Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order Disapproving Proposed Rule Change To Adopt Additional Criteria for Listing Companies That Have Indicated Their Business Plan Is To Buy and Hold Commodities, 36947-36949 [2011-15674]
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Federal Register / Vol. 76, No. 121 / Thursday, June 23, 2011 / Notices
copying at the principal office of CBOE.
All comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–CBOE–2011–056 and
should be submitted on or before July
14, 2011.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.14
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011–15670 Filed 6–22–11; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–64700; File No. SR–
NASDAQ–2010–134]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Order
Disapproving Proposed Rule Change
To Adopt Additional Criteria for Listing
Companies That Have Indicated Their
Business Plan Is To Buy and Hold
Commodities
June 17, 2011.
I. Introduction
On October 15, 2010, The NASDAQ
Stock Market LLC (‘‘Nasdaq’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
adopt additional criteria for listing
companies that have indicated their
business plan is to buy and hold
commodities. The proposed rule change
was published for comment in the
Federal Register on November 3, 2010.3
On December 9, 2010, the Commission
extended the time period in which to
either approve the proposed rule change
or to institute proceedings to determine
whether to disapprove the proposed
rule change, to February 1, 2011.4 The
Commission received one comment
letter on the proposal.5 On January 31,
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. 63207
(October 28, 2010), 75 FR 67788.
4 See Securities Exchange Act Release No. 63508
(December 9, 2010), 75 FR 78300 (December 15,
2010).
5 See Letter from Edward H. Smith, Jr. to Florence
E. Harmon, Deputy Secretary, Commission, dated
January 18, 2011.
2011, the Commission issued an order
instituting proceedings to determine
whether to disapprove the proposed
rule change (‘‘Order Instituting
Disapproval Proceedings’’).6 The
Commission received no comments on
the proceedings to determine whether to
disapprove the proposed rule change,
and Nasdaq did not provide a response
to the Commission’s grounds for
disapproval under consideration as set
forth in the Order Instituting
Disapproval Proceedings. On April 8,
2011, the Commission extended the
time period for Commission action on
the proceedings to determine whether to
disapprove the proposed rule change, to
July 1, 2011.7 This order disapproves
the proposed rule change.
II. Description of the Proposal
The Exchange proposes to adopt
additional listing standards for
companies that have indicated that their
business plan is to purchase and
stockpile raw materials or other
commodities (‘‘commodity stockpiling
companies’’). Under the proposal, such
companies are required to meet all other
applicable Nasdaq initial listing
requirements, as well as the following
additional listing standards. First,
within 18 months of the effectiveness of
its initial public offering registration
statement, or such shorter period as the
company specifies in the registration
statement, the company would be
required to invest at least 85% of the net
proceeds of the initial public offering in
the raw material or commodity
identified in the registration statement,
or return the unused amount pro rata to
its shareholders.8
Second, the company would be
required to publish, or facilitate access
to, at no cost and in an easily accessible
manner, regular pricing information
regarding the raw material or other
commodity from a reliable, independent
source, at least as frequently as current
industry practice but no less than twice
per week.9
Third, the company would be
required to publish its net market value
on a daily basis, or where pricing
information for the raw material or other
commodity is not available on a daily
basis, no less frequently than twice per
week.10 If the spot price of the raw
14 17
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6 See Securities Exchange Act Release No. 63804
(January 31, 2011), 76 FR 6506 (February 4, 2011).
7 See Securities Exchange Act Release No. 64259
(April 8, 2011), 76 FR 20760 (April 13, 2011).
8 See proposed Nasdaq IM–5101–3(a).
9 See proposed Nasdaq IM–5101–3(b).
10 See proposed Nasdaq IM–5101–3(d). Net
market value would be determined by multiplying
the volume of the raw material or commodity held
in inventory by the last spot price published or
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36947
material or commodity fluctuates by
more than 5%, the company shall
publish the net market value within one
business day of the fluctuation.
Fourth, the company would be
required to publish the quantity of the
raw material or other commodity held
in inventory, the average price paid, and
the company’s net market value within
two business days of any change in
inventory held.11 Where the company
contracts to purchase or sell a material
quantity of the raw material or
commodity, such information would be
required to be disclosed in a Form 8–K
filing within four business days.
Fifth, the company would be required
to employ the services of one or more
independent third party storage
facilities to safeguard the physical
holdings of the raw material or
commodity.12 Finally, the company
would be required to create a committee
comprised solely of independent
directors who shall consider, at least
quarterly, whether the company’s
purchasing activities have had a
measurable impact on the market price
of the raw material or other commodity
and shall report such determinations
and make subsequent recommendations
to the company’s board of directors.13
Nasdaq also is proposing to adopt
additional audit committee
requirements applicable to commodity
stockpiling companies. In addition to
the existing audit committee
requirements in Nasdaq rules, audit
committees for commodity stockpiling
companies would be required to
establish procedures for the
identification and management of
potential conflicts of interest, and
would be required to review and
approve any transactions where such
otherwise relied upon by the company, plus cash
and other assets, less any liabilities.
11 See proposed Nasdaq IM–5101–3(c).
12 See proposed Nasdaq IM–5101–3(e). Under the
proposed rule language, the facility ‘‘should
provide services consistent with those provided by
custodians and these must include: storage and
safeguarding; insurance; transfer of the raw material
or other commodity in and out of the facility; visual
inspections, spot checks and assays; confirmation of
deliveries to supplier packing lists; and reporting of
transfers and of inventory to the [commodity
stockpiling company] and its auditors.’’ The
company must oversee the third party storage
facility with its committee of independent directors.
13 See proposed Nasdaq IM–5101–3(f). The
independent directors may rely upon and shall
have the authority to engage and pay an industry
expert in conducting this review. If the company’s
board of directors disagrees with or does not accept
the recommendations of the committee, the
company will be required to file a Form 8–K with
the Commission outlining the relevant events, the
committee’s determinations and recommendations,
and the rationale for the board of directors’
determination.
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Federal Register / Vol. 76, No. 121 / Thursday, June 23, 2011 / Notices
potential conflicts have been
identified.14
III. Comment Letter
The Commission received one
comment letter on the proposal.15 The
commenter, a shareholder in SMG
Indium Resources Ltd. (‘‘SMG’’),
supported the proposal and stated,
among other things, that approval of the
proposal would ‘‘support making the
market for commodities, such as
[i]ndium, more efficient and transparent
by providing investors * * * with an
easier and more cost-effective
alternative for investing in such
commodities.’’ This commenter further
noted that, unlike commodity-based
trust shares, which are designed along
the lines of an exchange-traded fund
(‘‘ETF’’) structure and offer exposure to
very liquid and actively-traded
commodities, commodity stockpiling
companies ‘‘provide investment
exposure to select strategic and
commercial commodities which do not
have substantial liquid and active
trading markets nor extensive and well
developed derivative and/or spot
markets and pricing mechanisms.’’ The
commenter explained his view that the
proposed listing standards would assure
appropriate investor protection in
connection with the listing of
commodity stockpiling companies, and
cited particular aspects of the proposal,
including the frequency and source of
pricing information, the requirement to
calculate and disseminate net market
value, and the use of third-party storage
facilities.
IV. Discussion
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Under Section 19(b)(2)(C) of the Act,
the Commission shall approve a
proposed rule change of a selfregulatory organization if the
Commission finds that such proposed
rule change is consistent with the
requirements of the Act, and the rules
and regulations thereunder that are
applicable to such organization.16 The
Commission shall disapprove a
proposed rule change if it does not make
such a finding.17 The Commission’s
Rules of Practice, under Rule 700(b)(3),
state that the ‘‘burden to demonstrate
that a proposed rule change is
consistent with the [Act] * * * is on the
14 See proposed Nasdaq Rule 5605(c)(3) and IM–
5605. Under the proposal, the procedures should
include any material amendment to the
management agreement, including any change with
respect to the compensation of the manager.
15 See, note 5, supra.
16 15 U.S.C. 78s(b)(2)(C)(i).
17 15 U.S.C. 78s(b)(2)(C)(ii); see also 17 CFR
201.700(b)(3) and note 18 infra, and accompanying
text.
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self-regulatory organization that
proposed the rule change’’ and that a
‘‘mere assertion that the proposed rule
change is consistent with those
requirements * * * is not sufficient.’’ 18
After careful consideration, the
Commission does not find that the
proposed rule change is consistent with
the requirements of the Act and the
rules and regulations thereunder
applicable to a national securities
exchange.19 In particular, the
Commission does not find that the
proposed rule change is consistent with
Section 6(b)(5) of the Act,20 which
requires that the rules of a national
securities exchange be designed, among
other things, to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, and to protect investors and the
public interest.
The development and enforcement of
appropriate standards governing the
initial and continued listing of
securities on an exchange is an activity
of critical importance to financial
markets and the investing public.21
Listing standards, among other things,
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. Adequate listing standards are
especially important given the
expectations of investors that exchanges
will appropriately vet listed companies
and effectively monitor the fairness and
efficiency of trading in the securities of
listed companies on the exchange. A
critical aspect of assuring fair and
efficient exchange trading is the
widespread availability of timely and
reliable information that will directly
18 17 CFR 201.700(b)(3). The description of a
proposed rule change, its purpose and operation, its
effect, and a legal analysis of its consistency with
applicable requirements must all be sufficiently
detailed and specific to support an affirmative
Commission finding. See id. Any failure of a selfregulatory organization to provide the information
solicited by Form 19b–4 may result in the
Commission not having a sufficient basis to make
an affirmative finding that a proposed rule change
is consistent with the [Act] and the rules and
regulations issued thereunder that are applicable to
the self-regulatory organization. Id.
19 In disapproving the proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
20 15 U.S.C. 78f(b)(5).
21 See, e.g., Securities Exchange Release Act No.
58228 (July 25, 2008), 73 FR 44794 (July 31, 2008).
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impact the price of the listed security.
This is particularly true for derivatives
and other similar securities, where the
price of the listed security is highly
correlated with the price of the
underlying securities or commodities.22
Further, the rules of the exchange
should provide appropriate mechanisms
to assure effective surveillance of
trading in listed companies to deter and
detect manipulation, fraud or other
illegal practices.
Nasdaq’s proposal would authorize a
national securities exchange, for the first
time, to list the securities of an
operating company that simply plans to
buy and hold a commodity or other raw
material. A liquid market may not exist
for the underlying commodity or other
raw material to be held by the
commodity stockpiling company.
Indeed, the commenter, an SMG
shareholder, noted that commodity
stockpiling companies ‘‘provide
investment exposure to select strategic
and commercial commodities which do
not have substantial liquid and active
trading markets nor extensive and well
developed derivative and/or spot
markets and pricing mechanisms,’’ but
believed that the proposed listing
standards would provide adequate
investor protections.
In the Order Instituting Disapproval
Proceedings, however, the Commission
noted several concerns that raised
questions as to whether the Nasdaq
proposal is consistent with the
requirements of Section 6(b)(5) of the
Act, including whether the nature of the
required pricing information, and the
frequency and manner of its
dissemination, would prevent
manipulation, promote just and
22 See, e.g., Securities Exchange Act Release No.
50603 (October 28, 2004), 69 FR 64614 (November
5, 2004) (SR–NYSE–2004–22) (approving the New
York Stock Exchange’s (‘‘NYSE’’) proposal for the
listing and trading of streetTRACKS Gold Shares
(‘‘Gold Shares’’)). In its approval order, the
Commission noted that the gold spot market is
extremely deep and liquid, and that reliable gold
price information is available to investors in the
Gold Shares. Further, the trustee for the Gold
Shares agreed to provide on its public Web site
continuously updated information, from an
unaffiliated source, with respect to the spot price
of gold, as well as the intraday indicative value (the
estimated net asset value) of a Gold Share on an
essentially real-time basis. In its approval order, the
Commission found that the dissemination of this
information would facilitate transparency with
respect to the Gold Shares and diminish the risk of
manipulation or unfair informational advantage.
The Commission also found that the unique
liquidity and depth of the gold market, together
with an intermarket surveillance sharing agreement
with a futures market related to gold financial
instruments and the adoption of specific NYSE
rules to address and monitor dealings by Gold
Share market makers and their member firms in the
underlying gold market, would create the basis for
NYSE to monitor for fraudulent and manipulative
practices in the trading of the Gold Shares. Id.
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Federal Register / Vol. 76, No. 121 / Thursday, June 23, 2011 / Notices
equitable principles of trade, perfect the
mechanism of a free and open market
and the national market system, or
protect investors and the public
interest.23 Specifically, the Commission
stated that the proposal raises issues as
to: (1) Whether the dissemination of upto-date pricing information twice per
week about the sole asset of an
operating company would be sufficient
to support the fair and efficient
exchange trading of its securities; (2) in
the absence of a liquid and transparent
market for the commodity or other raw
material held by the company, whether
the pricing information from the
‘‘independent source’’ would in fact
have sufficient reliability and integrity,
or whether there are risks that
information could be manipulated; (3)
whether there would be risks such
pricing information may be available to
some market participants sooner than
others, thereby giving the former an
unfair trading advantage; and (4)
whether Nasdaq’s proposal adequately
addresses any special risks to investors
that might be presented by the exchange
trading of an operating company in the
business solely of stockpiling an illiquid
commodity.
The Commission invited interested
persons to submit written views with
respect to these or other concerns with
the Nasdaq proposal. Neither Nasdaq
nor any other person submitted
comments in response to the
Commission’s request.
The Commission remains concerned
about the issues raised in the Order
Instituting Disapproval Proceedings.
Under the Nasdaq proposal, the
business plan of a ‘‘commodity
stockpiling company’’ that could be
listed on Nasdaq would simply be to
purchase and stockpile raw materials or
other commodities, with the result that
the sole asset of the listed company
could be a relatively illiquid
commodity. Accordingly, the value of
the equity securities of the commodity
stockpiling company would depend
almost exclusively on the value of the
underlying commodity.
The Commission is concerned that
Nasdaq’s proposal, to permit
dissemination of up-to-date pricing
information on the commodity
stockpiled as infrequently as twice per
week, would be inadequate for market
participants to fairly and efficiently
assess the value of the listed company
and trade its securities on the
exchange.24 In addition, the
23 See
supra note 6.
sole comment letter stated that Nasdaq’s
proposal would allow companies such as SMG to
list its securities on Nasdaq. The commenter states
24 The
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Commission is concerned that, if the
market for the commodity stockpiled is
illiquid and opaque, the pricing
information disseminated at least
biweekly by the ‘‘independent source’’
may in fact not be reliable, despite the
best efforts of the pricing service. The
Commission notes that the proposal
does not define what would constitute
a ‘‘reliable, independent source’’ and
does not set forth any standards to
ensure the reliability and integrity of the
pricing information of the underlying
commodity or other raw material.
Finally, the Commission is concerned
that, because of the potential
infrequency and irregularity of pricing
information on the underlying
commodity, and its consequent
importance, there is a risk that some
market participants—perhaps those
party to, or with knowledge of, the
transaction in the underlying
commodity—would have access to
price-moving market information before
it is reported to the pricing service and
publicly disseminated in accordance
with the Nasdaq proposal. This could
provide an opportunity for an unfair
trading advantage in the securities of the
commodity stockpiling company to
those with advance access to any
information that affects pricing. In
addition, there might be the potential
for manipulation through the reporting
of false or misleading transaction
information to the pricing service. This
type of activity could be facilitated by
the fact that transactions in illiquid
markets are infrequent and often selfreported by the parties in the trade. The
incentive to utilize an unfair trading
advantage or to manipulate prices in
this way could be magnified by the
exchange listing of an investment
vehicle that allowed someone to profit
from such an advantage or
manipulation.
Because of these issues with respect
to the nature of the required pricing
information, and the frequency and
manner of its dissemination, the
Commission is concerned the proposal
is not designed, among other things, to
prevent manipulation, promote just and
equitable principles of trade, perfect the
mechanism of a free and open market
and a national market system, and to
protect investors and the public interest,
as required by Section 6(b)(5) of the
Exchange Act. Nasdaq did not respond
to, or otherwise address, any of these
concerns, which were articulated by the
Commission in the Order Instituting
Disapproval Proceedings. As noted
above, Rule 700(b)(3) of the
Commission’s Rules of Practice states
that the ‘‘burden to demonstrate that a
proposed rule change is consistent with
the [Act] * * * is on the self-regulatory
organization that proposed the rule
change’’ and that a ‘‘mere assertion that
the proposed rule change is consistent
with those requirements * * * is not
sufficient.’’ 25
For the reasons set forth above, the
Commission does not believe that the
Exchange has met its burden to
demonstrate that the proposed rule
change is consistent with the
requirements of the Act and the rules
and regulations thereunder.
that indium does not ‘‘have substantial liquid and
active trading markets nor extensive and well
developed derivative and/or spot markets and
pricing mechanisms.’’ See note 5, supra. The
commenter notes that SMG has engaged Metal
Bulletin PLC to be the pricing source of indium.
According to the commenter, Metal Bulletin
publishes indium prices twice per week, on
Wednesdays and Fridays, and the source of the
price information can be any entity regularly
involved in buying or selling indium (currently five
producers, four consumers, and three large traders).
The commenter notes that Metal Bulletin requests
trade information from these sources (such as price,
quantity, date of transactions and location or origin
of material), and then publishes the final price after
adjustment for outliers, provided that a minimum
of six sources provided trading information.
BILLING CODE 8011–01–P
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V. Conclusion
For the foregoing reasons, the
Commission does not find that the
proposed rule change is consistent with
the requirements of the Act and the
rules and regulations thereunder
applicable to a national securities
exchange, and in particular, Section
6(b)(5) of the Act.
It Is Therefore Ordered, pursuant to
Section 19(b)(2) of the Act, that the
proposed rule change (SR–NASDAQ–
2010–134) be, and it hereby is,
disapproved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.26
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011–15674 Filed 6–22–11; 8:45 am]
25 17
26 17
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CFR 201.700(b)(3).
CFR 200.30–3(a)(12).
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]]>Agencies
[Federal Register Volume 76, Number 121 (Thursday, June 23, 2011)]
[Notices]
[Pages 36947-36949]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-15674]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-64700; File No. SR-NASDAQ-2010-134]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order
Disapproving Proposed Rule Change To Adopt Additional Criteria for
Listing Companies That Have Indicated Their Business Plan Is To Buy and
Hold Commodities
June 17, 2011.
I. Introduction
On October 15, 2010, The NASDAQ Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to adopt additional criteria for listing companies
that have indicated their business plan is to buy and hold commodities.
The proposed rule change was published for comment in the Federal
Register on November 3, 2010.\3\ On December 9, 2010, the Commission
extended the time period in which to either approve the proposed rule
change or to institute proceedings to determine whether to disapprove
the proposed rule change, to February 1, 2011.\4\ The Commission
received one comment letter on the proposal.\5\ On January 31, 2011,
the Commission issued an order instituting proceedings to determine
whether to disapprove the proposed rule change (``Order Instituting
Disapproval Proceedings'').\6\ The Commission received no comments on
the proceedings to determine whether to disapprove the proposed rule
change, and Nasdaq did not provide a response to the Commission's
grounds for disapproval under consideration as set forth in the Order
Instituting Disapproval Proceedings. On April 8, 2011, the Commission
extended the time period for Commission action on the proceedings to
determine whether to disapprove the proposed rule change, to July 1,
2011.\7\ This order disapproves the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 63207 (October 28,
2010), 75 FR 67788.
\4\ See Securities Exchange Act Release No. 63508 (December 9,
2010), 75 FR 78300 (December 15, 2010).
\5\ See Letter from Edward H. Smith, Jr. to Florence E. Harmon,
Deputy Secretary, Commission, dated January 18, 2011.
\6\ See Securities Exchange Act Release No. 63804 (January 31,
2011), 76 FR 6506 (February 4, 2011).
\7\ See Securities Exchange Act Release No. 64259 (April 8,
2011), 76 FR 20760 (April 13, 2011).
---------------------------------------------------------------------------
II. Description of the Proposal
The Exchange proposes to adopt additional listing standards for
companies that have indicated that their business plan is to purchase
and stockpile raw materials or other commodities (``commodity
stockpiling companies''). Under the proposal, such companies are
required to meet all other applicable Nasdaq initial listing
requirements, as well as the following additional listing standards.
First, within 18 months of the effectiveness of its initial public
offering registration statement, or such shorter period as the company
specifies in the registration statement, the company would be required
to invest at least 85% of the net proceeds of the initial public
offering in the raw material or commodity identified in the
registration statement, or return the unused amount pro rata to its
shareholders.\8\
---------------------------------------------------------------------------
\8\ See proposed Nasdaq IM-5101-3(a).
---------------------------------------------------------------------------
Second, the company would be required to publish, or facilitate
access to, at no cost and in an easily accessible manner, regular
pricing information regarding the raw material or other commodity from
a reliable, independent source, at least as frequently as current
industry practice but no less than twice per week.\9\
---------------------------------------------------------------------------
\9\ See proposed Nasdaq IM-5101-3(b).
---------------------------------------------------------------------------
Third, the company would be required to publish its net market
value on a daily basis, or where pricing information for the raw
material or other commodity is not available on a daily basis, no less
frequently than twice per week.\10\ If the spot price of the raw
material or commodity fluctuates by more than 5%, the company shall
publish the net market value within one business day of the
fluctuation.
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\10\ See proposed Nasdaq IM-5101-3(d). Net market value would be
determined by multiplying the volume of the raw material or
commodity held in inventory by the last spot price published or
otherwise relied upon by the company, plus cash and other assets,
less any liabilities.
---------------------------------------------------------------------------
Fourth, the company would be required to publish the quantity of
the raw material or other commodity held in inventory, the average
price paid, and the company's net market value within two business days
of any change in inventory held.\11\ Where the company contracts to
purchase or sell a material quantity of the raw material or commodity,
such information would be required to be disclosed in a Form 8-K filing
within four business days.
---------------------------------------------------------------------------
\11\ See proposed Nasdaq IM-5101-3(c).
---------------------------------------------------------------------------
Fifth, the company would be required to employ the services of one
or more independent third party storage facilities to safeguard the
physical holdings of the raw material or commodity.\12\ Finally, the
company would be required to create a committee comprised solely of
independent directors who shall consider, at least quarterly, whether
the company's purchasing activities have had a measurable impact on the
market price of the raw material or other commodity and shall report
such determinations and make subsequent recommendations to the
company's board of directors.\13\
---------------------------------------------------------------------------
\12\ See proposed Nasdaq IM-5101-3(e). Under the proposed rule
language, the facility ``should provide services consistent with
those provided by custodians and these must include: storage and
safeguarding; insurance; transfer of the raw material or other
commodity in and out of the facility; visual inspections, spot
checks and assays; confirmation of deliveries to supplier packing
lists; and reporting of transfers and of inventory to the [commodity
stockpiling company] and its auditors.'' The company must oversee
the third party storage facility with its committee of independent
directors.
\13\ See proposed Nasdaq IM-5101-3(f). The independent directors
may rely upon and shall have the authority to engage and pay an
industry expert in conducting this review. If the company's board of
directors disagrees with or does not accept the recommendations of
the committee, the company will be required to file a Form 8-K with
the Commission outlining the relevant events, the committee's
determinations and recommendations, and the rationale for the board
of directors' determination.
---------------------------------------------------------------------------
Nasdaq also is proposing to adopt additional audit committee
requirements applicable to commodity stockpiling companies. In addition
to the existing audit committee requirements in Nasdaq rules, audit
committees for commodity stockpiling companies would be required to
establish procedures for the identification and management of potential
conflicts of interest, and would be required to review and approve any
transactions where such
[[Page 36948]]
potential conflicts have been identified.\14\
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\14\ See proposed Nasdaq Rule 5605(c)(3) and IM-5605. Under the
proposal, the procedures should include any material amendment to
the management agreement, including any change with respect to the
compensation of the manager.
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III. Comment Letter
The Commission received one comment letter on the proposal.\15\ The
commenter, a shareholder in SMG Indium Resources Ltd. (``SMG''),
supported the proposal and stated, among other things, that approval of
the proposal would ``support making the market for commodities, such as
[i]ndium, more efficient and transparent by providing investors * * *
with an easier and more cost-effective alternative for investing in
such commodities.'' This commenter further noted that, unlike
commodity-based trust shares, which are designed along the lines of an
exchange-traded fund (``ETF'') structure and offer exposure to very
liquid and actively-traded commodities, commodity stockpiling companies
``provide investment exposure to select strategic and commercial
commodities which do not have substantial liquid and active trading
markets nor extensive and well developed derivative and/or spot markets
and pricing mechanisms.'' The commenter explained his view that the
proposed listing standards would assure appropriate investor protection
in connection with the listing of commodity stockpiling companies, and
cited particular aspects of the proposal, including the frequency and
source of pricing information, the requirement to calculate and
disseminate net market value, and the use of third-party storage
facilities.
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\15\ See, note 5, supra.
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IV. Discussion
Under Section 19(b)(2)(C) of the Act, the Commission shall approve
a proposed rule change of a self-regulatory organization if the
Commission finds that such proposed rule change is consistent with the
requirements of the Act, and the rules and regulations thereunder that
are applicable to such organization.\16\ The Commission shall
disapprove a proposed rule change if it does not make such a
finding.\17\ The Commission's Rules of Practice, under Rule 700(b)(3),
state that the ``burden to demonstrate that a proposed rule change is
consistent with the [Act] * * * is on the self-regulatory organization
that proposed the rule change'' and that a ``mere assertion that the
proposed rule change is consistent with those requirements * * * is not
sufficient.'' \18\
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\16\ 15 U.S.C. 78s(b)(2)(C)(i).
\17\ 15 U.S.C. 78s(b)(2)(C)(ii); see also 17 CFR 201.700(b)(3)
and note 18 infra, and accompanying text.
\18\ 17 CFR 201.700(b)(3). The description of a proposed rule
change, its purpose and operation, its effect, and a legal analysis
of its consistency with applicable requirements must all be
sufficiently detailed and specific to support an affirmative
Commission finding. See id. Any failure of a self-regulatory
organization to provide the information solicited by Form 19b-4 may
result in the Commission not having a sufficient basis to make an
affirmative finding that a proposed rule change is consistent with
the [Act] and the rules and regulations issued thereunder that are
applicable to the self-regulatory organization. Id.
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After careful consideration, the Commission does not find that the
proposed rule change is consistent with the requirements of the Act and
the rules and regulations thereunder applicable to a national
securities exchange.\19\ In particular, the Commission does not find
that the proposed rule change is consistent with Section 6(b)(5) of the
Act,\20\ which requires that the rules of a national securities
exchange be designed, among other things, to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to remove impediments to and perfect the mechanism
of a free and open market and a national market system, and to protect
investors and the public interest.
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\19\ In disapproving the proposed rule change, the Commission
has considered the proposed rule's impact on efficiency,
competition, and capital formation. 15 U.S.C. 78c(f).
\20\ 15 U.S.C. 78f(b)(5).
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The development and enforcement of appropriate standards governing
the initial and continued listing of securities on an exchange is an
activity of critical importance to financial markets and the investing
public.\21\ Listing standards, among other things, 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. Adequate listing standards are especially important
given the expectations of investors that exchanges will appropriately
vet listed companies and effectively monitor the fairness and
efficiency of trading in the securities of listed companies on the
exchange. A critical aspect of assuring fair and efficient exchange
trading is the widespread availability of timely and reliable
information that will directly impact the price of the listed security.
This is particularly true for derivatives and other similar securities,
where the price of the listed security is highly correlated with the
price of the underlying securities or commodities.\22\ Further, the
rules of the exchange should provide appropriate mechanisms to assure
effective surveillance of trading in listed companies to deter and
detect manipulation, fraud or other illegal practices.
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\21\ See, e.g., Securities Exchange Release Act No. 58228 (July
25, 2008), 73 FR 44794 (July 31, 2008).
\22\ See, e.g., Securities Exchange Act Release No. 50603
(October 28, 2004), 69 FR 64614 (November 5, 2004) (SR-NYSE-2004-22)
(approving the New York Stock Exchange's (``NYSE'') proposal for the
listing and trading of streetTRACKS Gold Shares (``Gold Shares'')).
In its approval order, the Commission noted that the gold spot
market is extremely deep and liquid, and that reliable gold price
information is available to investors in the Gold Shares. Further,
the trustee for the Gold Shares agreed to provide on its public Web
site continuously updated information, from an unaffiliated source,
with respect to the spot price of gold, as well as the intraday
indicative value (the estimated net asset value) of a Gold Share on
an essentially real-time basis. In its approval order, the
Commission found that the dissemination of this information would
facilitate transparency with respect to the Gold Shares and diminish
the risk of manipulation or unfair informational advantage. The
Commission also found that the unique liquidity and depth of the
gold market, together with an intermarket surveillance sharing
agreement with a futures market related to gold financial
instruments and the adoption of specific NYSE rules to address and
monitor dealings by Gold Share market makers and their member firms
in the underlying gold market, would create the basis for NYSE to
monitor for fraudulent and manipulative practices in the trading of
the Gold Shares. Id.
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Nasdaq's proposal would authorize a national securities exchange,
for the first time, to list the securities of an operating company that
simply plans to buy and hold a commodity or other raw material. A
liquid market may not exist for the underlying commodity or other raw
material to be held by the commodity stockpiling company. Indeed, the
commenter, an SMG shareholder, noted that commodity stockpiling
companies ``provide investment exposure to select strategic and
commercial commodities which do not have substantial liquid and active
trading markets nor extensive and well developed derivative and/or spot
markets and pricing mechanisms,'' but believed that the proposed
listing standards would provide adequate investor protections.
In the Order Instituting Disapproval Proceedings, however, the
Commission noted several concerns that raised questions as to whether
the Nasdaq proposal is consistent with the requirements of Section
6(b)(5) of the Act, including whether the nature of the required
pricing information, and the frequency and manner of its dissemination,
would prevent manipulation, promote just and
[[Page 36949]]
equitable principles of trade, perfect the mechanism of a free and open
market and the national market system, or protect investors and the
public interest.\23\ Specifically, the Commission stated that the
proposal raises issues as to: (1) Whether the dissemination of up-to-
date pricing information twice per week about the sole asset of an
operating company would be sufficient to support the fair and efficient
exchange trading of its securities; (2) in the absence of a liquid and
transparent market for the commodity or other raw material held by the
company, whether the pricing information from the ``independent
source'' would in fact have sufficient reliability and integrity, or
whether there are risks that information could be manipulated; (3)
whether there would be risks such pricing information may be available
to some market participants sooner than others, thereby giving the
former an unfair trading advantage; and (4) whether Nasdaq's proposal
adequately addresses any special risks to investors that might be
presented by the exchange trading of an operating company in the
business solely of stockpiling an illiquid commodity.
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\23\ See supra note 6.
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The Commission invited interested persons to submit written views
with respect to these or other concerns with the Nasdaq proposal.
Neither Nasdaq nor any other person submitted comments in response to
the Commission's request.
The Commission remains concerned about the issues raised in the
Order Instituting Disapproval Proceedings. Under the Nasdaq proposal,
the business plan of a ``commodity stockpiling company'' that could be
listed on Nasdaq would simply be to purchase and stockpile raw
materials or other commodities, with the result that the sole asset of
the listed company could be a relatively illiquid commodity.
Accordingly, the value of the equity securities of the commodity
stockpiling company would depend almost exclusively on the value of the
underlying commodity.
The Commission is concerned that Nasdaq's proposal, to permit
dissemination of up-to-date pricing information on the commodity
stockpiled as infrequently as twice per week, would be inadequate for
market participants to fairly and efficiently assess the value of the
listed company and trade its securities on the exchange.\24\ In
addition, the Commission is concerned that, if the market for the
commodity stockpiled is illiquid and opaque, the pricing information
disseminated at least biweekly by the ``independent source'' may in
fact not be reliable, despite the best efforts of the pricing service.
The Commission notes that the proposal does not define what would
constitute a ``reliable, independent source'' and does not set forth
any standards to ensure the reliability and integrity of the pricing
information of the underlying commodity or other raw material. Finally,
the Commission is concerned that, because of the potential infrequency
and irregularity of pricing information on the underlying commodity,
and its consequent importance, there is a risk that some market
participants--perhaps those party to, or with knowledge of, the
transaction in the underlying commodity--would have access to price-
moving market information before it is reported to the pricing service
and publicly disseminated in accordance with the Nasdaq proposal. This
could provide an opportunity for an unfair trading advantage in the
securities of the commodity stockpiling company to those with advance
access to any information that affects pricing. In addition, there
might be the potential for manipulation through the reporting of false
or misleading transaction information to the pricing service. This type
of activity could be facilitated by the fact that transactions in
illiquid markets are infrequent and often self-reported by the parties
in the trade. The incentive to utilize an unfair trading advantage or
to manipulate prices in this way could be magnified by the exchange
listing of an investment vehicle that allowed someone to profit from
such an advantage or manipulation.
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\24\ The sole comment letter stated that Nasdaq's proposal would
allow companies such as SMG to list its securities on Nasdaq. The
commenter states that indium does not ``have substantial liquid and
active trading markets nor extensive and well developed derivative
and/or spot markets and pricing mechanisms.'' See note 5, supra. The
commenter notes that SMG has engaged Metal Bulletin PLC to be the
pricing source of indium. According to the commenter, Metal Bulletin
publishes indium prices twice per week, on Wednesdays and Fridays,
and the source of the price information can be any entity regularly
involved in buying or selling indium (currently five producers, four
consumers, and three large traders). The commenter notes that Metal
Bulletin requests trade information from these sources (such as
price, quantity, date of transactions and location or origin of
material), and then publishes the final price after adjustment for
outliers, provided that a minimum of six sources provided trading
information.
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Because of these issues with respect to the nature of the required
pricing information, and the frequency and manner of its dissemination,
the Commission is concerned the proposal is not designed, among other
things, to prevent manipulation, promote just and equitable principles
of trade, perfect the mechanism of a free and open market and a
national market system, and to protect investors and the public
interest, as required by Section 6(b)(5) of the Exchange Act. Nasdaq
did not respond to, or otherwise address, any of these concerns, which
were articulated by the Commission in the Order Instituting Disapproval
Proceedings. As noted above, Rule 700(b)(3) of the Commission's Rules
of Practice states that the ``burden to demonstrate that a proposed
rule change is consistent with the [Act] * * * is on the self-
regulatory organization that proposed the rule change'' and that a
``mere assertion that the proposed rule change is consistent with those
requirements * * * is not sufficient.'' \25\
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\25\ 17 CFR 201.700(b)(3).
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For the reasons set forth above, the Commission does not believe
that the Exchange has met its burden to demonstrate that the proposed
rule change is consistent with the requirements of the Act and the
rules and regulations thereunder.
V. Conclusion
For the foregoing reasons, the Commission does not find that the
proposed rule change is consistent with the requirements of the Act and
the rules and regulations thereunder applicable to a national
securities exchange, and in particular, Section 6(b)(5) of the Act.
It Is Therefore Ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (SR-NASDAQ-2010-134) be, and it hereby
is, disapproved.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\26\
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\26\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-15674 Filed 6-22-11; 8:45 am]
BILLING CODE 8011-01-P
