Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing of Amendment No. 2 to a Proposed Rule Change To Create a New, Non-Trading Limited Underwriter Membership Class and Impose Related Requirements for Principal Underwriting Activity, 13779-13784 [2024-03647]
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Federal Register / Vol. 89, No. 37 / Friday, February 23, 2024 / Notices
dealers that act as their order-routing
agents, have a wide range of choices of
where to route orders for execution’;
[and] ‘no exchange can afford to take its
market share percentages for granted’
because ‘no exchange possesses a
monopoly, regulatory or otherwise, in
the execution of order flow from broker
dealers’. . . .’’.27 Accordingly, the
Exchange does not believe its proposed
change imposes any burden on
competition that is not 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
The Exchange neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act 28 and paragraph (f) of Rule
19b–4 29 thereunder. At any time within
60 days of the filing of the proposed rule
change, the Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission will institute proceedings
to determine whether the proposed rule
change should be approved or
disapproved.
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IV. Solicitation of Comments
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to file
number SR–CboeBZX–2024–016. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also
will be available for inspection and
copying at the principal office of the
Exchange. Do not include personal
identifiable information in submissions;
you should submit only information
that you wish to make available
publicly. We may redact in part or
withhold entirely from publication
submitted material that is obscene or
subject to copyright protection. All
submissions should refer to file number
SR–CboeBZX–2024–016 and should be
submitted on or before March 15, 2024.
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:
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.30
Sherry R. Haywood,
Assistant Secretary.
Electronic Comments
[FR Doc. 2024–03641 Filed 2–22–24; 8:45 am]
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include file number SR–
CboeBZX–2024–016 on the subject line.
BILLING CODE 8011–01–P
27 NetCoalition v. SEC, 615 F.3d 525, 539 (D.C.
Cir. 2010) (quoting Securities Exchange Act Release
No. 59039 (December 2, 2008), 73 FR 74770, 74782–
83 (December 9, 2008) (SR–NYSEArca–2006–21)).
28 15 U.S.C. 78s(b)(3)(A).
29 17 CFR 240.19b–4(f).
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–99557; File No. SR–
NASDAQ–2023–022]
Self-Regulatory Organizations; The
Nasdaq Stock Market LLC; Notice of
Filing of Amendment No. 2 to a
Proposed Rule Change To Create a
New, Non-Trading Limited Underwriter
Membership Class and Impose Related
Requirements for Principal
Underwriting Activity
February 16, 2024.
On July 12, 2023, 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 create a new, non-trading
limited underwriter membership class
and impose related requirements for
principal underwriting activity in
connection with a company applying for
initial listing on the exchange with a
transaction involving an underwriter.
The proposed rule change was
published for comment in the Federal
Register on July 31, 2023.3
On September 12, 2023, pursuant to
Section 19(b)(2) of the Act,4 the
Commission designated a longer period
within which to approve the proposed
rule change, disapprove the proposed
rule change, or institute proceedings to
determine whether to disapprove the
proposed rule change.5 On September
29, 2023, the Commission instituted
proceedings under Section 19(b)(2)(B) of
the Act 6 to determine whether to
disapprove the proposed rule change.7
On September 29, 2023, the Exchange
filed Amendment No. 1 to the proposed
rule change, which amended and
replaced the proposed rule change in its
entirety.8
On January 22, 2024, the Exchange
filed Amendment No. 2 to the proposed
rule change which amended and
replaced the proposed rule change, as
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 97985
(July 25, 2023), 88 FR 49508.
4 15 U.S.C. 78s(b)(2).
5 See Securities Exchange Act Release No. 98366,
88 FR 63999 (Sept. 18, 2023). The Commission
designated October 29, 2023, as the date by which
the Commission shall approve or disapprove, or
institute proceedings to determine whether to
approve or disapprove, the proposed rule change.
6 15 U.S.C. 78s(b)(2)(B).
7 See Securities Exchange Act Release No. 98606,
88 FR 68894 (Oct. 4, 2023).
8 Amendment No. 1 is available at https://
www.sec.goc/comments/sr-nasdaq-2023-022/
srnasdaq2023022-267740-644342.pdf.
2 17
CFR 200.30–3(a)(12).
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Federal Register / Vol. 89, No. 37 / Friday, February 23, 2024 / Notices
modified by Amendment No. 1, in its
entirety.9 The proposed rule change, as
modified by Amendment No. 2, is
described in Items I and II below, which
Items have been prepared by the
Exchange.
On January 26, 2024, the Commission
extended the time period for approving
or disapproving the proposal to March
27, 2024.10 The Commission has
received no comment letters on the
proposed rule change. The Commission
is publishing this notice to solicit
comments on the proposed rule change,
as modified by Amendment No. 2, from
interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
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.
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
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1. Purpose
The purpose of the proposed rule
change is to amend the Exchange’s
Rules to create a new, limited
membership class for those
underwriters that are FINRA members
seeking only to perform underwriting
activity as the principal underwriter on
9 Amendment No. 2 is available at https://
www.sec.goc/comments/sr-nasdaq-2023-022/
srnasdaq2023022-414859-982462.pdf.
10 See Securities Exchange Act Release No. 99433,
89 FR 6559 (Feb. 1, 2024).
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the Exchange 11 (and not seeking access
to trade via the Nasdaq Market Center)
and require a company applying for
initial listing in connection with a
transaction involving an underwriter to
have a principal underwriter 12 that is a
member or limited member of Nasdaq.13
Specifically, the Exchange proposes to
amend its General Rules to: (i) add a
definition of ‘‘Limited Underwriting
Member’’ to General 1, Section 1; and
(ii) add a new, limited underwriting
membership to General 3, Section 1031,
as described below. The Exchange
proposes to amend Equity 7, Section 10
to exempt Limited Underwriting
Members from being assessed a trading
rights fee. In addition, the Exchange
proposes to amend Rule 5210 of the
11 ‘‘Principal underwriter’’ will have the same
definition used in Rule 405 promulgated under the
Securities Act of 1933 (‘‘Securities Act’’): an
underwriter in privity of contract with the issuer of
the securities as to which he is underwriter. Such
definition provides that the term ‘‘issuer’’ in the
definition of ‘‘principal underwriter’’ has the
meaning given in Sections 2(4) and 2(11) of the
Securities Act. 17 CFR 230.405.
12 The Exchange proposes to apply the
requirements herein to a principal underwriter
(defined as an underwriter in privity of contract
with the issuer of the securities as to which he is
underwriter) because the definition of principal
underwriter points to the lead underwriter, who is
generally responsible for organizing the offering,
including tasks such as determining allocation of
shares and the offering price, in conjunction with
the issuer. Although offerings may require more
than one underwriter, or a group of underwriters
known as an underwriting syndicate, the Exchange
proposes to focus on the lead underwriters given
the substantial role they typically play in the
offering process.
13 This Amendment 2 modifies the Exhibit 5 by:
(i) updating the numbering in Rule 5210 to account
for recently added rule language; (ii) updating a
related reference to Rule 5210 in General 3, Section
1031(b); (iii) excluding Section 1032 of General 3,
a new provision, from the Rules the Exchange
proposes to apply under General 3, Section 1031(c)
for reasons described below; (iv) adds General 9,
Section 21 to the Rules the Exchange proposes to
apply under General 3, Section 1031(c) for reasons
described below; and (v) updates existing Rule
language in Equity 7, Section 10 due to recent
changes in the Rule text. In addition, this
Amendment 2 provides related updates and other
clarifying updates to the narrative explanation
herein and adds a statutory basis explanation for
the imposition of fees. Amendment 1 modified the
original filing to make several changes as it relates
to Associated Persons, including: (i) removing a
proposed exemption from registration for certain
investment banking representatives associated
solely with Limited Underwriting Members as the
Exchange determined that such exemption was
unnecessary because such representatives are not
required to register as Associated Persons under
current Rules; (ii) removing proposed rule language
from proposed Rule 1032(a) about eligibility to
become Associated Persons; (iii) removing General
4 from the list of Rules applicable to Limited
Underwriting Members; and (iv) revising rule
language to clarify that associated persons of
Limited Underwriting Members shall at all times be
properly qualified and registered under FINRA
rules. In addition, Amendment 1 provided
additional information about Nasdaq’s rationale in
not applying certain existing rules to Limited
Underwriting Members.
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Listing Rules to impose a requirement
that each Company applying for initial
listing in connection with a transaction
involving an underwriter have a
principal underwriter that is a Member
or Limited Underwriting Member.
Background
In the fall of 2022, Nasdaq observed
instances of unusually high price spikes
immediately following the pricing of
certain initial public offerings (IPOs) on
the Exchange and other national
securities exchanges, mostly with
respect to small-cap companies whose
offerings were less than $25 million. In
many instances, the IPO securities that
were the subject of these extreme price
spikes then experienced equally
dramatic price declines to a level at or
below the offering price. These extreme
price spikes may occur in the opening
trade on an exchange, or in continuous
trading on the day of, or days
immediately following, the listing.
Underwriters play a critical role as
gatekeepers to the capital markets in
connection with the trading of newly
issued securities. Unusual price
volatility following IPOs of certain
small-cap issuers highlights the
essential role underwriters play. Nasdaq
relies on underwriters to select the
selling syndicate and ensure that the
shares are placed in a way that is
reasonably designed to allow liquid
trading, consistent with Nasdaq’s listing
requirements, and the successful
introduction of the company to the
marketplace. In a recent Equity
Regulatory Alert,14 Nasdaq highlighted
the important role of underwriters as
gatekeepers in the IPO process and the
applicability of market rules and the
federal securities laws. The Financial
Industry Regulatory Authority (FINRA)
and the New York Stock Exchange
(NYSE) published similar alerts at the
same time.15 In Nasdaq’s Equity
Regulatory Alert, the Exchange also
noted:
Nasdaq members, as well as the members
of other self-regulatory organizations, that
underwrite IPOs, and that play other roles in
the offering process, should expect a
heightened focus when an IPO experiences
unusual price movements. Nasdaq
Regulation will continue to investigate to
determine whether such members have
complied with applicable rules designed to
prevent fraudulent and manipulative acts
and practices, to promote just and equitable
principles of trade, and to protect investors
14 https://www.nasdaqtrader.com/MicroNews.
aspx?id=ERA2022-9.
15 https://www.nyse.com/publicdocs/nyse/
markets/nyse/rule-interpretations/2022/NYSER_
Reg_Memo_-_Regulatory_Scrutiny_in_Connection_
with_IPOs_(2022.11.17_final).pdf; https://
www.finra.org/rules-guidance/notices/22-25.
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Federal Register / Vol. 89, No. 37 / Friday, February 23, 2024 / Notices
and the public interest. Areas of focus will
include suspected manipulation and, beyond
manipulation, whether the members are
complying with their obligation to observe
high standards of commercial honor and just
and equitable principles of trade pursuant to
Nasdaq Rule General 9, Section 1(a). That
rule sets forth a standard intended to
encompass a wide variety of conduct that
may operate as an injustice to investors or
other participants in the marketplace.16
Notwithstanding the important role of
underwriters, Nasdaq does not currently
require underwriters of companies that
are going public on the Exchange to be
Members of the Exchange. As such,
Nasdaq does not have authority to
require responses to investigative
inquiries or to enforce its Rules directly
against non-member underwriters.17
Nasdaq proposes creating a new,
limited membership class and requiring
underwriters involved in Nasdaq-listed
IPOs to be Members or Limited
Underwriting Members in order to serve
as a principal underwriter of an IPO on
the Exchange. By creating a new,
limited membership class, Nasdaq
would provide those firms seeking only
to perform principal underwriting
activity on the Exchange (and not
seeking access to trade via the Nasdaq
Market Center) the option of selecting a
membership that is less burdensome
(i.e., to become a Limited Underwriting
Member rather than a Member).18
Proposed Changes to Listing Rules
The proposed rule change primarily
impacts membership rules and other
non-listing rules, which would apply to
the underwriters themselves. However,
as part of the proposal, Nasdaq would
impose a new requirement in its Listing
Rules at Rule 5210(m), requiring each
Company applying for initial listing in
connection with a transaction involving
16 Supra
note 14.
does, however, have broad
discretionary authority over the initial and
continued listing of securities in Nasdaq and over
Members of the Exchange in order to maintain the
quality of and public confidence in its market, to
prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles
of trade, and to protect investors and the public
interest. The Exchange may request information
from companies that are going public on the
Exchange and from Members who are permitted to
trade on the Exchange. They are required to
respond to those requests. The Exchange may also
request information from non-Members, including
non-Member underwriters, but they are not
required to respond to these requests. As described
further below, this proposal would provide the
Exchange with authority to directly obtain
information from Limited Underwriting Members,
whether pre- or post-IPO.
18 A revised Membership Application is attached
[sic] as Exhibit 3, in which Nasdaq proposes to add
a category for Limited Underwriting Members and
clarify that Limited Underwriting Members are not
subject to the requirement to provide an NSCC
account number.
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17 Nasdaq
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an underwriter to have a principal
underwriter that is a Member or Limited
Underwriting Member of Nasdaq. In
proposed Rule 5210(m), the Exchange
would also specify that ‘‘principal
underwriter’’ shall have the same
definition used in Rule 405 promulgated
under the Securities Act.19 The rule
would cross reference the definition of
‘‘Limited Underwriting Member,’’
which is proposed to be added at
General 1, Section 1, and would define
Limited Underwriting Member to mean
a broker or dealer admitted to limited
underwriting membership in Nasdaq.
Proposed Changes to General Rules
Within its General Rules, the
Exchange proposes to amend General 1
(General Provisions) and General 3
(Membership and Access).
The Exchange proposes to add the
definition of ‘‘Limited Underwriting
Member’’ to General 1, Section 1
(Definitions). As noted above, the
Exchange proposes to define Limited
Underwriting Member to mean a broker
or dealer admitted to limited
underwriting membership in Nasdaq.
The Exchange proposes to add the
new category of membership to General
3, Section 1031, within which the
Exchange proposes to include
information about persons eligible to
become Limited Underwriting Members,
Limited Underwriting Member access to
the Exchange, and rules applicable to
Limited Underwriting Members.
The Exchange would specify in
General 3, Section 1031(a), that any
registered broker or dealer shall be
eligible for limited underwriting
membership in the Exchange, except
such registered brokers or dealers as are
excluded under paragraph (b) of Rule
1002.20 Proposed Rule 1031(a) is
consistent with the existing rules for
persons eligible to become Members in
General 3, Rule 1002(a).
The Exchange proposes to state, in
General 3, Section 1031(b) that (i) a
limited underwriting membership
provides no rights to transact on the
Exchange and (ii) a limited
underwriting membership is solely to
allow a firm that is not otherwise a
Member to serve as a principal
19 Supra
note 11.
relevant part, General 3, Section 1002(b)
provides that, subject to certain exceptions, no
registered broker or dealer shall be admitted to
membership, and no Member shall be continued in
membership, if such broker, dealer, or Member fails
or ceases to satisfy the qualification requirements
established by the Rules, or if such broker, dealer,
or Member is or becomes subject to a statutory
disqualification, or if such broker, dealer, or
Member fails to file such forms as may be required
in accordance with such process as the Exchange
may prescribe.
20 In
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13781
underwriter for a Company seeking to
list on the Exchange, pursuant to Rule
5210(m).
Nasdaq proposes applying a limited
ruleset to this newly proposed limited
membership class.21 Specifically, the
Exchange proposes to apply only the
following rules to Limited Underwriting
Members: General 1 (General
Provisions); General 2 (Organization and
Administration), with the exception of
Sections 6(a) and 22; General 3
(Membership and Access), with the
exception of Section 1032; General 5
(Discipline), with the exception of Rules
8211 and 9557; General 9 (Regulation),
Sections 1, 20, and 21; and Equity 7,
Section 10 (Pricing Schedule,
Membership Fees). The Exchange would
specify the aforementioned rules
applicable to this new membership class
in General 3, Section 1031(c)(1). With
the proposal, the Exchange aims to
apply only those rules it deems
appropriate to a firm serving as a
principal underwriter, including those
rules it deems critical to such firms. Of
course, a firm registering as a Limited
Underwriting Member on Nasdaq would
remain subject to all applicable rules of
the Commission and any other SelfRegulatory Organization of which it is a
member, including FINRA.
The Exchange acknowledges that
there are additional, existing Rules that
it could propose to apply to Limited
Underwriting Members. However, the
Exchange is proposing to apply only a
narrow ruleset as the Exchange does not
intend to create comprehensive rules to
regulate underwriting activity. Rather,
the Exchange proposes to apply a
limited ruleset, primarily to provide the
Exchange with the authority to require
information directly from the Limited
Underwriting Members and enhance its
tools for oversight with respect to the
role the underwriter plays in connection
with a company listing on the Exchange,
as described below. Limited
Underwriting Members would be
subject to FINRA’s rules, including its
rules that substantively regulate
underwriting activity. Nasdaq would
consider whether additional existing
Rules that are not proposed in the
limited ruleset for Limited Underwriting
Members or new Rules are warranted as
the Exchange gains more experience in
applying the rules proposed herein. As
the Exchange adopts new Rules over
time, it also would consider whether to
apply such Rules to Limited
Underwriting Members.
21 Members of the Exchange, unlike Limited
Underwriting Members, are subject to all of the
Exchange’s Rules (which includes the limited
ruleset applicable to the newly proposed limited
membership class).
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Federal Register / Vol. 89, No. 37 / Friday, February 23, 2024 / Notices
The Exchange proposes to apply
General 1 to Limited Underwriting
Members because General 1 provides
defined terms that would be applicable
to Limited Underwriting Members and,
as explained above, the proposed rule
change would also add a definition
(‘‘Limited Underwriting Member’’) to
General 1.
The Exchange proposes to apply
General 2 (with the exception of
Sections 6(a) and 22) to Limited
Underwriting Members because General
2 relates to organization and
administration including requirements
surrounding fees, limitations on
affiliations, and a requirement for an
executive representative, among other
obligations. The Exchange proposes to
specifically exclude General 2, Sections
6(a) and Section 22. General 2, Section
6(a) states that General Equity and
Options Rules and Equity Rules shall
apply to all members and persons
associated with a member, which is not
accurate in the case of Limited
Underwriting Members. General 2,
Section 22 relates to Sponsored
Participants and client access to the
Nasdaq Market Center via a Member,
which is not applicable to underwriting
activity.
The Exchange also proposes to subject
Limited Underwriting Members to
General 3 (with the exception of Section
1032) because General 3 contains
membership rules, including an
obligation to follow specified
procedures for applying to be a member,
making changes to membership, or
terminating membership. The Exchange
proposes to specifically exclude General
3, Section 1032 because such section
includes requirements related to Nasdaq
Market Center Participant registration.
This section is inapplicable to Limited
Underwriting Members because they are
not permitted to transact on the Nasdaq
Market Center. As described herein, the
proposed rule change would also add
additional details regarding the limited
underwriting membership to General 3,
Rule 1031.
The Exchange believes it is critical to
subject Limited Underwriting Members
to General 5 (with the exception of
Rules 8211 and 9557), which contains
the Exchange’s disciplinary rules.22
Notably, General 5, Rule 8210 provides
the Exchange with authority to require
22 General 5, Rule 8001 provides that the
Exchange and FINRA are parties to the FINRA
Regulatory Contract (often referred to as a
Regulatory Services Agreement (‘‘RSA’’)) pursuant
to which FINRA has agreed to perform certain
functions described in the Exchange’s Rules on
behalf of the Exchange. The Exchange does not
anticipate that the proposed rule change would
have any material impact on the current RSA.
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information from Exchange Members.
The Exchange proposes to specifically
exclude General 5, Rule 8211 and Rule
9557. Rule 8211 relates to members
submission of trade data. Rule 9557
relates to procedures for regulating
activities under General 9, Sections 40
and 41, which incorporate FINRA Rules
4110 and 4120, which relate to FINRA
carrying or clearing members. Therefore,
Rule 8211 and Rule 9557 are not
relevant to underwriting activity.
The Exchange also believes it is
important to subject Limited
Underwriting Members to General 9,
Section 1 which includes general
standards by which Members must
abide. Specifically, of importance,
General 9, Section 1(a) requires
Members to observe just and equitable
principles of trade. General 9, Sections
20 and 21 require Members to establish
and maintain a system to supervise the
activities of each registered
representative and associated person
that is reasonably designed to achieve
compliance with applicable securities
laws and regulations and with
applicable Nasdaq rules, and to identify
principles who must establish,
maintain, and enforce a system of
supervisory control policies and
procedures that, among other things,
tests that the member’s supervisory
procedures are reasonably designed
with respect to the activities of the
member and its associated persons, to
achieve compliance with applicable
securities laws and regulations, and
with applicable Nasdaq rules. The
Exchange believes it is important to
apply these provisions on supervision
as it would provide the Exchange with
authority to assess whether a Limited
Underwriting Member has an adequate
supervisory system and written
supervisory procedures in place. With
the exception of General 9, Section 1,
Section 20, and Section 21, the
Exchange does not propose to apply
other sections of General 9 to Limited
Underwriting Members at this time.
Although the Exchange acknowledges
that certain other sections of General 9
could be applied to underwriters, the
Exchange is targeting limited inclusion
of those Rules it deems critical. Further,
many of the standards in General 9 are
FINRA rules that are incorporated by
reference into the Exchange’s Rules.
Limited Underwriting Members would
therefore be subject to such FINRA rules
by virtue of their FINRA membership.
Finally, the Exchange proposes to
include Equity 7, Section 10 to Limited
Underwriting Members because this
section includes the membership and
application fees applicable to Limited
Underwriting Members. The Exchange
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proposes to avoid applying all those
Exchange rules not specified in
proposed General 3, Section 1031(c)(1)
to Limited Underwriting Members in an
effort to impose minimal burden on
Limited Underwriting Members, while
still allowing the Exchange to have
regulatory authority over such members.
Furthermore, the Exchange believes that
the Exchange’s rules that Limited
Underwriting Members would not be
subject to under the proposal primarily
relate to trading activity and are,
therefore, not relevant to the activities of
Limited Underwriting Members. As
noted above, Nasdaq would consider
whether additional existing Rules that
are not proposed in the limited ruleset
for Limited Underwriting Members or
new Rules are warranted as the
Exchange gains more experience in
applying the rules proposed herein.
The Exchange proposes to include
language in General 3, Section
1031(c)(1) providing that, for purposes
of interpreting and applying the rules to
Limited Underwriting Members,
references to ‘‘Member,’’ ‘‘Members,’’ or
‘‘membership’’ shall be functionally
equivalent to ‘‘Limited Underwriting
Member,’’ ‘‘Limited Underwriting
Members,’’ or ‘‘limited underwriting
membership’’ respectively. The
Exchange also proposes to include a
requirement, in General 3, Section
1031(c)(2), that Limited Underwriting
Members shall at all times be members
of FINRA and associated persons of
Limited Underwriting Members shall at
all times be properly qualified and
registered under FINRA rules.23
Proposed Change to Equity Rules
The Exchange proposes to exempt
Limited Underwriting Members from
the trading rights fee of $1,250 per
month that is normally charged to
Members because such Limited
Underwriting Members would not be
eligible to trade on the Exchange.
Accordingly, the Exchange proposes to
add language to Equity 7, Section 10(a)
to specify that Limited Underwriting
Members would not be charged the
monthly trading rights fee. Limited
Underwriting Members would be
23 Limited Underwriting Members would,
therefore, be eligible to waive-in to Exchange
membership, as provided for in General 3, Section
1013(b). Prospective Limited Underwriting
Members would need to submit a membership
application (see supra note 18) in which they
would select ‘‘Waive-In Membership’’ for the
application type and ‘‘Limited Underwriting
Member of NQX’’ for the nature of intended
activity. For ‘‘waive-in’’ applicants, the Exchange
relies substantially upon FINRA’s determination to
approve the applicant for FINRA membership when
the Exchange evaluates the applicant for Exchange
membership.
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subject to a $2,000 application fee (per
Equity 7, Section 10(b)) and a $4,000
yearly membership fee (per Equity 7,
Section 10(a)).
ddrumheller on DSK120RN23PROD with NOTICES1
Excluded Rules
As noted above, Nasdaq
acknowledges that additional Rules
could theoretically be applied to
Limited Underwriting Members.
However, Nasdaq proposes to apply the
limited ruleset for the reasons described
above. In addition to the Rules
discussed above, the Exchange has not
proposed to apply the following Rules
to Limited Underwriting Members at
this time: General 4; General 6; General
7; General 8; Equity Rules (with the
exception of Equity 7, Section 10); and
Options Rules. General 4 requires
certain categories of persons associated
with members to register with the
Exchange. Because these categories do
not relate to underwriting, the Exchange
does not propose to apply General 4 to
Limited Underwriting Members.
However, as noted above, the Exchange
would require all Limited Underwriting
Members to be FINRA members and
associated persons of Limited
Underwriting Members to be properly
qualified and registered under FINRA
rules. Limited Underwriting Members
and their associated persons would be
subject to FINRA’s registration and
qualification rules,24 including, for
example, requirements regarding
relevant examinations for underwriting
(Series 79, Investment Banking, IB) and
supervision of underwriting (Series 79
plus Series 24, Investment Banking
Principal). General 6 relates generally to
FINRA arbitration rules to which the
Limited Underwriting Members would
be subject to directly by virtue of their
FINRA membership. The Exchange does
not propose to apply General 7 to
Limited Underwriting Members because
it governs consolidated audit trail
compliance and would not apply to
underwriting activity. General 8 governs
connectivity to the Exchange and would
not be relevant to Limited Underwriting
Members given their lack of access to
trade on the Exchange. Similarly, the
Equities Rules and the Options Rules
are generally not relevant to the
activities of Limited Underwriting
Members due to their lack of access to
trade on the Exchange. Although
Limited Underwriting Members could
access the Exchange via other means,
such as trading through another
Member, Limited Underwriting
24 See FINRA Rules, Rule 1210 (Registration
Requirements) and Rule 1220 (Registration
Categories).
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17:19 Feb 22, 2024
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Members would have no direct access to
trade on the Exchange.
Implementation
The Exchange would designate the
proposed changes to be operative 60
days after publication of the
Commission’s approval order of SR–
NASDAQ–2023–022, as amended, in the
Federal Register. This delay will allow
time for firms involved with upcoming
IPOs to become Limited Underwriting
Members, if they choose, and for
companies planning IPOs to select
alternative underwriters if their current
firm is not, and does not intend to
become, a Member or Limited
Underwriting Member.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act,25 in general, and furthers the
objectives of Section 6(b)(5) of the Act,26
in particular, in that it is 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, and, in general to protect
investors and the public interest, by
strengthening Nasdaq’s ability to carry
out its oversight responsibilities. It is
also consistent with Section 6(b)(7) of
the Act in that it provides for a fair
procedure for prohibiting or limiting
any person with respect to access to
services offered by the Exchange or a
Member thereof.27 As discussed above,
the proposal would create a new,
limited membership class for those
firms seeking only to perform activity as
the principal underwriter of an IPO on
the Exchange (and not seeking access to
trade via the Nasdaq Market Center) and
require a company applying for initial
listing in connection with a transaction
involving an underwriter to have a
principal underwriter that is a member
or limited member of Nasdaq. The
Exchange would apply specified rules to
Limited Underwriting Members, as
explained above. Such rules include
general provisions and standards,
membership and access rules,
organization and administration rules,
registration requirements, disciplinary
rules, and certain fees. Creating this new
membership class and subjecting
principal underwriters to such specified
rules supports fair and orderly markets,
which protects investors and the public
interest, consistent with Section 6(b)(5)
of the Act. Notably, the proposal would
subject Limited Underwriting Members
25 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
27 15 U.S.C. 78f(b)(7).
26 15
PO 00000
Frm 00105
Fmt 4703
Sfmt 4703
13783
to Nasdaq’s disciplinary rules, which
provides Nasdaq authority to require
information from such underwriters (per
General 5, Rule 8210), as well as other
general rules, including the requirement
to observe just and equitable principles
of trade (per General 9, Section 1(a)), the
requirement to establish and maintain a
system to supervise the activities of
registered representatives and
associated persons (per General 9,
Section 20), and the requirement to test
and verify that the system is reasonably
designed (per General 9, Section 21).
Nasdaq believes that imposing these
Nasdaq rules, as well as the other rules
included in proposed Rule 1031(c)(1),
on principal underwriters will
strengthen 28 Nasdaq’s ability to carry
out its oversight responsibilities and
deter potential violative conduct, such
as fraud or manipulation, thereby
protecting investors and the public
interest. Nasdaq also believes that it is
appropriate and consistent with the
protection of investors and the public
interest that it not impose those rules
excluded from proposed Rule 1031(c)(1)
because these rules are not directly
applicable to the activities a Limited
Underwriting Members is permitted to
conduct on the Exchange, and the firms
will be subject to all applicable FINRA
rules.
The Exchange also believes that the
proposed rule change is not designed to
permit unfair discrimination between
customers, issuers, brokers and dealers,
consistent with Section 6(b)(5) of the
Act.29 The proposed changes to the
Listing Rules will apply equally to all
similarly situated companies applying
for initial listing in connection with a
transaction involving an underwriter on
the Exchange and therefore, are not
designed to permit unfair
discrimination. The Exchange’s
proposal to subject Limited
Underwriting Members to a limited set
of rules and exclude certain rules
applicable to Members is not designed
to permit unfair discrimination between
brokers and dealers because the limited
underwriting membership does not
confer the same benefits as a standard
Exchange membership and does not
warrant application of the same ruleset.
All Limited Underwriting Members
28 As noted above, the Exchange acknowledges
that additional, existing Rules could apply to
underwriters. The Exchange proposes to apply a
limited ruleset to Limited Underwriting Members,
consisting of those Rules it deems most critical.
Today, underwriters are not required to be Members
and therefore, non-member underwriters are not
subject to any of the Exchange’s Rules.
29 15 U.S.C. 78f(b)(5).
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Federal Register / Vol. 89, No. 37 / Friday, February 23, 2024 / Notices
ddrumheller on DSK120RN23PROD with NOTICES1
would be subject to the same specified
rules.
Finally, Nasdaq believes that its
proposal to impose certain fees on
Limited Underwriting Members is
consistent with Section 6(b) of the Act,
in general, and furthers the objectives of
Sections 6(b)(4) and 6(b)(5) of the Act,
in particular, in that it provides for the
equitable allocation of reasonable dues,
fees and other charges among members
and issuers and other persons using any
facility, and is not designed to permit
unfair discrimination between
customers, issuers, brokers, or dealers.
The Exchange believes that its proposal
to charge the $2,000 application fee and
$4,000 yearly membership fee but not
charge the $1,250 monthly trading rights
fee is reasonable, equitable and not
unfairly discriminatory. The Exchange
would apply fees that are already in
existence and the Exchange believes
such fees reflect the value of services it
provides its applicants and
membership. By charging Limited
Underwriting Members the same
application and yearly membership fee
as Members, the Exchange believes that
it would be treating the membership
equitably. Further, the Exchange
believes it is reasonable and equitable to
exempt Limited Underwriting Members
from the monthly trading rights fee
because such members would not have
access to trade on the Exchange. The
Exchange believes that the fee proposal
is not designed to permit unfair
discrimination between Exchange
members because the fees would be
applied equally to all similarly situated
members.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act. As noted
above, the proposed changes to the
Listing Rules will apply equally to all
similarly situated companies applying
for initial listing in connection with a
transaction involving an underwriter on
the Exchange. Likewise, the proposed
changes to the General and Equity
Rules, including to the membership
rules, will apply equally to all similarly
situated Applicants and Members and
they will confer no relative advantage or
disadvantage upon any category of
Exchange Applicant or Member.
Although the Exchange proposes to
subject Limited Underwriting Members
to a limited set of rules, the limited
underwriting membership does not
confer the same benefits as a standard
Exchange membership. Namely, a
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17:19 Feb 22, 2024
Jkt 262001
Limited Underwriting Member would
not be permitted to transact on the
Nasdaq Market Center. Therefore,
applying a limited ruleset to Limited
Underwriting Members is justified. All
Limited Underwriting Members would
be subject to the same specified rules, as
noted above. Moreover, the Exchange
does not expect that its proposal will
have an adverse impact on competition
among exchanges for members. The
Exchange believes the proposed rule
changes, overall, will strengthen the
Exchange’s ability to carry out its role
and responsibilities as a self-regulatory
organization and deter potential
violative conduct. As such, the
Exchange does not believe that the
proposed rule change will impose any
burden on competition not necessary or
appropriate in furtherance of the
purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
III. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether Amendment No. 2 to
the proposed rule change is consistent
with the Act. Comments may be
submitted by any of the following
methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include file number SR–
NASDAQ–2023–022 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to file
number SR–NASDAQ–2023–022. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
PO 00000
Frm 00106
Fmt 4703
Sfmt 4703
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also
will be available for inspection and
copying at the principal office of the
Exchange. Do not include personal
identifiable information in submissions;
you should submit only information
that you wish to make available
publicly. We may redact in part or
withhold entirely from publication
submitted material that is obscene or
subject to copyright protection. All
submissions should refer to file number
SR–NASDAQ–2023–022 and should be
submitted on or before March 15, 2024.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.30
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024–03647 Filed 2–22–24; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–99553; File No. SR–
CboeEDGA–2024–006]
Self-Regulatory Organizations; Cboe
EDGA Exchange, Inc.; Notice of Filing
and Immediate Effectiveness of a
Proposed Rule Change To Amend Its
Fees Schedule Related to Physical
Port Fees
February 16, 2024.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on February
9, 2024, Cboe EDGA Exchange, Inc. (the
‘‘Exchange’’ or ‘‘EDGA’’) 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.
30 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
E:\FR\FM\23FEN1.SGM
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]]>Agencies
[Federal Register Volume 89, Number 37 (Friday, February 23, 2024)]
[Notices]
[Pages 13779-13784]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-03647]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-99557; File No. SR-NASDAQ-2023-022]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing of Amendment No. 2 to a Proposed Rule Change To Create
a New, Non-Trading Limited Underwriter Membership Class and Impose
Related Requirements for Principal Underwriting Activity
February 16, 2024.
On July 12, 2023, 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 create a new, non-trading limited underwriter
membership class and impose related requirements for principal
underwriting activity in connection with a company applying for initial
listing on the exchange with a transaction involving an underwriter.
The proposed rule change was published for comment in the Federal
Register on July 31, 2023.\3\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 97985 (July 25,
2023), 88 FR 49508.
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On September 12, 2023, pursuant to Section 19(b)(2) of the Act,\4\
the Commission designated a longer period within which to approve the
proposed rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to disapprove the proposed rule
change.\5\ On September 29, 2023, the Commission instituted proceedings
under Section 19(b)(2)(B) of the Act \6\ to determine whether to
disapprove the proposed rule change.\7\ On September 29, 2023, the
Exchange filed Amendment No. 1 to the proposed rule change, which
amended and replaced the proposed rule change in its entirety.\8\
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\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 98366, 88 FR 63999
(Sept. 18, 2023). The Commission designated October 29, 2023, as the
date by which the Commission shall approve or disapprove, or
institute proceedings to determine whether to approve or disapprove,
the proposed rule change.
\6\ 15 U.S.C. 78s(b)(2)(B).
\7\ See Securities Exchange Act Release No. 98606, 88 FR 68894
(Oct. 4, 2023).
\8\ Amendment No. 1 is available at https://www.sec.goc/comments/sr-nasdaq-2023-022/srnasdaq2023022-267740-644342.pdf.
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On January 22, 2024, the Exchange filed Amendment No. 2 to the
proposed rule change which amended and replaced the proposed rule
change, as
[[Page 13780]]
modified by Amendment No. 1, in its entirety.\9\ The proposed rule
change, as modified by Amendment No. 2, is described in Items I and II
below, which Items have been prepared by the Exchange.
---------------------------------------------------------------------------
\9\ Amendment No. 2 is available at https://www.sec.goc/comments/sr-nasdaq-2023-022/srnasdaq2023022-414859-982462.pdf.
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On January 26, 2024, the Commission extended the time period for
approving or disapproving the proposal to March 27, 2024.\10\ The
Commission has received no comment letters on the proposed rule change.
The Commission is publishing this notice to solicit comments on the
proposed rule change, as modified by Amendment No. 2, from interested
persons.
---------------------------------------------------------------------------
\10\ See Securities Exchange Act Release No. 99433, 89 FR 6559
(Feb. 1, 2024).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of 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.
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
The purpose of the proposed rule change is to amend the Exchange's
Rules to create a new, limited membership class for those underwriters
that are FINRA members seeking only to perform underwriting activity as
the principal underwriter on the Exchange \11\ (and not seeking access
to trade via the Nasdaq Market Center) and require a company applying
for initial listing in connection with a transaction involving an
underwriter to have a principal underwriter \12\ that is a member or
limited member of Nasdaq.\13\
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\11\ ``Principal underwriter'' will have the same definition
used in Rule 405 promulgated under the Securities Act of 1933
(``Securities Act''): an underwriter in privity of contract with the
issuer of the securities as to which he is underwriter. Such
definition provides that the term ``issuer'' in the definition of
``principal underwriter'' has the meaning given in Sections 2(4) and
2(11) of the Securities Act. 17 CFR 230.405.
\12\ The Exchange proposes to apply the requirements herein to a
principal underwriter (defined as an underwriter in privity of
contract with the issuer of the securities as to which he is
underwriter) because the definition of principal underwriter points
to the lead underwriter, who is generally responsible for organizing
the offering, including tasks such as determining allocation of
shares and the offering price, in conjunction with the issuer.
Although offerings may require more than one underwriter, or a group
of underwriters known as an underwriting syndicate, the Exchange
proposes to focus on the lead underwriters given the substantial
role they typically play in the offering process.
\13\ This Amendment 2 modifies the Exhibit 5 by: (i) updating
the numbering in Rule 5210 to account for recently added rule
language; (ii) updating a related reference to Rule 5210 in General
3, Section 1031(b); (iii) excluding Section 1032 of General 3, a new
provision, from the Rules the Exchange proposes to apply under
General 3, Section 1031(c) for reasons described below; (iv) adds
General 9, Section 21 to the Rules the Exchange proposes to apply
under General 3, Section 1031(c) for reasons described below; and
(v) updates existing Rule language in Equity 7, Section 10 due to
recent changes in the Rule text. In addition, this Amendment 2
provides related updates and other clarifying updates to the
narrative explanation herein and adds a statutory basis explanation
for the imposition of fees. Amendment 1 modified the original filing
to make several changes as it relates to Associated Persons,
including: (i) removing a proposed exemption from registration for
certain investment banking representatives associated solely with
Limited Underwriting Members as the Exchange determined that such
exemption was unnecessary because such representatives are not
required to register as Associated Persons under current Rules; (ii)
removing proposed rule language from proposed Rule 1032(a) about
eligibility to become Associated Persons; (iii) removing General 4
from the list of Rules applicable to Limited Underwriting Members;
and (iv) revising rule language to clarify that associated persons
of Limited Underwriting Members shall at all times be properly
qualified and registered under FINRA rules. In addition, Amendment 1
provided additional information about Nasdaq's rationale in not
applying certain existing rules to Limited Underwriting Members.
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Specifically, the Exchange proposes to amend its General Rules to:
(i) add a definition of ``Limited Underwriting Member'' to General 1,
Section 1; and (ii) add a new, limited underwriting membership to
General 3, Section 1031, as described below. The Exchange proposes to
amend Equity 7, Section 10 to exempt Limited Underwriting Members from
being assessed a trading rights fee. In addition, the Exchange proposes
to amend Rule 5210 of the Listing Rules to impose a requirement that
each Company applying for initial listing in connection with a
transaction involving an underwriter have a principal underwriter that
is a Member or Limited Underwriting Member.
Background
In the fall of 2022, Nasdaq observed instances of unusually high
price spikes immediately following the pricing of certain initial
public offerings (IPOs) on the Exchange and other national securities
exchanges, mostly with respect to small-cap companies whose offerings
were less than $25 million. In many instances, the IPO securities that
were the subject of these extreme price spikes then experienced equally
dramatic price declines to a level at or below the offering price.
These extreme price spikes may occur in the opening trade on an
exchange, or in continuous trading on the day of, or days immediately
following, the listing.
Underwriters play a critical role as gatekeepers to the capital
markets in connection with the trading of newly issued securities.
Unusual price volatility following IPOs of certain small-cap issuers
highlights the essential role underwriters play. Nasdaq relies on
underwriters to select the selling syndicate and ensure that the shares
are placed in a way that is reasonably designed to allow liquid
trading, consistent with Nasdaq's listing requirements, and the
successful introduction of the company to the marketplace. In a recent
Equity Regulatory Alert,\14\ Nasdaq highlighted the important role of
underwriters as gatekeepers in the IPO process and the applicability of
market rules and the federal securities laws. The Financial Industry
Regulatory Authority (FINRA) and the New York Stock Exchange (NYSE)
published similar alerts at the same time.\15\ In Nasdaq's Equity
Regulatory Alert, the Exchange also noted:
---------------------------------------------------------------------------
\14\ https://www.nasdaqtrader.com/MicroNews.aspx?id=ERA2022-9.
\15\ https://www.nyse.com/publicdocs/nyse/markets/nyse/rule-interpretations/2022/NYSER_Reg_Memo_-_Regulatory_Scrutiny_in_Connection_with_IPOs_(2022.11.17_final).pdf;
https://www.finra.org/rules-guidance/notices/22-25.
Nasdaq members, as well as the members of other self-regulatory
organizations, that underwrite IPOs, and that play other roles in
the offering process, should expect a heightened focus when an IPO
experiences unusual price movements. Nasdaq Regulation will continue
to investigate to determine whether such members have complied with
applicable rules designed to prevent fraudulent and manipulative
acts and practices, to promote just and equitable principles of
trade, and to protect investors
[[Page 13781]]
and the public interest. Areas of focus will include suspected
manipulation and, beyond manipulation, whether the members are
complying with their obligation to observe high standards of
commercial honor and just and equitable principles of trade pursuant
to Nasdaq Rule General 9, Section 1(a). That rule sets forth a
standard intended to encompass a wide variety of conduct that may
operate as an injustice to investors or other participants in the
marketplace.\16\
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\16\ Supra note 14.
Notwithstanding the important role of underwriters, Nasdaq does not
currently require underwriters of companies that are going public on
the Exchange to be Members of the Exchange. As such, Nasdaq does not
have authority to require responses to investigative inquiries or to
enforce its Rules directly against non-member underwriters.\17\
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\17\ Nasdaq does, however, have broad discretionary authority
over the initial and continued listing of securities in Nasdaq and
over Members of the Exchange in order to maintain the quality of and
public confidence in its market, to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, and to protect investors and the public
interest. The Exchange may request information from companies that
are going public on the Exchange and from Members who are permitted
to trade on the Exchange. They are required to respond to those
requests. The Exchange may also request information from non-
Members, including non-Member underwriters, but they are not
required to respond to these requests. As described further below,
this proposal would provide the Exchange with authority to directly
obtain information from Limited Underwriting Members, whether pre-
or post-IPO.
---------------------------------------------------------------------------
Nasdaq proposes creating a new, limited membership class and
requiring underwriters involved in Nasdaq-listed IPOs to be Members or
Limited Underwriting Members in order to serve as a principal
underwriter of an IPO on the Exchange. By creating a new, limited
membership class, Nasdaq would provide those firms seeking only to
perform principal underwriting activity on the Exchange (and not
seeking access to trade via the Nasdaq Market Center) the option of
selecting a membership that is less burdensome (i.e., to become a
Limited Underwriting Member rather than a Member).\18\
---------------------------------------------------------------------------
\18\ A revised Membership Application is attached [sic] as
Exhibit 3, in which Nasdaq proposes to add a category for Limited
Underwriting Members and clarify that Limited Underwriting Members
are not subject to the requirement to provide an NSCC account
number.
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Proposed Changes to Listing Rules
The proposed rule change primarily impacts membership rules and
other non-listing rules, which would apply to the underwriters
themselves. However, as part of the proposal, Nasdaq would impose a new
requirement in its Listing Rules at Rule 5210(m), requiring each
Company applying for initial listing in connection with a transaction
involving an underwriter to have a principal underwriter that is a
Member or Limited Underwriting Member of Nasdaq. In proposed Rule
5210(m), the Exchange would also specify that ``principal underwriter''
shall have the same definition used in Rule 405 promulgated under the
Securities Act.\19\ The rule would cross reference the definition of
``Limited Underwriting Member,'' which is proposed to be added at
General 1, Section 1, and would define Limited Underwriting Member to
mean a broker or dealer admitted to limited underwriting membership in
Nasdaq.
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\19\ Supra note 11.
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Proposed Changes to General Rules
Within its General Rules, the Exchange proposes to amend General 1
(General Provisions) and General 3 (Membership and Access).
The Exchange proposes to add the definition of ``Limited
Underwriting Member'' to General 1, Section 1 (Definitions). As noted
above, the Exchange proposes to define Limited Underwriting Member to
mean a broker or dealer admitted to limited underwriting membership in
Nasdaq.
The Exchange proposes to add the new category of membership to
General 3, Section 1031, within which the Exchange proposes to include
information about persons eligible to become Limited Underwriting
Members, Limited Underwriting Member access to the Exchange, and rules
applicable to Limited Underwriting Members.
The Exchange would specify in General 3, Section 1031(a), that any
registered broker or dealer shall be eligible for limited underwriting
membership in the Exchange, except such registered brokers or dealers
as are excluded under paragraph (b) of Rule 1002.\20\ Proposed Rule
1031(a) is consistent with the existing rules for persons eligible to
become Members in General 3, Rule 1002(a).
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\20\ In relevant part, General 3, Section 1002(b) provides that,
subject to certain exceptions, no registered broker or dealer shall
be admitted to membership, and no Member shall be continued in
membership, if such broker, dealer, or Member fails or ceases to
satisfy the qualification requirements established by the Rules, or
if such broker, dealer, or Member is or becomes subject to a
statutory disqualification, or if such broker, dealer, or Member
fails to file such forms as may be required in accordance with such
process as the Exchange may prescribe.
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The Exchange proposes to state, in General 3, Section 1031(b) that
(i) a limited underwriting membership provides no rights to transact on
the Exchange and (ii) a limited underwriting membership is solely to
allow a firm that is not otherwise a Member to serve as a principal
underwriter for a Company seeking to list on the Exchange, pursuant to
Rule 5210(m).
Nasdaq proposes applying a limited ruleset to this newly proposed
limited membership class.\21\ Specifically, the Exchange proposes to
apply only the following rules to Limited Underwriting Members: General
1 (General Provisions); General 2 (Organization and Administration),
with the exception of Sections 6(a) and 22; General 3 (Membership and
Access), with the exception of Section 1032; General 5 (Discipline),
with the exception of Rules 8211 and 9557; General 9 (Regulation),
Sections 1, 20, and 21; and Equity 7, Section 10 (Pricing Schedule,
Membership Fees). The Exchange would specify the aforementioned rules
applicable to this new membership class in General 3, Section
1031(c)(1). With the proposal, the Exchange aims to apply only those
rules it deems appropriate to a firm serving as a principal
underwriter, including those rules it deems critical to such firms. Of
course, a firm registering as a Limited Underwriting Member on Nasdaq
would remain subject to all applicable rules of the Commission and any
other Self-Regulatory Organization of which it is a member, including
FINRA.
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\21\ Members of the Exchange, unlike Limited Underwriting
Members, are subject to all of the Exchange's Rules (which includes
the limited ruleset applicable to the newly proposed limited
membership class).
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The Exchange acknowledges that there are additional, existing Rules
that it could propose to apply to Limited Underwriting Members.
However, the Exchange is proposing to apply only a narrow ruleset as
the Exchange does not intend to create comprehensive rules to regulate
underwriting activity. Rather, the Exchange proposes to apply a limited
ruleset, primarily to provide the Exchange with the authority to
require information directly from the Limited Underwriting Members and
enhance its tools for oversight with respect to the role the
underwriter plays in connection with a company listing on the Exchange,
as described below. Limited Underwriting Members would be subject to
FINRA's rules, including its rules that substantively regulate
underwriting activity. Nasdaq would consider whether additional
existing Rules that are not proposed in the limited ruleset for Limited
Underwriting Members or new Rules are warranted as the Exchange gains
more experience in applying the rules proposed herein. As the Exchange
adopts new Rules over time, it also would consider whether to apply
such Rules to Limited Underwriting Members.
[[Page 13782]]
The Exchange proposes to apply General 1 to Limited Underwriting
Members because General 1 provides defined terms that would be
applicable to Limited Underwriting Members and, as explained above, the
proposed rule change would also add a definition (``Limited
Underwriting Member'') to General 1.
The Exchange proposes to apply General 2 (with the exception of
Sections 6(a) and 22) to Limited Underwriting Members because General 2
relates to organization and administration including requirements
surrounding fees, limitations on affiliations, and a requirement for an
executive representative, among other obligations. The Exchange
proposes to specifically exclude General 2, Sections 6(a) and Section
22. General 2, Section 6(a) states that General Equity and Options
Rules and Equity Rules shall apply to all members and persons
associated with a member, which is not accurate in the case of Limited
Underwriting Members. General 2, Section 22 relates to Sponsored
Participants and client access to the Nasdaq Market Center via a
Member, which is not applicable to underwriting activity.
The Exchange also proposes to subject Limited Underwriting Members
to General 3 (with the exception of Section 1032) because General 3
contains membership rules, including an obligation to follow specified
procedures for applying to be a member, making changes to membership,
or terminating membership. The Exchange proposes to specifically
exclude General 3, Section 1032 because such section includes
requirements related to Nasdaq Market Center Participant registration.
This section is inapplicable to Limited Underwriting Members because
they are not permitted to transact on the Nasdaq Market Center. As
described herein, the proposed rule change would also add additional
details regarding the limited underwriting membership to General 3,
Rule 1031.
The Exchange believes it is critical to subject Limited
Underwriting Members to General 5 (with the exception of Rules 8211 and
9557), which contains the Exchange's disciplinary rules.\22\ Notably,
General 5, Rule 8210 provides the Exchange with authority to require
information from Exchange Members. The Exchange proposes to
specifically exclude General 5, Rule 8211 and Rule 9557. Rule 8211
relates to members submission of trade data. Rule 9557 relates to
procedures for regulating activities under General 9, Sections 40 and
41, which incorporate FINRA Rules 4110 and 4120, which relate to FINRA
carrying or clearing members. Therefore, Rule 8211 and Rule 9557 are
not relevant to underwriting activity.
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\22\ General 5, Rule 8001 provides that the Exchange and FINRA
are parties to the FINRA Regulatory Contract (often referred to as a
Regulatory Services Agreement (``RSA'')) pursuant to which FINRA has
agreed to perform certain functions described in the Exchange's
Rules on behalf of the Exchange. The Exchange does not anticipate
that the proposed rule change would have any material impact on the
current RSA.
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The Exchange also believes it is important to subject Limited
Underwriting Members to General 9, Section 1 which includes general
standards by which Members must abide. Specifically, of importance,
General 9, Section 1(a) requires Members to observe just and equitable
principles of trade. General 9, Sections 20 and 21 require Members to
establish and maintain a system to supervise the activities of each
registered representative and associated person that is reasonably
designed to achieve compliance with applicable securities laws and
regulations and with applicable Nasdaq rules, and to identify
principles who must establish, maintain, and enforce a system of
supervisory control policies and procedures that, among other things,
tests that the member's supervisory procedures are reasonably designed
with respect to the activities of the member and its associated
persons, to achieve compliance with applicable securities laws and
regulations, and with applicable Nasdaq rules. The Exchange believes it
is important to apply these provisions on supervision as it would
provide the Exchange with authority to assess whether a Limited
Underwriting Member has an adequate supervisory system and written
supervisory procedures in place. With the exception of General 9,
Section 1, Section 20, and Section 21, the Exchange does not propose to
apply other sections of General 9 to Limited Underwriting Members at
this time. Although the Exchange acknowledges that certain other
sections of General 9 could be applied to underwriters, the Exchange is
targeting limited inclusion of those Rules it deems critical. Further,
many of the standards in General 9 are FINRA rules that are
incorporated by reference into the Exchange's Rules. Limited
Underwriting Members would therefore be subject to such FINRA rules by
virtue of their FINRA membership.
Finally, the Exchange proposes to include Equity 7, Section 10 to
Limited Underwriting Members because this section includes the
membership and application fees applicable to Limited Underwriting
Members. The Exchange proposes to avoid applying all those Exchange
rules not specified in proposed General 3, Section 1031(c)(1) to
Limited Underwriting Members in an effort to impose minimal burden on
Limited Underwriting Members, while still allowing the Exchange to have
regulatory authority over such members. Furthermore, the Exchange
believes that the Exchange's rules that Limited Underwriting Members
would not be subject to under the proposal primarily relate to trading
activity and are, therefore, not relevant to the activities of Limited
Underwriting Members. As noted above, Nasdaq would consider whether
additional existing Rules that are not proposed in the limited ruleset
for Limited Underwriting Members or new Rules are warranted as the
Exchange gains more experience in applying the rules proposed herein.
The Exchange proposes to include language in General 3, Section
1031(c)(1) providing that, for purposes of interpreting and applying
the rules to Limited Underwriting Members, references to ``Member,''
``Members,'' or ``membership'' shall be functionally equivalent to
``Limited Underwriting Member,'' ``Limited Underwriting Members,'' or
``limited underwriting membership'' respectively. The Exchange also
proposes to include a requirement, in General 3, Section 1031(c)(2),
that Limited Underwriting Members shall at all times be members of
FINRA and associated persons of Limited Underwriting Members shall at
all times be properly qualified and registered under FINRA rules.\23\
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\23\ Limited Underwriting Members would, therefore, be eligible
to waive-in to Exchange membership, as provided for in General 3,
Section 1013(b). Prospective Limited Underwriting Members would need
to submit a membership application (see supra note 18) in which they
would select ``Waive-In Membership'' for the application type and
``Limited Underwriting Member of NQX'' for the nature of intended
activity. For ``waive-in'' applicants, the Exchange relies
substantially upon FINRA's determination to approve the applicant
for FINRA membership when the Exchange evaluates the applicant for
Exchange membership.
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Proposed Change to Equity Rules
The Exchange proposes to exempt Limited Underwriting Members from
the trading rights fee of $1,250 per month that is normally charged to
Members because such Limited Underwriting Members would not be eligible
to trade on the Exchange. Accordingly, the Exchange proposes to add
language to Equity 7, Section 10(a) to specify that Limited
Underwriting Members would not be charged the monthly trading rights
fee. Limited Underwriting Members would be
[[Page 13783]]
subject to a $2,000 application fee (per Equity 7, Section 10(b)) and a
$4,000 yearly membership fee (per Equity 7, Section 10(a)).
Excluded Rules
As noted above, Nasdaq acknowledges that additional Rules could
theoretically be applied to Limited Underwriting Members. However,
Nasdaq proposes to apply the limited ruleset for the reasons described
above. In addition to the Rules discussed above, the Exchange has not
proposed to apply the following Rules to Limited Underwriting Members
at this time: General 4; General 6; General 7; General 8; Equity Rules
(with the exception of Equity 7, Section 10); and Options Rules.
General 4 requires certain categories of persons associated with
members to register with the Exchange. Because these categories do not
relate to underwriting, the Exchange does not propose to apply General
4 to Limited Underwriting Members. However, as noted above, the
Exchange would require all Limited Underwriting Members to be FINRA
members and associated persons of Limited Underwriting Members to be
properly qualified and registered under FINRA rules. Limited
Underwriting Members and their associated persons would be subject to
FINRA's registration and qualification rules,\24\ including, for
example, requirements regarding relevant examinations for underwriting
(Series 79, Investment Banking, IB) and supervision of underwriting
(Series 79 plus Series 24, Investment Banking Principal). General 6
relates generally to FINRA arbitration rules to which the Limited
Underwriting Members would be subject to directly by virtue of their
FINRA membership. The Exchange does not propose to apply General 7 to
Limited Underwriting Members because it governs consolidated audit
trail compliance and would not apply to underwriting activity. General
8 governs connectivity to the Exchange and would not be relevant to
Limited Underwriting Members given their lack of access to trade on the
Exchange. Similarly, the Equities Rules and the Options Rules are
generally not relevant to the activities of Limited Underwriting
Members due to their lack of access to trade on the Exchange. Although
Limited Underwriting Members could access the Exchange via other means,
such as trading through another Member, Limited Underwriting Members
would have no direct access to trade on the Exchange.
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\24\ See FINRA Rules, Rule 1210 (Registration Requirements) and
Rule 1220 (Registration Categories).
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Implementation
The Exchange would designate the proposed changes to be operative
60 days after publication of the Commission's approval order of SR-
NASDAQ-2023-022, as amended, in the Federal Register. This delay will
allow time for firms involved with upcoming IPOs to become Limited
Underwriting Members, if they choose, and for companies planning IPOs
to select alternative underwriters if their current firm is not, and
does not intend to become, a Member or Limited Underwriting Member.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\25\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\26\ in particular, in that it is 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, and, in general to protect investors and the public
interest, by strengthening Nasdaq's ability to carry out its oversight
responsibilities. It is also consistent with Section 6(b)(7) of the Act
in that it provides for a fair procedure for prohibiting or limiting
any person with respect to access to services offered by the Exchange
or a Member thereof.\27\ As discussed above, the proposal would create
a new, limited membership class for those firms seeking only to perform
activity as the principal underwriter of an IPO on the Exchange (and
not seeking access to trade via the Nasdaq Market Center) and require a
company applying for initial listing in connection with a transaction
involving an underwriter to have a principal underwriter that is a
member or limited member of Nasdaq. The Exchange would apply specified
rules to Limited Underwriting Members, as explained above. Such rules
include general provisions and standards, membership and access rules,
organization and administration rules, registration requirements,
disciplinary rules, and certain fees. Creating this new membership
class and subjecting principal underwriters to such specified rules
supports fair and orderly markets, which protects investors and the
public interest, consistent with Section 6(b)(5) of the Act. Notably,
the proposal would subject Limited Underwriting Members to Nasdaq's
disciplinary rules, which provides Nasdaq authority to require
information from such underwriters (per General 5, Rule 8210), as well
as other general rules, including the requirement to observe just and
equitable principles of trade (per General 9, Section 1(a)), the
requirement to establish and maintain a system to supervise the
activities of registered representatives and associated persons (per
General 9, Section 20), and the requirement to test and verify that the
system is reasonably designed (per General 9, Section 21). Nasdaq
believes that imposing these Nasdaq rules, as well as the other rules
included in proposed Rule 1031(c)(1), on principal underwriters will
strengthen \28\ Nasdaq's ability to carry out its oversight
responsibilities and deter potential violative conduct, such as fraud
or manipulation, thereby protecting investors and the public interest.
Nasdaq also believes that it is appropriate and consistent with the
protection of investors and the public interest that it not impose
those rules excluded from proposed Rule 1031(c)(1) because these rules
are not directly applicable to the activities a Limited Underwriting
Members is permitted to conduct on the Exchange, and the firms will be
subject to all applicable FINRA rules.
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\25\ 15 U.S.C. 78f(b).
\26\ 15 U.S.C. 78f(b)(5).
\27\ 15 U.S.C. 78f(b)(7).
\28\ As noted above, the Exchange acknowledges that additional,
existing Rules could apply to underwriters. The Exchange proposes to
apply a limited ruleset to Limited Underwriting Members, consisting
of those Rules it deems most critical. Today, underwriters are not
required to be Members and therefore, non-member underwriters are
not subject to any of the Exchange's Rules.
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The Exchange also believes that the proposed rule change is not
designed to permit unfair discrimination between customers, issuers,
brokers and dealers, consistent with Section 6(b)(5) of the Act.\29\
The proposed changes to the Listing Rules will apply equally to all
similarly situated companies applying for initial listing in connection
with a transaction involving an underwriter on the Exchange and
therefore, are not designed to permit unfair discrimination. The
Exchange's proposal to subject Limited Underwriting Members to a
limited set of rules and exclude certain rules applicable to Members is
not designed to permit unfair discrimination between brokers and
dealers because the limited underwriting membership does not confer the
same benefits as a standard Exchange membership and does not warrant
application of the same ruleset. All Limited Underwriting Members
[[Page 13784]]
would be subject to the same specified rules.
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\29\ 15 U.S.C. 78f(b)(5).
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Finally, Nasdaq believes that its proposal to impose certain fees
on Limited Underwriting Members is consistent with Section 6(b) of the
Act, in general, and furthers the objectives of Sections 6(b)(4) and
6(b)(5) of the Act, in particular, in that it provides for the
equitable allocation of reasonable dues, fees and other charges among
members and issuers and other persons using any facility, and is not
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers. The Exchange believes that its proposal to charge
the $2,000 application fee and $4,000 yearly membership fee but not
charge the $1,250 monthly trading rights fee is reasonable, equitable
and not unfairly discriminatory. The Exchange would apply fees that are
already in existence and the Exchange believes such fees reflect the
value of services it provides its applicants and membership. By
charging Limited Underwriting Members the same application and yearly
membership fee as Members, the Exchange believes that it would be
treating the membership equitably. Further, the Exchange believes it is
reasonable and equitable to exempt Limited Underwriting Members from
the monthly trading rights fee because such members would not have
access to trade on the Exchange. The Exchange believes that the fee
proposal is not designed to permit unfair discrimination between
Exchange members because the fees would be applied equally to all
similarly situated members.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. As noted above, the proposed
changes to the Listing Rules will apply equally to all similarly
situated companies applying for initial listing in connection with a
transaction involving an underwriter on the Exchange. Likewise, the
proposed changes to the General and Equity Rules, including to the
membership rules, will apply equally to all similarly situated
Applicants and Members and they will confer no relative advantage or
disadvantage upon any category of Exchange Applicant or Member.
Although the Exchange proposes to subject Limited Underwriting Members
to a limited set of rules, the limited underwriting membership does not
confer the same benefits as a standard Exchange membership. Namely, a
Limited Underwriting Member would not be permitted to transact on the
Nasdaq Market Center. Therefore, applying a limited ruleset to Limited
Underwriting Members is justified. All Limited Underwriting Members
would be subject to the same specified rules, as noted above. Moreover,
the Exchange does not expect that its proposal will have an adverse
impact on competition among exchanges for members. The Exchange
believes the proposed rule changes, overall, will strengthen the
Exchange's ability to carry out its role and responsibilities as a
self-regulatory organization and deter potential violative conduct. As
such, the Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether Amendment No. 2
to the proposed rule change is consistent with the Act. Comments may be
submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-NASDAQ-2023-022 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-NASDAQ-2023-022. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to file number SR-NASDAQ-2023-022 and should
be submitted on or before March 15, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\30\
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\30\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-03647 Filed 2-22-24; 8:45 am]
BILLING CODE 8011-01-P
