
room brokerages from asserting that
subject to listing standards that are
securities they are offering and selling
are exempt from state registration
lower than those of any national
because they are listed on the Boston
securities exchange with an active
Stock Exchange.161 In addition, this
listings program. Under the proposal,
commenter stated that twelve states
the Exchange will monitor real-time
have registration exemptions for
trading of securities listed on the BX
Venture Market.154 The Exchange would securities listed on the Boston Stock
Exchange, which were predicated on the
contract with FINRA to regulate market
protections provided by the higher
activity of BX-listed securities (e.g., to
listing standards of that exchange.162
implement surveillance patterns to
The Commission acknowledges these
detect possible insider trading, frontcomments and notes that BX stated that
running, fraud, auto-execution
its regulatory program will have: (i)
manipulation, mid-point cross
Surveillance patterns revised to
manipulation, wash sales, layering,
incorporate trading activity of BX
open/close marking, and Reg SHO
Venture Market-listed securities on the
clearing fails),155 but the Exchange
Exchange and on the over-the-counter
would retain ultimate legal
market; (ii) specific automated
responsibility for, and control of, all
surveillance patterns to address any rule
regulatory functions for the
and functionality changes resulting from
Exchange.156 The Commission expects
the BX Venture Market initiative; and
the Exchange to ensure that it and
(iii) calibrated surveillance patterns to
FINRA have effective regulatory
programs relating to BX Venture Market- detect potential issues that may arise
particularly in low-priced, less liquid
listed securities before the BX Venture
stocks.163 Moreover, the regulatory
Market begins operations. Also, the
program will include review of the
Exchange committed to represent in a
activity of firms on the BX Venture
letter to the staff in the Commission’s
Market.164 The review will include
Office of Compliance Inspections and
‘‘focused exams’’ concentrated on sales
Examinations, before the operation of
practices and firm oversight, as well as
the Exchange, that it and FINRA have
any other activities required to
adequate regulatory procedures and
165 As
programs in place to effectively regulate effectively regulate the market.
stated above, the Exchange represented
the BX Venture Market and its listing
that a regulatory program for these
program, and adequate procedures and
activities will be in place before the BX
programs in place to effectively process
166
trades and maintain the confidentiality, Venture Market begins operations.
Further, the Commission notes, in
integrity, and availability of the
addition to Commission oversight and
Exchange’s systems.157
oversight by the Exchange and FINRA,
The Commission notes that one
under Section 18 of the Securities Act
commenter stated that there have been
of 1933, ‘‘the securities commission (or
significant problems in the penny stock
any agency or office performing like
market, including boiler room sales
functions) of any State shall retain
practices by brokerages and market
jurisdiction under the laws of such State
manipulation (including the spreading
to investigate and bring enforcement
of false rumors) by stock promoters and
actions with respect to fraud or deceit,
brokerages that hold a block of a given
158 This commenter is also
stock.
159 See MSD Letter II, supra note 8 at 2.
concerned that new technology has
160 See MSD Letter, supra note 5 at 3 and MSD
154 See
BX Rule 5105.
BX Rule 5105 and Amendment No. 2. The
Exchange stated that it will have in place, before the
BX Venture Market is operational, a contractual
agreement with FINRA to regulate market activity
on the Exchange. See BX Rule 5105 and
Amendment No. 2.
156 See BX Rule 5105 and Amendment No. 2.
157 See Amendment No. 2.
158 See MSD Letter, supra note 5 at 3 and MSD
Letter II, supra note 8 at 2.
155 See
VerDate Mar<15>2010
14:49 May 11, 2011
Jkt 223001
Letter II, supra note 8 at 2.
161 See MSD Letter, supra note 5 at 2.
162 See id. The Exchange noted that the
Massachusetts Securities Division has requested
comment on a proposed rule change to its
regulations to eliminate the exemption from the
registration requirements for securities listed on the
BX Venture Market. See Amendment No. 2.
163 See BX Rule 5105 and Amendment No. 2.
164 See BX Rule 5105.
165 See id.
166 See BX Rule 5105 and Amendment No. 2.
PO 00000
Frm 00093
Fmt 4703
Sfmt 4703
27725
or unlawful conduct by a broker or
dealer, in connection with securities or
securities transactions.’’ 167
The Exchange also committed to
providing a monthly report to the
Directors of the Division of Trading and
Markets and Office of Compliance
Inspections and Examinations
describing any significant developments
on the BX Venture Market, including
companies added to or removed from
the market during that period.168 In
addition, the Exchange’s Chief
Regulatory Officer will provide
quarterly reports to the Directors of the
Division of Trading and Markets and
Office of Compliance Inspections and
Examinations describing the regulatory
activities of the Exchange and FINRA
during the prior quarter.169 The
Exchange also stated that it will provide
copies of the Listing Department’s
procedures manuals and surveillance
procedures used by FINRA and the
Exchange to the Commission’s Office of
Compliance Inspections and
Examinations.170
3. Disclosure of BX-listed Securities
The Commission believes that it is
important to reduce the likelihood of
investor confusion regarding the BX
Venture Market. Three commenters
expressed concern that investors would
confuse BX Venture Market-listed
securities with Nasdaq-listed
securities.171 One commenter believed
that ticker symbols for BX Venture
Market-listed securities should
differentiate such securities from other
securities that meet the higher listing
standards typically associated with
listing on a national securities
exchange.172 This commenter suggested
that BX-listed securities should only use
four or five character ticker symbols
because shorter symbols are typically
used by exchanges with higher listing
standards than the BX Venture
Market.173 Further, this commenter
stated that if BX-listed securities are
permitted to use symbols with three or
fewer characters, those securities would
be precluded from trading in the overthe-counter market because the OTCBB
and Pink’s OTC systems are
programmatically limited to trading four
167 15
U.S.C. 77r(c)(1).
BX Rule 5105 and Amendment No. 2.
169 See BX Rule 5105.
170 See Amendment No. 2.
171 See MSD Letter, supra note 5 at 3, MSD Letter
II, supra note 8 at 2, Pink OTC Markets Letter, supra
note 5 at 4–5, and Niehoff Letter, supra note 8 at
1–2.
172 See Pink OTC Markets Letter, supra note 5 at
2 and OTC Markets Group Letter, supra note 8 at
5.
173 See Pink OTC Markets Letter, supra note 5 at
2.
168 See
E:\FR\FM\12MYN1.SGM
12MYN1
27726
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Notices
wwoods2 on DSK1DXX6B1PROD with NOTICES_PART 1
or five character symbols.174 This
commenter reiterated these issues in a
subsequent letter, and expressed
concern that shorter ticker symbols
would reduce the amount of over-thecounter market trading volume in BXlisted securities and result in a decrease
in competition for execution of investor
orders.175 A second commenter
disagreed and contended that ticker
symbols no longer say anything to the
investor about the nature of the
company and changing symbols can
cause confusion.176 However, this
commenter stated that it is reasonable to
require BX-listed securities to use only
four or five character symbols until the
industry technology can handle shorter
ticker symbols.177
With respect to the comments
regarding ticker symbols, the Exchange
stated that the BX Venture Market is a
national securities exchange and a party
to the existing National Market System
Plan for the Selection and Reservation
of Securities Symbols (‘‘Symbology
Plan’’), and as such is eligible to trade
symbols of one to five characters.178 The
Exchange explained that this eligibility
is important because the BX Venture
Market is intended to afford a listing
venue to former exchange-listed
companies that would want to retain
their symbols.179 The Exchange stated
its belief that its proposed data vendor
display requirement is a far more
effective means of communicating the
listing market to investors.180 Further,
the Exchange stated that BX Venture
Market-listed securities should not be
limited to four or five characters
because firms can quote or trade
securities on either the Exchange or in
the over-the-counter market until their
technology is updated, and listed
companies that believe this hurts their
liquidity can elect to change their
symbol.181
As noted in Section II above, the
Exchange proposes different ticker
symbol requirements, depending on
whether the company was previously
listed on a national securities exchange.
Specifically, the Exchange would
prohibit companies that were not
previously listed on a national securities
exchange from utilizing one to three
character ticker symbols.182 Companies
that were delisted from a national
174 See
175 See
id. at 2–3.
OTC Markets Group Letter, supra note 8
at 5–6.
176 See Angel Letter, supra note 8 at 11.
177 See id.
178 See BX Response Letter, supra note 9 at 7.
179 See id.
180 See id. at 8.
181 See id. at note 28.
182 See BX Rule 5210(j).
VerDate Mar<15>2010
14:49 May 11, 2011
Jkt 223001
securities exchange before listing on BX
could retain their one to three character
ticker symbols, provided that the
company must, prior to listing on the
BX Venture Market, issue a press release
announcing its delisting from the other
exchange and comply with the
disclosure requirements of Item 3.01 of
Form 8–K.183 The Commission believes
that such approach is not inconsistent
with the Act. As the Exchange noted,
this approach is permitted under the
Symbology Plan.184 In addition, as
stated above, although certain
companies might be permitted to retain
their one to three character ticker
symbols when listing on the BX Venture
Market, in order to inform investors,
such companies would be required to
issue a press release announcing its
delisting and comply with the
disclosure requirements of Form 8–K.185
The Commission acknowledges the
comments that companies with ticker
symbols of less than four characters
cannot trade on the OTCBB or the Pink
OTC system because they are
programmatically limited to four or five
character symbols; 186 however, the
Commission notes that companies that
believe this limitation hurts their
liquidity can elect to not list on the BX
Venture Market, or, as the Exchange
noted in the BX Response Letter, change
their symbol.187
While the Exchange is not
substantially changing the ticker symbol
length a BX Venture Market-listed
company can use,188 the Exchange has
proposed several other measures
intended to reduce the likelihood that
investors will believe securities listed
on the BX Venture Market are of the
same caliber as securities listed on other
national securities exchanges. In
particular, the Exchange proposes
specific rules to differentiate securities
of the BX Venture Market from those of
the NASDAQ Stock Market, which is
also owned by the NASDAQ OMX
Group. Toward that end, the listing
rules of the BX Venture Market specify
that a BX Venture Market-listed
company must refer to its listing as on
the BX Venture Market, unless
183 See
id.
Securities Exchange Act Release No.
58904 (November 6, 2008), 73 FR 67218 (November
13, 2008) (order approving the National Market
System Plan for the Selection and Reservation of
Securities Symbols).
185 See BX Rule 5210(j).
186 See Pink OTC Markets Letter, supra note 5 at
2–3.
187 See BX Response Letter, supra note 9 at note
28.
188 As stated above, the Exchange, however, will
prohibit companies not previously listed on a
national securities exchange from utilizing a one to
three character ticker symbol.
184 See
PO 00000
Frm 00094
Fmt 4703
Sfmt 4703
otherwise required by applicable rules
or regulations, and that such company
must never represent that it is listed on
The NASDAQ Stock Market.189 To
enforce this prohibition, the Exchange
has committed to monitor the press
releases issued by BX Venture Marketlisted companies and to annually review
each company’s Web site to determine
how each company is referring to its
listing.190 A BX Venture Market-listed
company that refers to itself as listed on
the NASDAQ Stock Market or on
NASDAQ will be subject to immediate
delisting.191
Additionally, in describing the BX
Venture Market, the Exchange will refer
to itself as the BX Venture Market, and
not as NASDAQ OMX BX, in its
communications and marketing
literature.192 The Exchange will also
include information prominently on its
Web site describing the differences
between the BX Venture Market and
other national securities exchanges,
including Nasdaq.193 For example, the
Exchange’s Web site will inform users
in a prominent manner that BX Venture
Market-listed securities are not ‘‘blue
sky’’ exempt, are not NMS securities,
and are not subject to the Commission’s
trade-through rule.194 The Exchange’s
Web site also will provide side-by-side
comparisons of BX Venture Market and
NASDAQ Stock Market features.195
Additionally, marketing materials for
the BX Venture Market will include a
prominent disclaimer explaining that
BX Venture Market is separate from, and
not a tier of, the NASDAQ Stock
Market.196 Further, in order to prevent
regulatory arbitrage, the Exchange
proposes that any company that meets
the quantitative (e.g., financial)
requirements for listing on any tier of
the NASDAQ Stock Market will not be
approved for listing on the BX Venture
Market.197 Specifically, it is appropriate
for the Exchange to restrict such
companies from listing on the BX
Venture Market to reduce the likelihood
of a company listing on the Exchange to
benefit from lower quantitative listing
standards when such companies are of
sufficient size that it should comply
with the higher Nasdaq listing
standards.
The Exchange will disseminate
information about securities listed on
the BX Venture Market via several
189 See
BX Rule 5250(b)(4).
Amendment No. 2.
191 See BX Rule 5250(b)(4).
192 See BX Rule 5106 and Amendment No. 2.
193 See BX Rule 5106 and Amendment No. 2.
194 17 CFR 242.611. See Amendment No. 2.
195 See id.
196 See BX Rule 5106.
197 See BX Rule 5210(i).
190 See
E:\FR\FM\12MYN1.SGM
12MYN1
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Notices
mechanisms to ensure broad
dissemination of quotation and last sale
information.198 The Exchange
committed to ensuring that BX Venture
Market-listed securities are clearly
distinguished, and distinguishable, from
securities listed on the traditional
exchanges on its data products and to
end-users of the data.199 The Exchange
stated that all market data for BX
Venture Market-listed securities will
include a unique data identifier in the
‘‘Market Center’’ field to distinguish the
security from those listing on other
exchanges and the over-the-counter
markets (‘‘Market Center Identifier’’).200
The Exchange represented that it will
require that market data distributors use
the Market Center Identifier to
prominently identify the listing market
with quotation and last sale information
for BX Venture Market-listed securities
through its distribution agreements and
by amendments to its global market data
policy document.201 Specifically, the
Exchange will require market data
distributors to prominently identify the
BX Venture Market as the listing market,
and where the display of text is not
consistent with the display
methodology or user needs of the
distributor, to use ‘‘B’’.202
The Commission believes that the
measures described above that are
designed to help clarify the differences
between the BX Venture Market and the
NASDAQ Stock Market should aid in
reducing the potential for investor
confusion. For example, as stated above,
the Exchange stated that it will require
market data distributors to prominently
display the listing market for BX
Venture Market-listed securities through
its distribution agreements and its
global market data policy document and
that these agreements and amendments
will be in place before the BX Venture
Market begins operations.203 The
Exchange also represented that the
Market Center Identifier will be
distributed by the Exchange and
displayed by the data vendors upon
198 See
Amendment No. 2.
BX Rule 5106.
200 See Amendment No. 2. The Exchange stated
that BX Venture Market-listed securities would be
identified with its own unique Market Center
Identifier (‘‘B’’) on any new consolidated data feeds
and in the BX Venture Market Daily List data
product. See id. The Exchange stated that the Daily
List will be adopted in a separate filing with the
Commission. See id. The Commission notes that
approval of the BX Venture Market in no way
prejudges or determines what action the
Commission may take with respect to any data
product not previously approved by the
Commission.
201 See BX Rule 5106 and Amendment No. 2.
202 See BX Rule 5106 and Amendment No. 2.
203 See BX Rule 5106 and Amendment No. 2.
wwoods2 on DSK1DXX6B1PROD with NOTICES_PART 1
199 See
VerDate Mar<15>2010
14:49 May 11, 2011
Jkt 223001
launch of the market.204 To assure
compliance with this requirement, the
Exchange stated that it will proactively
review the displays of prominent data
distributors in connection with the
launch of the market and the displays of
all data distributors periodically after
the launch, and require immediate
compliance if any displays fail to meet
the requirements of the market data
agreements.205 The Exchange further
stated that if a market data vendor does
not satisfy this display requirement, the
Exchange will take action against the
vendor, up to and including terminating
the vendor’s ability to receive data from
the Exchange.206 Lastly, the Exchange
has stated that it is committed to
working with market participants and
the Commission to evaluate, on an ongoing basis, whether the display
requirement described above is effective
in distinguishing BX Venture Marketlisted securities from those listed on
another national securities exchange in
order to reduce investor confusion.207
The Commission recognizes the
reputational tradeoff associated with
distinguishing the BX Venture Market
from Nasdaq. If the BX Venture Market
were to fail, Nasdaq would not suffer as
much reputational damage as investors
and issuers would not necessarily
associate a BX Venture Market failure
with Nasdaq. As a result, Nasdaq may
not have as much incentive to ensure
that the BX Venture Market is a success
than if Nasdaq had more reputation
capital on the line. While considering
this tradeoff, the Commission believes
that Nasdaq has sufficient incentives,
absent this reputational risk, to ensure
that the BX Venture Market is a success,
and that avoiding the risk of investor
confusion is a priority.
D. Review Process
The Commission believes that the
proposed deficiency notification,
delisting, and appeals procedures strike
a balance between the Exchange’s
obligation to protect investors and their
confidence in the market, with its
parallel obligation to perfect the
mechanism of a free and open market.
The measures by which a company may
return to compliance with continued
listing standards are explicitly
delineated, providing transparency to
the process and potentially fostering
investor confidence in the integrity of
the markets.
The Commission further notes that
the compliance periods and discretion
to allow a non-compliant company to
remain listed are generally shorter on
the BX Venture Market than what would
be allowed a company listed on other
exchanges, including Nasdaq. For
example, a Hearings Panel would be
permitted to grant only 90 calendar days
for a company to regain compliance
with a listing standard,208 instead of the
180 calendar days available on
Nasdaq.209 Similarly, a company that
falls below the market value of listed
securities requirement would be
provided a 90 calendar day compliance
period,210 instead of the 180 days
available to a Nasdaq company.211 The
Commission believes that these shorter
timelines will serve to protect investors,
given that the securities listed on the BX
Venture Market are subject to lower
listing standards than other exchangelisted securities.
One commenter suggested that the
Exchange should increase the amount of
time a company has to regain
compliance with BX listing standards
from 90 to 180 days because it will
allow companies that are trading
publicly for the first time to learn the
nuances of the market and to adjust to
the market.212 The Commission believes
that the compliance period timeframe
proposed by the Exchange is
appropriate. The Commission notes that
the listing standards of the BX Venture
Market are substantially lower than the
listing standards of other national
securities exchanges. The Commission
believes that the lower-tier and smaller
companies likely to trade on the BX
Venture Market warrant careful
monitoring and, for reasons of investor
protection, believes that such
companies cannot be permitted to not
meet listing standards for a lengthy
period of time. The Commission
believes that 90 calendar days is
sufficient to determine whether BXlisted companies have the resources and
capability to attain compliance with
listing standards.
Overall, the Commission believes that
the proposed appeals process is
reasonable and affords adequate due
process to issuers, while at the same
time bringing efficiency to the listing
and delisting processes. Among other
things, the process provides companies
with the right to appeal a staff
determination to deny initial or
continued listing to a Hearings Panel.213
The company has the right to appeal an
208 See
BX Rule 5815(c)(1)(A).
Nasdaq Rule 5815(c)(1)(A).
210 See BX Rule 5810(c)(3)(B).
211 See Nasdaq Rule 5810(c)(3)(C).
212 See BIO Letter, supra note 8 at 3.
213 See BX Rule 5815.
209 See
204 See
BX Rule 5106.
BX Rule 5106 and Amendment No. 2.
206 See BX Rule 5106 and Amendment No. 2.
207 See Amendment No. 2.
205 See
PO 00000
Frm 00095
Fmt 4703
Sfmt 4703
27727
E:\FR\FM\12MYN1.SGM
12MYN1
27728
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Notices
adverse Hearings Panel decision to the
Listing Council.214 All decisions of the
Listing Council, as well as certain
Hearings Panel decisions also will be
subject to review at the discretion of the
Exchange Board.215
wwoods2 on DSK1DXX6B1PROD with NOTICES_PART 1
E. Fees
In response to the proposed fees, one
commenter stated that a market targeted
to smaller companies, with listing
requirements and listing costs tailored
to their current economic reality, would
open a door that has been closed for
many venture-backed companies.216
After considering this comment, the
Commission finds that the proposed
fees are consistent with the
requirements of the Act and the rules
and regulations thereunder applicable to
a national securities exchange.
Specifically, the Commission finds that
the proposal is consistent with Sections
6(b)(4) and (b)(5) of the Act,217 which
require, among other things, that the
rules of an exchange (i) provide for the
equitable allocation of reasonable dues,
fees, and other charges among its
members and issuers and other persons
using its facilities, and (ii) are not
designed to permit unfair
discrimination between customers,
issuers, brokers, or dealers.
The Commission believes that the
proposal does not unfairly discriminate
between issuers as all companies will be
subject to the same fee schedule. The
Commission believes that the proposed
fees are reasonable, given the regulatory
expenses of the Exchange and the types
of companies expected to list on the
Exchange. The Commission notes that
the Exchange has committed to
enhanced vetting, examination,
surveillance and disclosure
requirements, all of which require
additional expenses. In addition, the
Commission expects the Exchange to
maintain its commitment of resources to
its regulatory oversight of the listing
process and its ongoing compliance
review of listed companies under its
regulatory program.
According to the Exchange, the
application review fee will allow the
Exchange to recover some of the costs
associated with the initial review of the
company’s application, including staff
time and the systems supporting the
initial review process.218 Similarly, the
214 See
BX Rule 5820.
215 See BX Rule 5825.
216 See Madrona Letter, supra note 5 at 1.
217 15 U.S.C. 78f(b)(4) and (b)(5).
218 See Amendment No. 2. The Exchange
proposed a $7,500 initial listing fee, and a $15,000
annual fee for the first class of securities listed on
the Exchange and a $5,000 annual fee for each
VerDate Mar<15>2010
14:49 May 11, 2011
Jkt 223001
annual fee would offset the staff and
system costs of continued monitoring of
the company.219 In addition, the
Commission notes that the proposed
application and annual fees are less
than those charged by other national
securities exchanges.220 Also, the
Exchange states that fees for certain onetime events (i.e., a $7,500 fee for
substitution listing events, a $2,500 fee
for record-keeping changes, and a
$4,000 or $5,000 fee for a written or oral
hearing, respectively) will allow it to
recover some of the costs associated
with facilitating these events.221 The
Exchange further proposes a $15,000 fee
for written interpretations of Exchange
rules, and states that the fee for written
interpretations of Exchange rules is
intended to recoup the cost of Exchange
staff’s time in reviewing and responding
to the request and that no such fee
would be charged in connection with
requests involving a company’s initial
listing application, given that the
company will pay an application fee.222
The Commission notes that
companies that were previously listed
on Nasdaq would receive a credit,
which could be used only to offset the
annual fee, for any annual fees paid to
Nasdaq during the same calendar year
that they initially list on the BX Venture
Market, for the months following their
delisting from Nasdaq.223 The Exchange
believes that this credit is reasonable
because it will avoid double charging
companies that have paid Nasdaq a nonrefundable fee to provide similar
services as those that the Exchange will
provide under its annual fee.224 In
approving this fee credit, the
Commission notes its expectation that a
rigorous and independent review by the
Exchange of compliance with the listing
additional class of securities listed on the Exchange.
See BX Rule 5910.
219 See Amendment No. 2.
220 For example, the Exchange noted that the
initial listing fees for listing common stock on the
NASDAQ Capital Market range from $50,000 to
$75,000 and the annual fees are $27,500; the initial
listing fees for listing common stock on NYSE
Amex range from $50,000 to $70,000 and the
annual fees range from $27,500 to $40,000; the
initial listing fees for listing common stock on the
New York Stock Exchange range from $150,000 to
$250,000 and the annual fees range from $38,000
to $500,000. See Amendment No, 2 (citing Nasdaq
Rule 5920(a)(1) and (c)(1)(A), NYSE Amex Listed
Company Guide Sections 140 and 141, and NYSE
Listed Company Manual 902.02 and 902.03).
221 See BX Rules 5815(a)(3) and 5910 and
Amendment No. 2.
222 See BX Rule 5602 and Amendment No. 2. See
also Securities Exchange Act Release No. 61669
(March 5, 2010), 75 FR 11958 (March 12, 2010) (SR–
NASDAQ–2009–081) (order granting approval of
Nasdaq’s proposed rule change to modify the fee for
written interpretations of Nasdaq listing rules to
$15,000).
223 See Amendment No. 2.
224 See id.
PO 00000
Frm 00096
Fmt 4703
Sfmt 4703
standards will be conducted for any
former Nasdaq-listed company that is
eligible for a credit, just as for any
company that lists on the BX Venture
Market.
F. Market Data
Currently, NMS securities listed on
national securities exchanges are subject
to a consolidated trade reporting
plan,225 so that all trades are
disseminated in a single data stream.
Likewise, because all trades in nonNMS securities today occur in the overthe-counter market, complete trade data
is collected and distributed by FINRA.
Since there currently is no joint SRO
trade reporting plan for non-NMS
securities, trades on the BX Venture
Market and any other exchange that
might trade BX Venture Market-listed
securities pursuant to unlisted trading
privileges (‘‘UTP’’) could be reported
separately from the over-the-counter
trade data disseminated by FINRA. For
similar reasons, quotation data could be
disseminated separately by BX and any
UTP exchange.
In the Order Instituting Proceedings,
the Commission asked whether BX
sufficiently addressed how quotations
and transactions reports relating to BXlisted securities will be disseminated.
The Commission was concerned that the
proposal could result in fragmentation
of pricing information relating to these
securities and undermine the ability of
investors to receive best execution. One
commenter stated that fragmentation of
pricing data was a valid concern.226
Another commenter stated that market
data for BX-listed securities must be
disseminated in a manner that makes
clear that BX-listed securities are not
NMS securities and that they do not
meet the higher listing standards for
exchange-listed securities.227 This
commenter stated that in order to
prevent investor confusion between
NMS securities and BX-listed securities,
quotations and transaction reports for
BX-listed securities should not be
disseminated under any NMS plan and
should not be commingled with NMS
data.228 Further, this commenter stated
that it would be inappropriate for
market data of BX-listed securities to be
distributed under the Nasdaq UTP
plan.229 Another commenter stated that
BX must clarify how market data
225 See
17 CFR 242.608.
Niehoff Letter, supra note 8 at 2–3.
227 See Pink OTC Markets Letter, supra note 5 at
2–3 and OTC Markets Group Letter, supra note 8
at 6–7.
228 See Pink OTC Markets Letter, supra note 5 at
3. See also OTC Markets Letter, supra note 8 at 7.
229 See Pink OTC Markets Letter, supra note 5 at
3. See also OTC Markets Letter, supra note 8 at 7.
226 See
E:\FR\FM\12MYN1.SGM
12MYN1
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Notices
products will be engaged to ensure
broad dissemination of quotation and
last sale information and suggested that
the Commission require the
consolidation of market place quotation
and last sale data for BX Venture
Market-listed securities from the BX
execution system and the over-thecounter market.230 However, a third
commenter believed that the proposal
could provide a good experiment in the
dissemination of market data outside
the existing NMS plans, in which
Nasdaq OMX directly markets the data
to market participants.231
In response, the Exchange stated that
it ‘‘is committed to ensuring that
quotations and transaction information
for listed securities occurring on The BX
Venture Market * * * are consolidated
fully with the same information from
OTC quoting and trading that FINRA
supervises.’’ 232 Additionally, in
response to comments that market data
for BX Venture Market-listed securities
must be disseminated in a manner that
makes clear that these securities are not
NMS securities and that they do not
meet the higher listing standards for
exchange-listed securities, the Exchange
proposed restrictions on the use of one
to three character ticker symbols, as
discussed above.233
With respect to the trading of BX
Venture Market-listed securities, the
Commission notes that until other
exchanges have appropriate trading
rules and oversight mechanisms for
transactions in second-tier securities,
other exchanges will not be able to
extend UTP to BX-listed securities.234
230 See
Niehoff Letter, supra note 8 at 2.
Angel Letter, supra note 8 at 10.
232 BX Response Letter, supra note 9 at 9.
233 See Section III.C.3, infra.
234 See 17 CFR 240.12f–5. Rule 12f–5 provides
that ‘‘[a] national securities exchange shall not
extend unlisted trading privileges to any security
unless the national securities exchange has in effect
a rule or rules providing for transactions in the class
or type of security to which the exchange extends
unlisted trading privileges.’’ Id. Specifically, the
Commission noted that Rule 12f–5 ‘‘is intended to
preserve a benefit of Commission review of UTP
applications,’’ referring to the fact that the
Commission previously reviewed each UTP
application to ensure, among other things, that the
applicant exchange had proper trading rules in
place to provide a fair and orderly market in each
security named, and had sufficient standards for
regulatory oversight of each security to provide for
the protection of investors. See Securities Exchange
Act Release Nos. 35323 (February 2, 1995), 60 FR
7718 at 7719, 7722 (February 9, 1995); 35637 (April
21, 1995), 60 FR 20891 at 20892, 20895 (April 28,
1995). Here, the Exchange proposed listing
standards that are substantially lower than those of
any other listings market, but the Exchange also
proposed to adopt a number of enhanced
surveillance, oversight and disclosure requirements.
As discussed previously, the Commission views
these enhanced requirements as being a necessary
and integral part of the BX Venture Market
proposal. Since these enhanced requirements
wwoods2 on DSK1DXX6B1PROD with NOTICES_PART 1
231 See
VerDate Mar<15>2010
14:49 May 11, 2011
Jkt 223001
The Commission notes, however, that
until other exchanges trade BX Venture
Market-listed securities on a UTP basis,
BX Venture Market-listed securities
could trade not only on BX, but also
over-the-counter, thus increasing the
competition for orders in these
securities, as these securities previously
were only able to trade over-the-counter
or not at all.
G. Margin
BX-listed securities may be less liquid
and more volatile than securities listed
on another national securities exchange.
In anticipation of the BX Venture
Market, the Commission notes that
FINRA has issued Regulatory Notice 11–
15 (‘‘FINRA Notice’’),235 which reminds
its members to consider the risks
associated with low-priced equity
securities 236 when extending credit in a
strategy-based or portfolio margin
account.237 According to the FINRA
Notice, ‘‘[p]rice volatility is more often
associated with low-priced, rather than
higher-priced, equity securities. Lowpriced equity securities tend to trade
with bid and ask spreads that make up
a greater percentage of the security’s
price. This is especially true for newer
companies whose stock is priced low
and whose earnings may be more
volatile. In addition, due to lower
volumes, low priced equity securities
can experience large price swings
during a given trading day, which
translates into greater price risk.
Further, low-priced equity securities
may be removed from an index, which
can increase the volatility and
exacerbate the price risk.’’ 238
The FINRA Notice also states that
‘‘[f]irms should take into account
volatility and concentrated positions in
address concerns associated with the listing of
securities that do not meet the listing requirements
of other national securities exchanges and since
Rule 12f–5 requires any exchange seeking to trade
securities on a UTP basis to have in effect rules that
provide for transactions in those securities, the
Commission believes that any national securities
exchange wishing to extend UTP to a BX Venture
Market-listed security would also need to
supplement their surveillance, oversight and
disclosure requirements in order to comply with
Rule 12f–5.
235 Low-Priced Equity Securities, FINRA
Regulatory Notice 11–15 (April 2011) (‘‘FINRA
Notice’’).
236 The BX Venture Market may likely have lowpriced equity securities listed on its exchange.
237 As equity securities listed on a national
securities exchange, the securities traded on the BX
Venture Market would meet the definition of
‘‘margin security’’ under the Federal Reserve Board’s
Regulation T, which specifies initial margin
requirements. See 12 CFR 220.2. However, in
extending credit to customers in a margin account,
broker-dealers also must comply with SRO margin
requirements (including maintenance margin
requirements). See, e.g., FINRA Rule 4210.
238 FINRA Notice.
PO 00000
Frm 00097
Fmt 4703
Sfmt 4703
27729
a single customer account and across all
customer accounts, as well as the daily
volume and market capitalization of
each security when imposing ‘‘house’’
maintenance margin requirements.
Firms should also consider the
fundamental business drivers and
financial performance of the issuer in
setting house requirements. Increased
maintenance margin requirements can
help to ensure that the equity in each
customer account is sufficient to cover
any large variances in the price of a
security.’’ 239 Further, the Notice states
that ‘‘FINRA believes that a best practice
is for firms to pay close attention to lowpriced equity securities when
considering the dollar amount of credit
to be extended to any one customer.
Similarly, in a portfolio margin account,
FINRA believes that a best practice is for
firms to subject low-priced or
concentrated positions to heightened
review and daily monitoring, subjected
to higher margin requirements, where
appropriate, and to include such
positions in exception reporting to
senior management.’’ 240 Finally, the
FINRA Notice reminds members that,
pursuant to the SEC’s net capital rule,
Rule 15c3–1,241 ‘‘if markets can absorb
only a limited number of shares of a
security for which a ready market exists
(a marketplace blockage), the nonmarketable portion in the proprietary or
other accounts of a broker dealer is
subject to a 100 percent deduction to net
capital, and is treated as a nonallowable asset.’’ 242 As such, the FINRA
Notice reminds firms that when dealing
with low-priced equity securities that
are thinly traded or concentrated, a firm
may be required to impose heightened
house margin requirements, where
appropriate, and value the securities
conservatively, in accordance with
FINRA’s margin requirements.243
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change, as modified by Amendment No.
2, is consistent with the Act. Comments
239 Id.
240 Id.
241 17
CFR 240.15c3–1.
FINRA Notice, supra note 235; see also
Letter from Michael A. Macchiaroli, Assistant
Director, Division of Market Regulation,
Commission, dated October 5, 1987 to Edward
Kwalwasser, Esq., NYSE and Mr. Thomas R.
Cassella, NASD; and FINRA Interpretation Rule
15c3–1(c)(2)(vii)/01 in FINRA’s Interpretations of
Financial and Operational Rules. These
interpretations may be found at FINRA’s Web site
at: https://www.finra.org/Industry/Regulation/
Guidance/FOR/index.htm.
243 See FINRA Rule 4210.
242 See
E:\FR\FM\12MYN1.SGM
12MYN1
27730
Federal Register / Vol. 76, No. 92 / Thursday, May 12, 2011 / Notices
investigative firms; (2) clarify the
Exchange’s discretionary authority to
deny listing to or delist companies
Electronic Comments
based on regulatory concerns; (3) add
• Use the Commission’s Internet
provisions relating to the internal
comment form (https://www.sec.gov/
structure and experience of those
rules/sro.shtml); or
charged with oversight of the listing
• Send an e-mail to ruleprogram; (4) describe market oversight
comments@sec.gov. Please include File
activities for BX Venture Market-listed
Number SR–BX–2010–059 on the
securities; (5) detail the use of market
subject line.
center identifiers to distinguish
companies listed on the BX Venture
Paper Comments
Market; (6) add restrictions on ticker
• Send paper comments in triplicate
symbol length; and (7) clarify the
to Elizabeth M. Murphy, Secretary,
consolidation of BX Venture Market
Securities and Exchange Commission,
data with over-the-counter information
100 F Street, NE., Washington, DC
for the same securities. These
20549–1090.
amendments clarify aspects of the
All submissions should refer to File
proposal, are responsive to commenters’
Number SR–BX–2010–059. This file
concerns about investor protection and
number should be included on the
brand confusion, and strengthen the
subject line if e-mail is used. To help the listing standards of the BX Venture
Commission process and review your
Market. Accordingly, the Commission
comments more efficiently, please use
also finds good cause, pursuant to
only one method. The Commission will Section 19(b)(2) of the Act,244 for
post all comments on the Commission’s approving the proposed rule change, as
Internet Web site (https://www.sec.gov/
modified by Amendment No. 2, prior to
rules/sro.shtml). Copies of the
the 30th day after the date of
submission, all subsequent
publication of notice in the Federal
amendments, all written statements
Register.
with respect to the proposed rule
VI. Conclusion
change that are filed with the
Commission, and all written
It is therefore ordered, pursuant to
communications relating to the
Section 19(b)(2) of the Act,245 that the
proposed rule change between the
proposed rule change (SR–BX–2010–
Commission and any person, other than 059), as modified by Amendment Nos.
those that may be withheld from the
1 and 2, be, and hereby is, approved on
public in accordance with the
an accelerated basis.
provisions of 5 U.S.C. 552, will be
It is further ordered that operation of
available for Web site viewing and
the BX Venture Market is conditioned
printing in the Commission’s Public
on the satisfaction of the requirements
Reference Room, 100 F Street, NE.,
below:
Washington, DC 20549, on official
A. Market Data Display. BX must
business days between the hours of 10
update its global market data policy
a.m. and 3 p.m. Copies of such filing
document and must enter into amended
also will be available for inspection and data distribution agreements to require
copying at the principal office of the
data vendors to prominently identify the
Exchange. All comments received will
listing market for BX Venture Marketbe posted without change; the
listed securities before the market
Commission does not edit personal
begins operations. In addition, BX must
identifying information from
represent in a letter to the staff in the
submissions. You should submit only
Commission’s Division of Trading and
information that you wish to make
Markets that such policy document and
publicly available. All submissions
agreements have been amended and that
should refer to File Number SR–BX–
the provisions in such documents that
2010–059 and should be submitted on
require data vendors to prominently
or before June 2, 2011.
identify or display the listing market for
BX-listed securities will be effective
V. Accelerated Approval of Proposed
with respect to all vendors that
Rule Change, as Modified by
distribute BX-listed securities data at
Amendment No. 2
the time the BX Venture Market begins
Amendment No. 2 revised the
operations.
proposed rule change, as modified by
B. Regulatory Services Agreement.
Amendment No. 1, to, among other
Before the BX Venture Market begins
things: (1) Explain the process of
operations, BX and FINRA must enter
reviewing companies for initial listing,
into a regulatory services agreement
including conducting background
244 15 U.S.C. 78s(b)(2).
checks on companies and associated
245 15 U.S.C. 78s(b)(2).
individuals, and the use of third-party
wwoods2 on DSK1DXX6B1PROD with NOTICES_PART 1
may be submitted by any of the
following methods:
VerDate Mar<15>2010
14:49 May 11, 2011
Jkt 223001
PO 00000
Frm 00098
Fmt 4703
Sfmt 4703
relating to regulatory activities to be
conducted by FINRA as described
above.
C. Examination by the Commission.
BX must have, and represent in a letter
to the staff in the Commission’s Office
of Compliance Inspections and
Examinations that it and FINRA have,
adequate regulatory procedures and
programs in place to effectively regulate
the BX Venture Market and its listing
program, and adequate procedures and
programs in place to effectively process
trades and maintain the confidentiality,
integrity, and availability of the
Exchange’s systems, before the BX
Venture Market begins operations.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.246
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011–11610 Filed 5–11–11; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–64414; File No. SR–CBOE–
2011–045]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend the CBOE
Stock Exchange Fees Schedule
May 5, 2011.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on April 29,
2011, the Chicago Board Options
Exchange, Incorporated (‘‘Exchange’’ or
‘‘CBOE’’) filed with the Securities and
Exchange Commission (‘‘Commission’’)
the proposed rule change as described
in Items I, II, and III 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.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend the
CBOE Stock Exchange (‘‘CBSX’’) Fees
Schedule. The text of the proposed rule
change is available on the Exchange’s
Web site (https://www.cboe.org/legal), at
the Exchange’s Office of the Secretary,
and at the Commission.
246 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
E:\FR\FM\12MYN1.SGM
12MYN1
]]>Agencies
[Federal Register Volume 76, Number 92 (Thursday, May 12, 2011)]
[Notices]
[Pages 27710-27730]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-11610]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-64437; File No. SR-BX-2010-059]
Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Order
Granting Approval of Proposed Rule Change and Amendment No. 1 Thereto
and Notice of Filing and Order Granting Accelerated Approval to
Amendment No. 2 Thereto To Create a Listing Market on the Exchange
May 6, 2011.
On August 20, 2010, NASDAQ OMX BX, Inc. (the ``Exchange'' or
``BX'') filed with the Securities and Exchange Commission (the
``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to create a listing market on the Exchange, called
``The BX Venture Market'' (``BX Venture Market''). The proposed rule
change was published for comment in the Federal Register on September
8, 2010.\3\ 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.\4\ The
Commission received three comments in response to the Notice.\5\
---------------------------------------------------------------------------
\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 Securities Exchange Act Release No. 63105 (October 14,
2010), 75 FR 64772 (October 20, 2010).
\5\ See Letters to Elizabeth M. Murphy, Secretary, Commission,
from William F. Galvin, Secretary of the Commonwealth, Commonwealth
of Massachusetts, dated September 28, 2010 (``MSD Letter''); Michael
R. Trocchio, Bingham McCutchen LLP, on behalf of Pink OTC Markets
Inc., dated October 3, 2010 (``Pink OTC Markets Letter''); and Tom
A. Alberg, Managing Director and Founder, Madrona Venture Group,
dated December 1, 2010 (``Madrona Letter'').
---------------------------------------------------------------------------
On December 6, 2010, the Exchange submitted Amendment No. 1 to the
proposed rule change.\6\ On December 7, 2010, the Commission instituted
proceedings to determine whether to disapprove the proposed rule
change, as modified by Amendment No. 1.\7\ The Commission thereafter
received eight comments on the proposal.\8\ The Exchange submitted a
response letter to the comments on February 17, 2011.\9\ On March 3,
2011, the Commission issued a notice of designation of longer period
for Commission action on proceedings to determine whether to disapprove
the proposed rule change, as modified by Amendment No. 1.\10\ On May 4,
2011, the Exchange submitted Amendment No. 2 to 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
[[Page 27711]]
comments on Amendment No. 2 from interested persons and is approving
the proposed rule change, as modified by Amendment Nos. 1 and 2, on an
accelerated basis.
---------------------------------------------------------------------------
\6\ See Securities Exchange Act Release No. 63597 (December 22,
2010), 75 FR 82098 (December 29, 2010).
\7\ See Securities Exchange Act Release No. 63448 (December 7,
2010), 75 FR 77036 (December 10, 2010) (``Order Instituting
Proceedings'').
\8\ See Letters to Elizabeth M. Murphy, Secretary, Commission,
from James J. Angel, Ph.D., CFA, dated January 14, 2011 (``Angel
Letter''); K. Richard B. Niehoff, Chairman and CEO, United States
OTC Markets, Inc., dated January 20, 2011 (``Niehoff Letter''); Mark
G. Heesen, President, National Venture Capital Association, dated
January 21, 2011 (``NVCA Letter''); Alan F. Eisenberg, Executive
Vice President, Emerging Companies and Business Development,
Biotechnology Industry Organization, dated January 24, 2011 (``BIO
Letter''); Michael R. Trocchio, Bingham McCutchen LLP, on behalf of
OTC Markets Group Inc., dated January 24, 2011 (``OTC Markets Group
Letter''); Rey Ramsey, President and CEO, TechNet, dated January 24,
2011 (``TechNet Letter''); William F. Galvin, Secretary of the
Commonwealth, Commonwealth of Massachusetts, dated January 26, 2011
(``MSD Letter II''); and James McCarthy, Co-Founder, the US Venture
Exchange, dated April 19, 2011 (``McCarthy Letter'').
\9\ See Letter to Elizabeth M. Murphy, Secretary, Commission,
from Joan C. Conley, Senior Vice President and Corporate Secretary,
The NASDAQ OMX Group, dated February 17, 2011 (``BX Response
Letter'').
\10\ See Securities Exchange Act Release No. 64028 (March 3,
2011), 76 FR 13010 (March 9, 2011).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of Amendment No. 2 to the Proposed Rule Change
The Exchange proposes to create a listing market, which will be
called ``the BX Venture Market.'' Following Commission approval, the
Exchange will announce the operational date of the new market in an
Equity Trader Alert and press release. The proposed rules will become
effective on the operational date.
The text of the proposed rule change is available at https://nasdaqomxbx.cchwallstreet.com, at BX's principal office, and at the
Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
Sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
In connection with the acquisition of the former Boston Stock
Exchange by The NASDAQ OMX Group, Inc., the Exchange discontinued its
listing marketplace and delisted all securities previously listed on
the Exchange.\11\ Since January 2009, the Exchange has operated as a
trading venue only, allowing market participants to trade securities
listed on other national securities exchanges pursuant to unlisted
trading privileges. The Exchange is proposing to begin listing
securities again, through the creation of a new listing market, to be
called ``The BX Venture Market.'' The BX Venture Market will have
minimal quantitative listing standards, but will have qualitative
requirements that are, in many respects, similar to those required for
listing on The NASDAQ Stock Market (``NASDAQ'') and other national
securities exchanges.\12\ The Exchange believes that the name BX
Venture Market will appropriately convey the lower financial standards
required for listing on this market and distinguish the BX Venture
Market from other national securities exchanges. The term ``venture''
is already used to designate the junior market in Canada, the TSX
Venture Market. Moreover, ``venture'' by definition broadly connotes an
undertaking involving some uncertainty or risk in return for the hope
of profit, rather than referring solely to companies that are backed by
venture capital. It is thus a familiar term for a venue designed to
provide an attractive alternative to companies being delisted from
another national securities exchange for failure to meet quantitative
listing standards (including price or other market value measures), as
well as smaller companies contemplating an initial exchange listing.
The Exchange further believes that the proposed listing venue will
provide a transparent, well-regulated marketplace for these companies
and their investors.\13\
---------------------------------------------------------------------------
\11\ See Securities Exchange Act Release No. 59265 (January 16,
2009), 74 FR 4790 (January 27, 2009) (approving SR-BSE-2008-36
relating to the delisting of all securities from the Exchange in
connection with the Exchange's discontinuation of trading).
\12\ The Exchange notes that not all qualitative requirements
imposed by other exchanges would be required. See Listing
Requirements, infra, for a full discussion of the proposed
quantitative and qualitative requirements for listing on BX.
\13\ The Exchange will propose in a separate rule filing changes
to the BX Equities Platform to govern trading of, and reporting of
transactions in, these listed securities and introducing and
modifying market data products to permit dissemination of accurate
quotation information and reporting of transactions.
---------------------------------------------------------------------------
As discussed in more detail below, the Exchange will operate and
regulate the BX Venture Market through regulatory contracts with FINRA
and the NASDAQ Stock Market LLC, which will be in place prior to the
Market becoming operational. While the Exchange will retain all legal
responsibility for and control of the functions performed by these
entities, it will leverage FINRA's expertise overseeing the over-the-
counter markets, surveillance enhancements provided by the SMARTS
Group,\14\ and the deep experience of the NASDAQ Listing Qualifications
Department to ensure high quality oversight for market activity and
listed companies. Moreover, the Exchange has proposed rules to provide
a clear signal to investors that a company is listed on the BX Venture
Market and to distinguish the BX Venture Market from NASDAQ and other
national securities exchanges. These proposed rules also require a
rigorous vetting procedure before a company may attain a listing, and
heightened scrutiny thereafter of listed Companies. Finally, the
Exchange will not launch the BX Venture Market before approval is
obtained for an arrangement between the Exchange and FINRA to
consolidate and disseminate best quotation and last sale data for BX
Venture Market listed securities and that arrangement is
operational.\15\ All of these matters are discussed more fully below.
---------------------------------------------------------------------------
\14\ SMARTS Group, a subsidiary of NASDAQ OMX, is a leading
technology provider of market surveillance solutions to exchanges
and regulators around the world
\15\ The Commission notes that its order in Section VI, infra,
does not contain this condition.
---------------------------------------------------------------------------
Listing Requirements
The BX Venture Market would list Common Stock, Preferred Stock,
Ordinary Shares, Shares or Certificates of Beneficial Interest of
Trust, Limited Partnership Interests, American Depositary Receipts
(ADR), American Depositary Shares (ADS), Units, Rights and Warrants. To
be listed on the BX Venture Market, companies will need to meet the
following qualitative listing standards, each of which is equivalent to
the comparable listing standard of NASDAQ or is derived from the
Federal securities laws:
(a) The company must be registered under Section 12(b) of the Act
\16\ and current in its periodic filings with the Commission and, as a
result, subject to the requirements of the Sarbanes-Oxley Act of 2002
\17\ (proposed Rule 5210(a) and 5210(e));
---------------------------------------------------------------------------
\16\ 15 U.S.C. 781(b).
\17\ 15 U.S.C. 7201-7266.
---------------------------------------------------------------------------
(b) The company must have a fully independent Audit Committee
comprised of at least three members and comply with the requirements of
SEC Rule 10A-3, promulgated under the Act \18\ (proposed Rule 5605(c));
---------------------------------------------------------------------------
\18\ 17 CFR 240.10A-3.
---------------------------------------------------------------------------
(c) The company must have independent directors make compensation
decisions for executive officers (proposed Rule 5605(d));
(d) The company will be prohibited from taking any corporate action
with the effect of nullifying, restricting or disparately reducing the
per share voting rights of holders of an outstanding class of the
company's common stock registered pursuant to Section 12 of the Act
(proposed Rule 5640);
(e) The company's auditor will be required to be registered with
the Public Company Accounting Oversight
[[Page 27712]]
Board \19\ (proposed Rules 5210(b) and 5250(c)(3));
---------------------------------------------------------------------------
\19\ See Section 102 of the Sarbanes-Oxley Act, 15 U.S.C. 7212.
---------------------------------------------------------------------------
(f) The company will be required to hold an annual shareholders'
meeting and solicit proxies for each shareholders' meeting (proposed
Rule 5620);
(g) The company will be required to obtain shareholder approval for
the use of equity compensation (proposed Rule 5635);
(h) The company will be required to adopt a code of conduct,
applicable to all directors, officers and employees (proposed Rule
5610);
(i) The company will be required to conduct an appropriate review
and oversight of all related party transactions, to address potential
conflict of interest situations (proposed Rule 5630);
(j) The company will be required to disclose material information
through any Regulation FD compliant method (or combination of methods)
(proposed Rule 5250(b) and IM-5250-1);
(k) The listed securities must be eligible for a Direct
Registration Program operated by a clearing agency registered under
Section 17A of the Act \20\ (proposed Rules 5210(c) and 5255);
---------------------------------------------------------------------------
\20\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------
(l) Public ``shells'' would not be allowed to list (proposed Rule
5103(b)); and
(m) The Exchange will conduct a public interest review of the
company and significant persons associated with it (proposed Rules
5205(c) and 5104 and IM-5104-1). A company would not be eligible for
listing if any executive officer, director, promoter, or control person
was involved in any event described in Item 401(f)(2)-(8) of Regulation
S-K that occurred during the prior five years (proposed Rule 5103(a)).
In addition, the BX Venture Market would apply the following
quantitative listing standards, set out in proposed Rules 5505 and 5506
(initial listing) and 5550 (continued listing), which are designed to
assure a minimum level of trading consistent with a public market for
the securities:
(a) 200,000 publicly held shares;
(b) 200 public shareholders, at least 100 of which must be round
lot holders for initial listing, and 200 public shareholders for
continued listing;
(c) A market value of listed securities of at least $2 million for
initial listing and $1 million for continued listing;
(d) Two market makers; and
(e) A minimum initial listing price of $0.25 per share for
securities previously listed on a national securities exchange and
$1.00 per share for securities not previously listed on a national
securities exchange. For continued listing, securities will be required
to maintain a minimum $0.25 per share bid price.
Further, with respect to companies not previously listed on a
national securities exchange, the BX Venture Market will also require
for initial listing that the company have either $1 million
stockholders' equity or $5 million total assets, a one year operating
history, and a plan to maintain sufficient working capital for the
company's planned business for at least twelve months after the first
day of listing.
The Exchange would also require that rights and warrants will only
be eligible for initial and continued listing if the underlying
security is listed on the BX Venture Market or is a covered security,
as described in Section 18(b) of the Securities Act of 1933.\21\
---------------------------------------------------------------------------
\21\ 15 U.S.C. 77r(b).
---------------------------------------------------------------------------
The proposed listing standards are designed to allow companies that
are being delisted from another national securities exchange for
failure to meet that exchange's quantitative listing requirements the
opportunity to provide their investors with a better regulated, more
transparent trading environment than may otherwise be available in the
over-the-counter markets. The Exchange believes that allowing these
companies to continue trading on a national securities exchange may
enable some institutional investors to continue their ownership stake
in the company, which could provide greater stability to the company's
shareholder base and possibly avoid forced sales by such investors.\22\
The Exchange also believes that the BX Venture Market will provide an
opportunity for smaller, private, venture-backed companies to expand
their capital financing opportunities and go public, and at the same
time, encourage investment in early-stage companies by providing
private equity and venture funders with an exit strategy. In addition,
companies currently traded over-the-counter could view this market as
an aspirational step towards a listing on another national securities
exchange. The Exchange believes that the agreement of such companies to
comply with the Exchange's corporate governance standards and the
application of the Exchange's public interest authority will provide
additional protections to their investors than would be available in
their present trading venue. Moreover, the Exchange believes that a
listing on the BX Venture Market could help such companies raise
capital, in turn promoting job creation within the United States.
Finally, the Exchange believes that the BX Venture Market will be a
more attractive alternative to domestic companies that might otherwise
have considered a listing on non-U.S. junior markets, which generally
have lower listing requirements.
---------------------------------------------------------------------------
\22\ 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 over-the-counter market.
---------------------------------------------------------------------------
Investor Protection Provisions
The Exchange recognizes that the listing requirements for the BX
Venture Market will be lower than those of the NASDAQ Stock Market and
other national securities exchanges, and that the market will,
therefore, attract smaller, less liquid companies, which may create
higher risks for investors. Mindful of these risks and the Exchange's
objective to preserve the quality of and public confidence in its
market, the Exchange has adopted rules to preclude investor confusion
about BX Venture Market listings. The Exchange will also subject
companies and associated individuals to a rigorous review process
before approving a listing, and apply heightened regulatory scrutiny to
listed Companies.
References to Listing. To avoid investor confusion, the listing
rules of the BX Venture Market specify that a BX Venture Market-listed
company must refer to its listing as on the BX Venture Market, unless
otherwise required by applicable rules or regulations. Staff will
review any failure of a company to follow this requirement, and take
appropriate action pursuant to the Rule 5800 Series. A company that
represents itself as listed on the NASDAQ Stock Market or refers to
itself as a NASDAQ listed company will be subject to immediate
delisting pursuant to procedures in the Rule 5800 Series.\23\ To
enforce this prohibition, the Exchange will monitor the press releases
issued by a BX Venture Market-listed company \24\ and will annually
review the company's Web site to determine how the company is referring
to its listing.
---------------------------------------------------------------------------
\23\ Proposed Rule 5250(b)(4).
\24\ Pursuant to Proposed Rule 5250, which addresses disclosure
obligations, a listed company that issues a press release in
satisfaction of its disclosure obligations is required to
disseminate the press release over a national newswire service
acceptable to the Exchange.
---------------------------------------------------------------------------
Similarly, in describing this listing venue, the Exchange will
refer to it as the BX Venture Market and not as NASDAQ OMX BX. The
Exchange will also prominently include information on its Web site
describing the
[[Page 27713]]
differences between the BX Venture Market and other national securities
exchanges, including NASDAQ.\25\ For example, it will inform users that
BX Venture Market-listed stocks are not ``blue sky'' exempt, are not
NMS securities, and are not subject to the trade-through rule, and
provide side-by-side comparisons of BX Venture Market and NASDAQ Stock
Market features. Marketing materials for the BX Venture Market will
also include a prominent disclaimer explaining that the BX Venture
Market is separate from, and not a tier of, the NASDAQ Stock Market.
Finally, as required by proposed Rule 5106 and discussed in more detail
later in this filing, the Exchange will require data vendors to
identify when the BX Venture Market is the listing market for a
security with a unique market center identifier, so as to clearly
differentiate those securities from securities listed on NASDAQ or
other exchanges or traded over-the-counter.
---------------------------------------------------------------------------
\25\ Rule 5106.
---------------------------------------------------------------------------
Automatic Bars to Listing. Proposed Rule 5103 provides for certain
automatic bars to listing. Under that Rule, the Exchange will not
approve for listing or allow the continued listing of ``shell''
Companies.\26\ This prohibition is based on concerns that the investors
in shell companies are unaware of the ultimate business in which they
are investing and that trading in such securities is more susceptible
to market manipulation. The Exchange will also decline to list any
company, and will delist any listed company, that attempts to rely on
an exemption from state securities registration which otherwise may be
available under state law to Companies listed on the Exchange. Finally,
the Exchange will not approve for listing or allow the continued
listing of a company if any executive officer, director, promoter, or
control person was involved in any event that occurred during the prior
five years described under Item 401(f)(2)--(8) of Regulation S-K under
the Act. Such events include criminal convictions and pending charges,
violations of securities laws, and court or administrative actions
barring or limiting the individual from certain security related
activities.\27\
---------------------------------------------------------------------------
\26\ Proposed Rule 5103(b) sets forth a number of factors that
the Exchange will consider in determining whether a Company is a
shell, including whether the Company is considered a ``shell
company'' as defined in Rule 12b-2 under the Act, 17 CFR 240.12b-2.
\27\ If a listed Company discloses an event involving an
executive officer, director, promoter, or control person described
under Item 401(f)(2)-(8) of Regulation S-K, the Exchange would
provide the Company with thirty days to remove the executive
officer, director, promoter, or control person. If the Company does
not do so, the Exchange would send a delisting notification to the
Company.
---------------------------------------------------------------------------
To enforce these automatic bars, and to identify other public
interest concerns that, while not triggering an automatic bar, may call
for the use of the Exchange's discretionary authority to disapprove a
listing, the Exchange will engage in a rigorous review of listing
applications, which will include background checks of individuals
associated with the company and the assistance of independent qualified
third-party investigators.
Application and Public Interest Review. The listing application
will require provision to the Exchange, and Staff review, of all
reports and documents required to be filed with the Commission or other
regulatory authority, as well as any other information or
documentation, public or non-public, Staff determines is necessary for
its review. Companies must also provide detailed descriptions and
supporting documentation of all pending or prior inquiries,
investigations, lawsuits, litigation, arbitration, hearings or any
other legal or administrative proceedings involving the company, its
executive officers, directors, promoters, and ten percent or greater
shareholders of the company.\28\ The company must, in addition,
disclose any events described under Item 401(f) of Regulation S-K
involving officers, directors, promoters, or control persons; describe
all bridge financings, shelf registrations, Regulation S offerings or
private placements consummated in the prior six months; and provide
copies of any blue sky memoranda.
---------------------------------------------------------------------------
\28\ A ten year history of such inquiries, investigations, and
proceedings involving the company will be required; there is no time
limit on the history required for executive officers, directors,
promoters, or controlling shareholders.
---------------------------------------------------------------------------
Staff will also review the company's proxy disclosures to screen
for events described pursuant to Item 401(f) of Regulation S-K under
the Act. Moreover, it will conduct background checks of the company and
affiliated individuals. This background investigation will be conducted
by Staff members experienced in such reviews and will make use of
public databases and other resources, such as Lexis-Nexis, the Web-CRD
regulatory database, and web-based search engines, such as Google.\29\
Finally, the Exchange will request review of a company by an
independent qualified third-party investigative firm in appropriate
circumstances, as discussed in more detail below.
---------------------------------------------------------------------------
\29\ Proposed Rule 5205(c)(1).
---------------------------------------------------------------------------
If the Exchange identifies a regulatory issue that triggers an
automatic bar the application will be disapproved. If the Exchange
identifies a regulatory event described pursuant to Item 401(f)(2)-(8)
of Regulation S-K about an officer, director, promoter, or control
person that occurred more than five years prior; or a history of
regulatory misconduct by a person that is not an officer, director,
promoter, or control person of the company but who has significant
influence on or importance to the company, it will ordinarily exercise
its discretionary authority to deny listing. However, if the Exchange
determines that the information identified may not rise to the level
requiring denial of the listing, or if it identifies any issue that
raises potential public interest concerns about which it seeks
additional information (such as, for example, media accounts of
criminal allegations or improper business practices, or any indication
of financial improprieties) it will refer the company to an independent
qualified third party investigative firm for review. Any decision to
list a company that has been referred to an independent investigative
review based on the regulatory history of an associated individual that
does not trigger an automatic bar, must be approved in writing by the
Chief Regulatory Officer (``CRO'') of the Exchange. The CRO must also
approve the listing of any company with an officer, director, promoter,
or control person who has described a bankruptcy under Item 401(f)(1)
of Regulation S-K. Finally, whenever Staff has identified a past
violation or evasion of a corporate governance standard pursuant to its
review of a formerly exchange-listed company's past corporate
governance activities, but decides not to exercise its discretionary
authority to deny listing, the listing must be approved in writing by
the CRO. Documentation of the CRO's approvals will be maintained with
the Exchange's listing file for the company.
Independent Investigative Assistance. The Exchange will retain a
qualified independent third party investigative firm to assist in its
public interest review process. Staff will make random, regular
referrals to such a firm of at least 10% of applicant companies that
were not previously listed on a national securities exchange.\30\ In
addition, Staff
[[Page 27714]]
will utilize an investigative firm when it would be impractical to
research a regulatory history occurring outside the United States.
Finally, Staff will seek review of a company when its internal review
has uncovered a regulatory issue or potential public interest concern
that does not trigger an automatic bar and Staff has not made a
determination to disapprove the application. While the scope of
investigations will vary based on the reasons for review, they
generally will focus on criminal history, government sanctions and
watchlists, and will also include online and onsite checks of court
records, searches of relevant state and country criminal databases, and
searches of global risk compliance databases covering government
prohibited and barred persons. In appropriate circumstances, such as
where questions are raised related to the legitimacy or appropriateness
of an applicant's business practices, customers, or suppliers, whether
through whistle blower complaints or otherwise, the outside firm would
be asked to make inquiries with respect to those matters.
---------------------------------------------------------------------------
\30\ Proposed Rule 5205(d). While the Exchange expects to refer
between 10-20% of such applicant companies, this ratio could change
upon evaluation of the findings provided by the investigative firms.
The Exchange does not expect that random referrals of companies that
have previously been listed on a national securities exchange will
be necessary, but will reevaluate that assumption on an on-going
basis.
---------------------------------------------------------------------------
These procedures and determinations shall be followed, as
applicable, whenever a listed company names a new officer, director,
promoter, or control person or describes an event pursuant to Item
401(f) of Regulation S-K under the Act, and whenever Staff, in the
course of its on-going monitoring of listed Companies, identifies a
potential public interest concern. These background procedures would
also apply when a listed company combines or reverse-merges with a non-
listed entity, resulting in a ``change of control'' transaction
pursuant to Listing Rule 5110.\31\
---------------------------------------------------------------------------
\31\ If a listed Company combines or reverse merges with a non-
listed entity, resulting in a change of control, the post-merger
company must apply for and meet all initial listing requirements
before listing on the Exchange. Delisting proceedings will be
initiated if an application for listing of the new entity has not
been approved before consummation of the transaction. Rule 5110
includes a non-exclusive list of considerations to be used for
determining whether a change of control has occurred.
---------------------------------------------------------------------------
Oversight of Listings and Delistings
Pursuant to an intercompany regulatory services agreement that will
be in place before the BX Venture Market is operational, Staff in
NASDAQ's Listing Qualifications Department will be responsible for
processing listings, conducting on-going compliance monitoring of
listed companies, and implementing delistings. Notwithstanding the
contractual arrangement, the Exchange retains ultimate legal
responsibility for, and control of, these functions. The NASDAQ Listing
Qualifications Department is presently comprised of 33 individuals,
which include 13 continued listing analysts, four initial listing
analysts, and an investigations group. This Staff is extremely
experienced in regulatory analysis: the average person has over ten
years of experience at NASDAQ and several have extensive backgrounds
outside NASDAQ in investigating alleged violations of the Federal
securities laws. The sophisticated technology used by this Department
enables Staff to efficiently review public filings and identify and
prioritize issues that may raise concerns under the listing standards,
including public interest concerns. Among other things, this system is
programmed to identify any quantitative deficiencies arising from the
filings or from trading data, immediately notify the appropriate Staff,
and keep an auditable record of how Staff treated the deficiency.
The proposed rules require, moreover, that the listing process will
at all times be supervised by at least one person with substantial
prior experience supervising such a program at a national securities
exchange with a currently active listing program. The head of the
Exchange's Listing Department, who will have no marketing
responsibilities and will report to NASDAQ OMX's Chief Regulatory
Officer, will be involved in all decisions concerning whether to permit
or deny listing to a company based on a public interest concern. In
addition, the investigations group must be supervised by at least one
person with substantial prior regulatory experience at another national
securities exchange or with an organization, such as the SEC's
Enforcement Division or FINRA, which has securities-related enforcement
responsibilities. Finally, the Exchange's Chief Regulatory Officer will
be required to have had substantial prior regulatory experience with a
national securities exchange or equivalent experience.\32\ This person
will be required to approve the listing of any company where potential
regulatory concerns have been identified, including cases where the
company has disclosed information about an executive officer, director,
promoter, or control person involving an event described under Item
401(f) of Regulation S-K that does not trigger the automatic bar
described above.\33\
---------------------------------------------------------------------------
\32\ Proposed Rule 5102.
\33\ Proposed IM 5104-1.
---------------------------------------------------------------------------
Should the workload resulting from the new BX Venture Market prove
sufficiently high, the Exchange and NASDAQ have each committed to
hiring additional staff, as necessary. In that regard, the staffing
within Listing Qualifications 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 the Exchange's Regulatory
Oversight Committee.
Quantitative Listing Standards
The Exchange proposes that any company that meets the quantitative
(e.g., financial) requirements for listing on NASDAQ will not be
approved for listing on the BX Venture Market. This will assure that
such companies only become listed on the exchange with higher listing
standards.
Given that the Exchange expects to list companies that do not meet
the quantitative listing requirements of the primary existing national
securities exchanges, it is expected that BX Venture Market-listed
companies will include smaller companies and companies facing business
or other challenges. Thus, the proposed quantitative standards for the
BX Venture Market were deliberately structured to be lower than those
of the other primary exchanges. In that regard, the minimum price
requirement for listing on the BX Venture Market will be $0.25 per
share for a security previously listed on another national securities
exchange and $1.00 per share for a security previously quoted in the
over-the-counter market or listing in connection with its initial
public offering. Until September 30, 2011, the Exchange would consider
any company that was listed on another national securities exchange at
any time since January 1, 2010, to be eligible to list with a $0.25 per
share price. The Exchange believes it appropriate to consider a company
delisted since January 1, 2010, as previously listed on another
national securities exchange because the BX Venture Market would not
have been available to such companies when they were delisted. A number
of companies were delisted during 2010 as a result of difficulties
arising from the financial crisis and this look-back will also allow
these companies, which may have recovered but not yet meet the initial
listing requirements of another exchange, to list on the BX Venture
Market. Furthermore, the Exchange believes it is appropriate to
continue this treatment until September 30, 2011, to assure that such
companies have an adequate opportunity to learn about the BX
[[Page 27715]]
Venture Market and sufficient time to complete their application and
have that application processed by the Exchange. After September 30,
2011, a company will be considered to have been previously listed on a
national securities exchange, and therefore eligible to list with a
$0.25 per share price, only if it was listed on such an exchange at any
time during the three months prior to its listing on the BX Venture
Market. The Exchange believes that this three month period will allow
the company sufficient time to apply for listing on the BX Venture
Market and have its application processed.
For continued listing, a security will be required to maintain a
minimum $0.25 per share bid price.\34\ If the security does not
maintain a minimum $0.25 per share bid price for 20 consecutive trading
days, Exchange Staff would issue a Staff Delisting Determination and
the security would be suspended from trading on the BX Venture
Market.\35\ A company could appeal that determination to a Hearings
Panel, however such an appeal would not stay the suspension of the
security.\36\ During the Hearings Panel process, the security could
regain compliance by achieving a $0.25 per share minimum bid price
while trading on another venue, such as the over-the-counter market,
for ten consecutive days. However, if the company has received three or
more Staff Delisting Determinations for failure to comply with minimum
price requirement in the prior 12 months, the company could only regain
compliance by achieving a closing bid price of $0.25 per share or more
for at least 20 consecutive trading days. The Exchange believes that
this higher requirement for companies that were previously non-
compliant is appropriate to reduce the likelihood of future instances
of non-compliance and the concomitant investor confusion concerning the
ability of the company to remain listed. If the Hearings Panel
determines that the security has satisfied the applicable standard to
regain compliance, the trading halt would be terminated and the
security would resume trading on the Exchange.
---------------------------------------------------------------------------
\34\ The Exchange notes there is also no price requirement for
initial or continued listing on the National Stock Exchange or for
continued listing on NYSE Amex and therefore that the proposed
continued listing requirement exceeds the requirement of those
exchanges.
\35\ Proposed Rule 4120(a)(12).
\36\ Proposed Rule 5815(a)(1)(C).
---------------------------------------------------------------------------
To be eligible for initial listing, a company not previously listed
on a national securities exchange must have at least a one year
operating history, a minimum of either $1 million in stockholders'
equity or $5 million in total assets, and demonstrate that it has a
plan to maintain sufficient working capital for its business for at
least twelve months after the first day of listing. The Exchange
believes that these requirements will help assure that a company that
was not previously subject to exchange regulation nonetheless has a
credible and sustainable business.
The Exchange believes that the proposed public float, holder and
market maker requirements, together with the minimum market value of
listed securities requirement, will assure sufficient liquidity in
listed securities. In that regard, the Exchange notes that the
shareholder and publicly held shares requirements are comparable to, or
higher than, requirements for listing a preferred stock or secondary
class of common stock on the NASDAQ Capital Market, which require 100
round lot shareholders and 200,000 publicly held shares. The Exchange
is not aware of any difficulties in the trading in securities meeting
these requirements. Further, requiring two market makers will assure
competing quotations for potential buyers and sellers of the securities
listed on the BX Venture Market. Finally, the Exchange believes that
the minimum market value of listed securities requirement will help
assure that the company issuing the securities is of a sufficient size
to generate interest from investors and market participants. While
these proposed standards may be lower than those of other exchanges,
investors will be protected by the fact that securities listed on the
BX Venture Market would be considered penny stocks under Exchange Act
Rule 3a51-1, unless they qualify for an exemption from the definition
of a penny stock.\37\ As such, broker-dealers would be required to pre-
approve their customers for trading in penny stocks and investors will
obtain the disclosures required to be made by broker-dealers in
connection with penny stock transactions, providing them with trade and
market information prior to effecting a transaction. Further, there
will be no ``blue sky'' exemption available under Section 18 of the
Securities Act of 1933,\38\ so companies will be required to satisfy
state law registration requirements and other state laws that regulate
the sale and offering of securities. Because some state laws and
regulations may provide an exemption from certain registration or
``blue sky'' requirements for companies listed on the former Boston
Stock Exchange, based on the higher listing standards previously
applied by that Exchange, proposed Rule 5103(c) would provide that the
Exchange will take action to delist any company listed on the BX
Venture Market that attempts to rely on such an exemption.\39\
Companies will also agree not to rely on any such exemption as a
provision of the BX Venture Market Listing Agreement. Listed companies
will be required to represent to the Exchange that they are not relying
on any such exemption in connection with any securities offering and
will be required to provide the Exchange with copies of any ``blue sky
memoranda'' prepared in connection with the issuance of shares.\40\
These steps will allow the Exchange to assure that the company is not
inappropriately relying on such an exemption.
---------------------------------------------------------------------------
\37\ 17 CFR 240.3a51-1. The Exchange is not seeking an exemption
from the penny stock rules for securities listed on BX, however a
security may be excluded from the definition of a penny stock as a
result of the security having a price in excess of $5 or its issuer
having net tangible assets in excess of $2 million (if the issuer
has been in continuous operation for at least three years) or $5
million (if the issuer has been in continuous operation for less
than three years) or average revenue of at least $6 million for the
last three years. Rule 3a51-1(d) and (g), 17 CFR 240.3a51-1(d) and
(g).
\38\ 15 U.S.C. 77r.
\39\ The Exchange notes that the Massachusetts Securities
Division has requested comment on a proposed change to its
regulations to eliminate its exemption from the registration
requirement for securities listed on the BX Venture Market. See
https://www.sec.state.ma.us/sct/sctnewregs/newregsidx.htm#hearing.
\40\ Proposed Rule 5250(e)(7). The Exchange has proposed to add
these requirements in response to comments submitted on the original
proposal.
---------------------------------------------------------------------------
Qualitative Listing Standards
The BX Venture Market corporate governance requirements are
generally comparable to those of the other exchanges. The Exchange
would require that a listed company have an audit committee comprised
of at least three independent directors that also meet the requirements
of SEC Rule 10A-3.\41\ For a director to be considered an independent
director, the company's board would have to determine that the
individual does not have a relationship which, in the board's opinion,
would interfere with the exercise of independent judgment in carrying
out the responsibilities of a director.\42\ The board would be
precluded from finding a director independent based on certain
relationships, including if that director
[[Page 27716]]
is currently an employee of the company or was employed by the company
during the prior three years (including as an executive officer),
accepted certain compensation or payments from the company during the
prior three years, or had a family member with certain affiliations
with the company.\43\
---------------------------------------------------------------------------
\41\ 17 CFR 240.10A-3. See proposed Rule 5605(c)(2). Companies
may be eligible for a phase-in or cure period with respect to
certain of these requirements.
\42\ Proposed Rule 5605(a)(2) and IM-5605-1. The proposed
definition of an independent director is identical to NASDAQ's
definition of an independent director.
\43\ Id.
---------------------------------------------------------------------------
The audit committee would be required to have a charter setting out
its responsibilities, including the committee's purpose of overseeing
the accounting and financial reporting processes of the company and the
audits of the company's financial statements and the responsibilities
and authority necessary to comply with SEC Rule 10A-3.\44\ The audit
committee, or another independent body of the board, will also be
required to conduct an appropriate review and oversight of any related
party transaction.\45\ The Exchange believes that this requirement will
limit the potential for self-dealing in connection with any related
party transactions.
---------------------------------------------------------------------------
\44\ Proposed Rule 5605(c)(1).
\45\ Proposed Rule 5630.
---------------------------------------------------------------------------
The Exchange would also require that independent directors make
compensation decisions concerning the chief executive officer and other
executive officers.\46\ Independent directors would be required to meet
on a regular basis in executive sessions.\47\ These requirements for
audit committees, compensation decisions, and executive sessions are
identical to those of NASDAQ and substantially similar to those of the
other national securities exchanges and the Exchange believes they will
serve to empower the independent directors of its listed companies.
---------------------------------------------------------------------------
\46\ Proposed Rule 5605(d) and IM-5605-6. A company can satisfy
this requirement by having their independent directors make these
decisions in executive session, or by having independent directors
sit on a compensation committee. If the company chooses to use a
compensation committee and the committee is comprised of at least
three members, one director who is not independent as defined in
Rule 5605(a)(2) and is not a current officer or employee or a Family
Member of an officer or employee, may be appointed to the
compensation committee under exceptional and limited circumstances,
provided the company makes appropriate disclosure. Of course the
Exchange will adopt rules required by Section 952 of the Dodd-Frank
Wall Street Reform and Consumer Protection Act following the
necessary SEC rulemaking related to that provision. See Listing
Standards for Compensation Committees, Release No. 33-9199 (April 6,
2011) (76 FR 18966).
\47\ Proposed Rule 5605(b).
---------------------------------------------------------------------------
While the Exchange would require that a listed company have at
least three independent directors to satisfy the audit committee
requirement described above, it would not require that a majority of
the company's board of directors be independent or an independent
nomination committee because the Exchange believes those requirements
could impose significant additional costs on these smaller companies
and therefore discourage companies from pursuing an otherwise
beneficial listing. In that regard, given the significant
responsibilities imposed on audit and compensation committee members,
directors who serve on these committees are sometimes reluctant to
serve on other committees. As such, if the BX Venture Market were to
also require an independent nominations committee, companies may have
to increase the size of their boards and add additional independent
directors. Similarly, requiring that independent directors comprise a
majority of a company's board could also require companies to add
additional independent directors. In each case, the need to add
independent directors would impose additional costs on the company.\48\
Moreover, nothing in the Commission's rules or the Act mandate these
requirements.\49\ However, the Exchange believes that the requirement
for executive sessions of the independent directors will provide a
forum for the independent directors to consider whether the governance
structure of the company is appropriate and raise any concerns,
notwithstanding the lack of a majority independence and nominations
committee requirement.
---------------------------------------------------------------------------
\48\ The 2008-2009 Director Compensation Report prepared by the
National Association of Corporate Directors (available from https://www.nacdonline.org/) found that the median total direct compensation
per director was $78,060 for smaller companies (defined as companies
with annual revenues of $50 to $500 million).
\49\ See, e.g., Item 407(a) of Regulation S-K, which requires
disclosure of non-independent directors who serve on nomination
committees, implicitly allowing such service.
---------------------------------------------------------------------------
Companies listing on the BX Venture Market 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. For this purpose, a company will be considered to be listing
in conjunction with an initial public offering only if it meets the
conditions in SEC Rule 10A-3(b)(1)(iv)(A), namely that the company was
not, immediately prior to the effective date of its registration
statement, required to file reports with the Commission pursuant to
Section 13(a) or 15(d) of the Act.
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 over-the-counter 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. For this purpose, a company will be
considered to be listing in conjunction with an initial public offering
if immediately prior to listing it does not have a class of common
stock registered under the Act.
A company that transfers to the BX Venture Market from another
national securities exchange with a substantially similar requirement
will be immediately subject to the audit and compensation committee
requirements, provided that the company will be afforded the balance of
any grace period afforded by the other market.
The Exchange will require companies to adopt a code of conduct
applicable to all directors, officers and employees.\50\ Any waivers of
the code for directors or executive officers must be approved by the
board and disclosed. The Exchange believes that this requirement will
help promote the ethical behavior of individuals associated with
companies listed on the BX Venture Market.
---------------------------------------------------------------------------
\50\ Proposed Rule 5610.
---------------------------------------------------------------------------
In addition, the Exchange will require shareholder approval when a
company adopts or materially amends a stock option or purchase plan or
other equity compensation arrangement pursuant to which stock may be
acquired by officers, directors, employees, or consultants.\51\ The
Exchange would not require shareholder approval for other share
issuances, however, given that the companies expected to list on the
Exchange may have a greater need to issue shares more frequently or
more quickly, due to their expected smaller size and the business
challenges they may be facing. As such, the Exchange believes that the
cost and delay associated with seeking approval for share issuances
would discourage companies from pursuing an otherwise
[[Page 27717]]
beneficial listing.\52\ Nonetheless, the Exchange will require listed
Companies to provide notice of any 5% change in its shares outstanding
and any capital raising transactions,\53\ and the Exchange Staff will
review such issuances for public interest concerns, such as issuances
significantly below the market price or for the benefit of related
parties.
---------------------------------------------------------------------------
\51\ Proposed Rule 5635.
\52\ In this regard, the proposed rules are comparable to the
rules of the National Stock Exchange, which require shareholder
approval for equity compensation issuances but not for other share
issuances. See National Stock Exchange Rule 15.6.
\53\ Proposed Rules 5250(e)(1) and (e)(7).
---------------------------------------------------------------------------
Appeal Process
Companies denied initial listing or delisted by the Exchange would
be afforded an appeal process similar to that contained in the existing
Rule 4800 Series of the Exchange's rules, which was modeled on the
process available to companies listed on NASDAQ.\54\ The Exchange's
Listing Qualifications Staff only will be able to allow time-limited
exceptions for certain deficiencies from the continued listing
standards, such as the failure to file periodic reports, certain of the
corporate governance requirements and any quantitative deficiency which
does not contain a compliance period.\55\ Other of the continued
listing requirements would provide for automatic compliance periods,
including the market maker, market value of listed securities, and
audit committee requirements, and a determination that an officer,
director, promoter, or control person of a company was involved in any
event that occurred during the prior five years described in Item
401(f)(2)-(8) of Regulation S-K under the Act.\56\ If the company fails
to timely solicit proxies or hold its annual meeting or fails to meet
the minimum price requirement, or if Staff has public interest concerns
in connection with the company, or if a company represents itself as
listed on the NASDAQ Stock Market or refers to itself as a NASDAQ
listed-company, or attempts to rely on an exemption from state
securities registration that otherwise may be available under state law
to companies listed on the Exchange, the Listing Qualifications Staff
will issue an immediate delisting letter to the company.\57\ Any other
deficiency would result in the Listing Qualifications Staff issuing a
Public Reprimand Letter or a delisting notification.\58\ Hearings
Panels composed of individuals not affiliated with the Exchange would
be permitted to grant additional, but limited time to companies that
received a delisting notification, or to reverse a denial of initial
listing. A company could appeal a decision of the Hearings Panel to the
Listing and Hearing Review Council, which is a committee appointed by
the Exchange's Board to act for the Board with respect to listing
decisions.\59\ The Listing and Hearing Review Council decision would be
final, unless it is called for a discretionary review by the Exchange
Board. The compliance periods and discretion to allow a non-compliant
company to remain listed are generally shorter on the BX Venture
Exchange than would be allowed an equivalent company listed on NASDAQ.
For example, 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.
Similarly, 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 company.
---------------------------------------------------------------------------
\54\ Nasdaq Listing Rules 5800-5899.
\55\ Proposed Rule 5810(c)(2).
\56\ Proposed Rule 5810(c)(3).
\57\ Proposed Rule 5810(c)(1).
\58\ Proposed Rule 5810(c).
\59\ Section 6.1 of the By-Laws on NASDAQ OMX BX, Inc.
---------------------------------------------------------------------------
Oversight of Market Activity
The Exchange represents that it will have in place before the BX
Venture Market is operational a contractual arrangement with FINRA to
regulate market activity on the BX Venture Market, as it does today for
NASDAQ. FINRA's oversight will include review of trading that takes
place on the over-the-counter market in securities listed on the BX
Venture Market. Based on its breadth of experience overseeing the over-
the-counter markets and advanced technology, FINRA will implement
electronic surveillance patterns designed to detect a wide range of
potential issues, including, for example, insider trading, front-
running, fraud, auto-execution manipulation, mid-point cross
manipulation, wash sales, layering, open/close marking, and Reg SHO
clearing fails. FINRA intends to revise a number of its existing
automated surveillance patterns to incorporate NASDAQ OMX BX trading
activity and over-the-counter trading activity in issues eligible for
trading on The BX Venture Market, and will develop and implement
specific automated surveillance patterns to address any rule and
functionality changes resulting from The BX Venture Market initiative.
FINRA will enhance its review process by calibrating surveillance
patterns to detect potential issues that may arise particularly in low
priced, less liquid stocks. In addition, the Exchange and FINRA will
leverage the expertise of SMARTS Group, a leading technology provider
of market surveillance solutions to exchanges and regulators around the
world,\60\ in creating a new suite of quoting and trading patterns to
detect suspicious activity in low priced and less widely traded
securities. Further, FINRA will review the activity of firms on the BX
Venture Market when conducting their reviews of these firms. This
review will include ``focused exams'' concentrated on sales practices
and firm oversight. The review will include any other activities
required to effectively regulate the Market.
---------------------------------------------------------------------------
\60\ SMARTS Group is a subsidiary of NASDAQ OMX.
---------------------------------------------------------------------------
The Exchange represents that an agreement with FINRA for these
activities will be in place before the BX Venture Market begins
operations. Notwithstanding the contractual arrangement with FINRA, the
Exchange retains ultimate legal responsibility for and control of all
regulatory functions for the Exchange.
The Exchange will monitor real-time trading of securities listed on
the BX Venture Market, and plans to implement a broad suite of realtime
surveillance patterns and functional analysis tools based on the most
up-to-date technology solution, SMARTS.
The Exchange will provide a monthly report to the Directors of the
Division of Trading and Markets and the Office of Compliance,
Inspections and Examinations describing any significant developments on
the BX Venture Market, including companies added or removed from the
market during that period. In addition, the Exchange's Chief Regulatory
Officer will provide quarterly reports to the Directors of the Division
of Trading and Markets and the Office of Compliance, Inspections and
Examinations describing the regulatory activities of the Exchange and
FINRA during the prior quarter. The Exchange will also provide copies
of the Listing Department's procedures manuals and surveillance
procedures used by FINRA and the Exchange to the Commission's Office of
Compliance, Inspections and Examinations. Finally, before the BX
Venture Market is operational, the Exchange will represent, in a letter
to the Staff in the Commission's Office of Compliance Inspections and
Examinations, that it and FINRA have adequate regulatory procedures and
programs in place to effectively regulate the BX Venture Market and its
listing
[[Page 27718]]
program, and adequate procedures and programs in place to effectively
process trades and maintain the confidentiality, integrity, and
availability of the Exchange's systems.
Market Data
The Exchange has committed to broad dissemination of quotation and
last sale information about BX Venture Market listed securities to
ensure that public investors and all market participants have all the
information needed to make informed investing and trading decisions.
Information about securities listed on the BX Venture Market will be
disseminated via several mechanisms. First, BX Venture Market listed
securities will have real-time consolidated market data for both quotes
and trades consistent with that provided by the network processors for
national market system securities. The Exchange notes that operation of
the BX Venture Market will be conditioned by the Commission upon
approval and operation of an arrangement by the Exchange and FINRA to
consolidate and disseminate the best quotation and last sale data for
BX Venture Market listed securities that is made available by BX and
FINRA.\61\ The consolidated market data for BX Venture Market listed
securities will be made available at no charge for the foreseeable
future.\62\ Second, the Exchange will disseminate real-time last sale
data, tick-by-tick details, and best bid and offer quotations and trade
data from the BX execution system.\63\
---------------------------------------------------------------------------
\61\ The Commission notes that its order in Section VI, infra,
does not contain this condition.
\62\ The Exchange will, as always, be required to file a
proposed rule change in order to assess a fee for this data in the
future.
\63\ BX Last Sale provides real-time last sal
