Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing of Amendment No. 3 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment Nos. 2 and 3, To Create a New, Non-Trading Limited Underwriter Membership Class and Impose Related Requirements for Principal Underwriting Activity, 21629-21636 [2024-06579]
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Federal Register / Vol. 89, No. 61 / Thursday, March 28, 2024 / Notices
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–BX–2024–011 and should be
submitted on or before April 18, 2024.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.51
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024–06573 Filed 3–27–24; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–99846; File No. SR–
NASDAQ–2023–022]
Self-Regulatory Organizations; The
Nasdaq Stock Market LLC; Notice of
Filing of Amendment No. 3 and Order
Granting Accelerated Approval of a
Proposed Rule Change, as Modified by
Amendment Nos. 2 and 3, To Create a
New, Non-Trading Limited Underwriter
Membership Class and Impose Related
Requirements for Principal
Underwriting Activity
ddrumheller on DSK120RN23PROD with NOTICES1
March 22, 2024.
I. Introduction
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
51 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 97985
(July 25, 2023), 88 FR 49508 (‘‘Notice’’).
4 15 U.S.C. 78s(b)(2).
1 15
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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
approve or 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 modified
by Amendment No. 1, in its entirety.9
On January 26, 2024, the Commission
extended the time period for approving
or disapproving the proposal to March
27, 2024.10 The proposed rule change,
as modified by Amendment No. 2, was
published for comment in the Federal
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
(‘‘Amendment No. 1’’). In Amendment No. 1, the
Exchange, among other things: (i) removed a
proposed exemption from registration for certain
investment banking representatives associated
solely with Limited Underwriting Members; (ii)
removed proposed rule language from proposed
General 3, Section 1032(a), which provided that any
person shall be eligible to become associated
persons of a Limited Underwriting Member; (iii)
removed General 4 from the list of rules applicable
to Limited Underwriting Members in proposed
General 3, Section 1031(c)(1); and (iv) revised
proposed General 3, Section 1031(c)(2) to clarify
that associated persons of Limited Underwriting
Members shall at all times be properly qualified and
registered under the Financial Industry Regulatory
Authority (‘‘FINRA’’) rules. Further, the Exchange
provided additional reasons it is not proposing to
apply certain existing rules to Limited
Underwriting Members.
9 Amendment No. 2 is available at https://
www.sec.goc/comments/sr-nasdaq-2023-022/
srnasdaq2023022-414859-982462.pdf. In
Amendment No. 2, the Exchange, among other
things: (i) updated the numbering in Listing Rule
5210 to account for recently added rule language
and a related reference to Listing Rule 5210 in
proposed General 3, Section 1031(b); (ii) excluded
General 3, Section 1032 from the rules the Exchange
proposes to apply to Limited Underwriting
Members (see infra note 14 and accompanying text)
under proposed General 3, Section 1031(c)(1); (iii)
added General 9, Section 21 to the rules the
Exchange proposes to apply to Limited
Underwriting Members under proposed General 3,
Section 1031(c)(1); (iv) updated Equity 7, Section 10
to reflect a recent change in the membership fee;
and (v) added a statutory basis for the imposition
of fees. Amendment No. 2 superseded Amendment
No. 1, so the changes made in Amendment No. 1,
unless otherwise amended, are incorporated into
Amendment No. 2. See supra note 8.
10 See Securities Exchange Act Release No. 99433,
89 FR 6559 (Feb. 1, 2024).
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Register on February 23, 2024.11 On
March 18, 2024, the Exchange filed
Amendment No. 3 to the proposed rule
change.12 The Commission has received
no comment letters on the proposed rule
change. The Commission is publishing
this notice to solicit comments on
Amendment No. 3 from interested
persons and is approving the proposed
rule change, as modified by Amendment
Nos. 2 and 3, on an accelerated basis.
II. Description of the Proposed Rule
Change, as Modified by Amendment
Nos. 2 and 3
The Exchange is proposing to amend
its rules to create a new limited
membership class for underwriters that
are FINRA members seeking only to
serve as a principal underwriter for a
company applying to list on the
Exchange (and not seeking access to
transact on the Exchange) 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 13 or a
broker or dealer admitted to limited
underwriting membership in the
Exchange (‘‘Limited Underwriting
Member’’).14 The Exchange states that
11 See Securities Exchange Act Release No. 99557
(Feb. 16, 2024), 89 FR 13779 (‘‘Amendment No. 2’’).
12 Amendment No. 3 is available at https://
www.sec.gov/comments/sr-nasdaq-2023-022/
srnasdaq2023022-447779-1145462.pdf
(‘‘Amendment No. 3’’). In Amendment No. 3, the
Exchange modified the proposal by: (i) adding back
proposed rule language from the original proposal
to General 3, Section 1031(a)(2) about eligibility to
become an associated person and modifying the
title of General 3, Section 1031(a) to reflect that
change; (ii) adding back language from the original
proposal to include General 4 (Registration
Requirements), which includes registration,
qualification, and continuing education
requirements, to the list of rules applicable to
Limited Underwriting Members in General 3,
Section 1031(c)(1); and (iii) excluding General 5,
Rule 9400 from the list of rules applicable to
Limited Underwriting Members in General 3,
Section 1031(c)(1) for the reasons described below.
Amendment No. 3 also updated the purpose section
to reflect the changes described above, made other
clarifying changes, and added a statutory basis
explanation for consistency with section 6(b)(2) of
the Act.
13 The Exchange defines the term ‘‘member’’ or
‘‘Nasdaq Member’’ (hereinafter referred to as
‘‘Member’’) to mean any registered broker or dealer
that has been admitted to membership in the
Exchange. See Nasdaq General 1, Section 1(b)(11).
See also Nasdaq Listing Rule 5005(a)(24) (defining
‘‘Member’’ to mean a broker or dealer admitted to
membership in Nasdaq).
14 See infra note 23. The Exchange states that
‘‘principal underwriter’’ will have the same
definition used in Rule 405 promulgated under the
Securities Act of 1933 (‘‘Securities Act’’), which is
an underwriter in privity of contract with the issuer
of the securities as to which he is underwriter, and
that 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. The Exchange
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underwriters play a critical role as
gatekeepers to the capital markets in
connection with the trading of newly
issued securities and that it 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
market place.15 According to the
Exchange, notwithstanding the
important role of underwriters, it does
not currently require underwriters of
companies that are going public on the
Exchange to be Members of the
Exchange, and as such, does not have
authority to require responses to
investigative inquiries or to enforce its
rules directly against non-Member
underwriters.16 The Exchange states
that this proposal would provide the
Exchange with authority to directly
obtain information from Limited
states it proposes to apply the proposed
requirements to a principal 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. See
Amendment No. 2, supra note 11, at 13780 n.11.
15 See Amendment No. 2, supra note 11, at 13780.
The Exchange states that it highlighted the
important role of underwriters as gatekeepers in the
initial public offering (‘‘IPO’’) process and the
applicability of market rules and the federal
securities laws in its recent Equity Regulatory Alert
(‘‘Nasdaq Alert’’), available at https://
www.nasdaqtrader.com/
MicroNews.aspx?id=ERA2022-9. In the Nasdaq
Alert, among other things, the Exchange highlighted
that ‘‘Nasdaq members, as well as members of other
self-regulatory organizations, that underwrite IPOs,
and that play other roles in the offering process,
should expect heightened focus when an IPO
experiences unusual price movements.’’ See also
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/rulesguidance/notices/22-25 (similar regulatory alerts
issued by the New York Stock Exchange and
FINRA, respectively).
16 See Amendment No. 2, supra note 11, at 13781.
The Exchange states, however, that it has broad
discretionary authority over the initial and
continued listing of securities in the Exchange and
over its Members 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.
According to the Exchange, it may request
information from companies that are going public
on the Exchange and from Members who are
permitted to trade on the Exchange, who are
required to respond to those requests. The Exchange
also states it may request information from nonMembers, including non-Member underwriters, but
they are not required to respond to these requests.
See id. at 13781 n.17.
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Underwriting Members,17 whether preor post-initial public offering.18 The
Exchange states that by creating a new,
limited underwriting membership class,
it will provide firms seeking only to
perform principal underwriting activity
on the Exchange (and not seeking access
to trade via the Nasdaq Market Center) 19
with the option of selecting a
membership that is less burdensome
(i.e., to become a Limited Underwriting
Member rather than a Member).20
The Exchange proposes to amend
several of its rules in conjunction with
the adoption of the new limited
underwriting membership class. First,
the Exchange proposes to amend its
Listing Rule 5210 (Prerequisites for
Applying to List on the Nasdaq Stock
Market) 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.21 In
proposed Listing Rule 5210(m), the
Exchange will also specify that
‘‘principal underwriter’’ shall have the
same definition used in Rule 405
promulgated under the Securities Act.22
Second, the Exchange proposes to add
a definition of ‘‘Limited Underwriting
Member’’ to General 1 (General
Provisions), Section 1 to mean a broker
or dealer admitted to limited
underwriting membership in Nasdaq.23
Third, as discussed in more detail
below, the Exchange also proposes to
add a new, limited underwriting
membership rule, proposed Section
17 See
infra note 23 and accompanying text.
Amendment No. 2, supra note 11, at 13781
n.17. The Exchange explains in its proposal that in
the fall of 2022 it observed, immediately following
the pricing of certain IPOs on the Exchange,
instances of unusually high price spikes
immediately followed by dramatic price declines to
at or below the offering price. This occurred mostly
with respect to small cap companies with offerings
of less than $25 million. According to the Exchange,
these extreme spikes may occur ‘‘in the opening
trade on an exchange or in continuous trading on
the day of, or days immediately following the
listing.’’ Id. at 13780.
19 The Exchange defines ‘‘Nasdaq Market Center’’
to mean the automated system for order execution
and trade reporting owned and operated by Nasdaq.
See Nasdaq Equity 1, Section 1(a)(3).
20 The Exchange submitted a revised Membership
Application as Exhibit 3, in which the Exchange
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.
21 See Amendment No. 2, supra note 11, at 13781.
The Exchange states that this rule would cross
reference the definition of ‘‘Limited Underwriting
Member’’ in General 1, Section 1. The Exchange
further states that this proposed rule change
primarily impacts membership rules and other nonlisting rules, which would apply to the
underwriters themselves. See id.
22 See id.
23 See id. at 13781–82.
18 See
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1031 to General 3 (Membership and
Access), within which, the Exchange
proposes to set forth the rules that will
be applicable to Limited Underwriting
Members and their associated persons,
the requirements for persons eligible to
become Limited Underwriting Members,
and rules on Limited Underwriting
Member access to the Exchange.24
Finally, the Exchange proposes to
amend Equity 7, Section 10 to exempt
Limited Underwriting Members from
being assessed a trading rights fee.25 The
Exchange states that Limited
Underwriting Members would not be
eligible to trade on the Exchange, and
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.26 Under the
proposal, Limited Underwriting
Members would be 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)).27
Specifically, as to proposed General 3,
Section 1031 requirements on eligibility
for membership, the Exchange proposes
to state in General 3, Section 1031(a)(1)
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 General 3, Rule 1002(b)
and in General 3, Section 1031(a)(2) that
any person shall be eligible to become
an associated persons of a Limited
Underwriting Member, except such
persons as are excluded under General
3, Rule 1002(b).28 The Exchange states
that proposed General 3, Section 1031(a)
is consistent with the existing rules for
persons eligible to become Members and
associated persons of Members in
General 3, Rule 1002(a).29 Further,
under the proposal to be eligible for
membership, Limited Underwriting
24 See
id.
id. at 13782–83. Specifically, the Exchange
proposes to exempt Limited Underwriting Members
from the trading rights fee of $1,250 per month that
is charged to Members. See id.
26 See id.
27 See id. These are the application and yearly
membership fees that currently apply to Members.
28 See id.; Amendment No. 3, supra note 12, at
3–4 and 7–8. According to the Exchange, General
3, Rule 1002(b) provides, in relevant part, 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
Exchange 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. See id.
at 13781 n.20; Amendment No. 3, supra note 12,
at 3–4 and 7–8.
29 See Amendment No. 3, supra note 12, at 8.
25 See
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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.30
Proposed General 3, Section 1031(b)
will also provide 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, as set
forth in proposed Listing Rule
5210(m).31 Proposed General 3, Section
1031(c)(1) also states that, for purposes
of interpreting and applying the rules
applicable to Limited Underwriting
Members (as described below),
references to ‘‘Member,’’ ‘‘Members,’’ or
‘‘membership’’ shall be functionally
equivalent to ‘‘Limited Underwriting
Member,’’ ‘‘Limited Underwriting
Members,’’ or ‘‘limited underwriting
membership,’’ respectively.32
The Exchange proposes to apply a
limited ruleset to its newly proposed
limited underwriting membership
class.33 Specifically, the Exchange
proposes to provide in new General 3,
Section 1031(c)(1) that Limited
Underwriting Members and their
associated persons are subject only to
the following rules: 34 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 4 (Registration Requirements);
30 See Amendment No. 2, supra note 11, at 13782.
According to the Exchange, Limited Underwriting
Members would 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 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 states it relies substantially upon FINRA’s
determination to approve the applicant for FINRA
membership when the Exchange evaluates the
applicant for Exchange membership. See id. at
13782 n.23.
31 See id. Proposed Listing Rule 5210(m) applies
to companies seeking to initially list on the
Exchange in connection with a transaction
involving an underwriter. See also supra notes 21–
22 and accompanying text.
32 See Amendment No. 2, supra note 11, at 13782.
33 See id. at 13781. The Exchange states that
Members, unlike Limited Underwriting Members,
are subject to all of the Exchange’s rules (which
includes the limited ruleset applicable to the newly
proposed limited underwriting membership class).
See id. at 13781 n.21.
34 There are multiple sections and rules under the
various ‘‘General Rules’’ numerical provisions.
References to ‘‘rules’’ herein generally include all
the sections and rules within the applicable General
numerical provisions that would apply to Limited
Underwriter Members with the exceptions noted.
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General 5 (Discipline), with the
exception of Rules 8211, 9400, and
9557; General 9 (Regulation), Sections 1,
20, and 21; and Equity 7, Section 10
(Pricing Schedule, Membership Fees).35
The Exchange states that it proposes 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.36
The Exchange further states that a firm
registering as a Limited Underwriting
Member on the Exchange would remain
subject to all applicable rules of the
Commission and any other selfregulatory organization (‘‘SRO’’) of
which it is a member, including the
FINRA.37
In its proposal, the Exchange set forth
its reasons for including the specified
rules in General 3, Section 1031(c)(1)
that apply to Limited Underwriting
Members. As to its proposal to apply
General 1 to Limited Underwriting
Members and their associated persons,38
the Exchange states that General 1
provides defined terms that would be
applicable to Limited Underwriting
Members and will also add a definition
of ‘‘Limited Underwriting Member’’ to
General 1.39 The Exchange also
proposes to apply General 2 (with the
exception of Sections 6(a) and 22) to
Limited Underwriting Members and
their associated persons.40 The
Exchange states that the rules in General
2 relate to organization and
administration including requirements
surrounding fees, limitations on
affiliations, and a requirement for an
executive representative, among other
obligations.41 The Exchange proposes to
specifically exclude General 2, Sections
6(a) and Section 22, as 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,
according to the Exchange, is not
accurate in the case of Limited
Underwriting Members, and General 2,
Section 22 relates to sponsored
participants 42 and client access to the
Nasdaq Market Center via a Member,
which, according to the Exchange, is not
applicable to underwriting activity.43
The Exchange also proposes to subject
Limited Underwriting Members and
their associated persons to General 3
35 See id. at 13781; Amendment No. 3, supra note
12, at 4–5.
36 See Amendment No. 2, supra note 11, at 13781.
37 See id.
38 See id. at 13782.
39 See id.
40 See id.
41 See id.
42 See Nasdaq General 2, Section 22.
43 See Amendment No. 2, supra note 11, at 13782.
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21631
with the exception of Section 1032.44
The Exchange states that 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.45 In addition,
the Exchange states that General 4
specifies registration, qualification, and
continuing education requirements,
including requirements for persons
engaged in the securities business of a
Member, and proposed to apply General
4 to Limited Underwriting Members and
their associated persons.46 The
Exchange states these requirements
apply in the same manner as such
registration, qualification, and
continuing education requirements that
apply to current Members.47 Limited
Underwriting Members and their
associated persons would also be
subject to FINRA’s registration and
qualification rules, 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).48
Limited Underwriting Members and
their associated persons would also
have to comply with General 5 (with the
exception of Rules 8211, 9400, and
9557), which, according to the
Exchange, is critical to subject Limited
Underwriting Members to, as it contains
the Exchange’s disciplinary rules.49 In
particular, the Exchange notes General
5, Rule 8210 that provides the Exchange
with authority to require information
44 The proposed rule change would also add new
Section 1031 to General 3, as described above, that
is applicable to limited underwriting memberships.
See supra note 24 and accompanying text. The
Exchange states that it proposes to specifically
exclude General 3, Section 1032 because such
section includes requirements related to Nasdaq
Market Center Participant registration, which,
according to the Exchange, is inapplicable to
Limited Underwriting Members because they are
not permitted to transact on the Nasdaq Market
Center. See Amendment No. 2, supra note 11, at
13782.
45 See Amendment No. 2, supra note 11, at 13781.
46 See Amendment No. 3, supra note 12, at 4–5
and 9–10.
47 See id. at 10.
48 See Amendment No. 2, supra note 11, at 13783.
See also FINRA Rules 1210 (Registration
Requirements) and 1220 (Registration Categories).
49 See Amendment No. 2, supra note 11, at 13783.
According to the Exchange, 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. See
id. at 13782 n.22.
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from its Members.50 The Exchange is
proposing to specifically exclude
General 5, Rules 8211, 9400, and 9557,
which the Exchange represents are not
relevant to underwriting activity
because these rules relate, respectively,
to trading data, expedited client
suspension proceedings for violations of
General 9, Section 53 (concerning
disruptive quoting and trading), and
FINRA carrying or clearing members.51
The Exchange also states that the
excluded rules from General 5 are
inapplicable to Limited Underwriting
Members because such members are not
permitted to transact on the Exchange.52
Further, the Exchange proposes to
subject Limited Underwriting Members
and their associated persons to General
9, Sections 1, 20, and 21.53 The
Exchange states that it believes it is
important to subject Limited
Underwriting Members to General 9,
Section 1, which includes general
standards by which Members must
abide, including the requirement to
observe just and equitable principles of
trade.54 The Exchange further states that
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, to identify principals who must
establish, maintain, and enforce a
system of supervisory control policies
and procedures that, among other
things, test that the member’s
supervisory procedures are reasonably
designed with respect to the activities of
the member and its associated persons,
and to achieve compliance with
applicable securities laws and
regulations, and with applicable Nasdaq
rules.55 The Exchange states its belief
that 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.56 The Exchange
50 See id. at 13782. Nasdaq General 5, Rule 8210
states information must be provided by a member
or persons associated with a member or subject to
Nasdaq’s jurisdiction ‘‘[f]or the purpose of an
investigation, complaint, examination or
proceeding authorized by the Nasdaq By-Laws or
Rules, Nasdaq Regulation Department, including
FINRA staff.’’ Nasdaq General 5, Rule 8210(a).
51 See id. at 13782; Amendment No. 3, supra note
12, at 10–11.
52 See Amendment No. 3, supra note 12, at 11.
53 See Amendment No. 2, supra note 11, at 13782.
54 See id.
55 See id.
56 See id.
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states that it does not propose to apply
other sections of General 9, except for
Sections 1, 20, and 21, to Limited
Underwriting Members at this time.57
The Exchange states that although it
acknowledges certain other sections of
General 9 could be applied to
underwriters, it is targeting limited
inclusion of rules that it deems
critical.58 Finally, the Exchange
proposes to include Equity 7, Section 10
in General 3, Section 1031(c)(1).59 The
Exchange states that Equity 7, Section
10 includes the membership and
application fees applicable to Limited
Underwriting Members.60
The Exchange states that it 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.61 The Exchange states that the
Exchange 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.62 The
Exchange states that it 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.63
The Exchange, in addition to the
excluded rules described above, has not
proposed to apply the following rules to
Limited Underwriting Members at this
time: General 6; General 7; General 8;
Equity Rules (with the exception of
57 See
id.
id. The Exchange further states that many
of the standards in General 9 are FINRA rules that
are incorporated by reference into the Exchange’s
rules; therefore, Limited Underwriting Members
would be subject to such FINRA rules by virtue of
their FINRA membership. See id. See, e.g., Nasdaq
General 9, Section 30 (incorporating by reference
FINRA Rule 4511).
59 See Amendment No. 2, supra note 11, at 13782.
60 See id. The Exchange acknowledges that there
are additional, existing rules that it could propose
to apply to Limited Underwriting Members but it
is proposing to apply only a narrow ruleset, as it
does not intend to create comprehensive rules to
regulate underwriting activity. See id. at 13781–82.
61 See id. at 13782.
62 See id.
63 See id. at 13781. The Exchange represents that
it will 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. See id. at 13781–
82.
58 See
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Equity 7, Section 10); and Options
Rules.64 Specifically, the Exchange
states that 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 and that 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.65 The Exchange also states that
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, and 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.66
Finally, the Exchange is proposing to
make the proposed rule change
described herein operative 60 days after
publication of the Commission’s
approval order of SR–NASDAQ–2023–
022 in the Federal Register, as 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.67
III. Discussion and Commission
Findings
After careful review, the Commission
finds that the proposed rule change, as
modified by Amendment Nos. 2 and 3,
is consistent with the requirements of
the Act and the rules and regulations
thereunder applicable to a national
securities exchange.68 Specifically, the
Commission finds that the proposed
rule change, as modified by Amendment
Nos. 2 and 3, is consistent with section
6 of the Act. In particular, the
Commission finds that the proposal, as
modified by Amendment Nos. 2 and 3,
is consistent with section 6(b)(5) 69 of
the Act, which requires, among other
64 See
id. at 13783.
id.
66 See id. The Exchange states that 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. See id.
67 See id.
68 In approving this proposed rule change, as
modified by Amendment Nos. 2 and 3, the
Commission has considered the proposed rule
change’s impact on efficiency, competition, and
capital formation. See 15 U.S.C. 78c(f).
69 15 U.S.C. 78f(b)(5).
65 See
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things, that the Exchange’s rules be
designed to prevent fraudulent and
manipulative acts and practices,
promote just and equitable principles of
trade, 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; and
are not designed to permit unfair
discrimination between customers,
issuers and brokers, or dealers.70
Further, the Commission finds that the
proposed rule change, as amended, is
consistent with (i) section 6(b)(1) of the
Act,71 which requires, among other
things, that a national securities
exchange be able to comply and enforce
compliance by its members and persons
associated with its members, with the
provisions of the Act, the rules and
regulation thereunder, and the rules of
the exchange, (ii) section 6(b)(2) of the
Act 72 which requires that exchange
rules provide that any registered broker
or dealer or natural person associated
with a registered broker or dealer may
become a member of such exchange and
any person may become associated with
a member thereof, and (iii) sections
6(b)(6) 73 and 6(b)(7) 74 of the Act, which
require, among other things, that a
national securities exchange provide
appropriate discipline for violations of
the Act, rules and regulations
thereunder and exchange rules and fair
procedures for the disciplining of
members and persons associated with
its members and the prohibition or
limitation by the exchange of any
person with respect to access to services
offered by the exchange or a member
thereof.75
70 See id. In addition, the Commission finds that
the proposed rule change as to the applicable fees
is consistent with section 6(b)(4) of the Act that
requires the Exchange’s rules to provide for the
equitable allocation of reasonable dues, fees, and
other charges among its members and issuers and
other persons using its facilities. 15 U.S.C. 78f(b)(4).
71 15 U.S.C. 78f(b)(1).
72 15 U.S.C. 78f(b)(2).
73 15 U.S.C. 78f(b)(6).
74 15 U.S.C. 78f(b)(7).
75 The Commission previously found that the
provisions on Nasdaq Member voting for the
Exchange Board of Directors ‘‘including that twenty
percent of the directors be ‘Member Representative
Directors’ and the means by which they are elected
by members provides for the fair representation of
members in the selection of directors and the
administration of the Exchange consistent with the
requirement of section 6(b)(3) of the Act.’’ See
Securities Exchange Act Release No. 53128 (Jan. 13,
2006), 71 FR 3550, 3553 (Jan. 23, 2006)
(Commission order approving Nasdaq for
registration as a national securities exchange)
(‘‘Nasdaq Exchange Registration Order’’). The ByLaws of Nasdaq apply to Limited Underwriting
Members as they do to current Members. See, e.g.,
Nasdaq By-Laws Article 1(t) (defining ‘‘Nasdaq
Member’’ as ‘‘any registered broker or dealer that
has been admitted to membership in the national
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The proposal, as modified by
Amendment Nos. 2 and 3, amends the
rules of the Exchange to provide for a
new limited underwriting membership
class and would require companies
applying to initially list on the
Exchange in connection with a
transaction involving an underwriter to
use a principal underwriter that is either
a Member or Limited Underwriting
Member of the Exchange.76 The
Exchange has proposed to add Section
1031 to General 3 (Membership and
Access) that sets forth the requirements
applicable to Limited Underwriting
Members including certain limitations
on Limited Underwriting Members.77 In
particular, a limited underwriting
membership provides no rights to trade
on the Exchange and such limited
underwriting membership is solely for
the purpose of allowing a firm that is
not otherwise a Member to serve as a
principal underwriter for a company
seeking to initially list on the
Exchange.78 A Limited Underwriting
Member is defined to mean a broker or
dealer admitted to limiting underwriting
membership in the Exchange.79 As
described above, similar to the existing
eligibility requirements for Members
and their associated persons, General 3,
Section 1031(a) provides that any
registered broker or dealer is eligible for
a limited underwriting membership and
any person shall be eligible to become
an associated person of a Limited
Underwriting Member, except for those
registered broker or dealers or persons
that are excluded under General 3, Rule
1002(b).80 These provisions on
eligibility are consistent with the Act,
including section 6(b)(2) of the Act,
which requires the rules of an exchange
to provide that any registered broker or
dealer or natural person associated with
a broker or dealer may become a
member of such exchange or associated
with a member thereof subject to the
provisions of section 6(c) of the Act.81
In its proposal, as modified by
Amendment Nos. 2 and 3, the Exchange
seeks to apply certain of its rules as set
security exchange operated by the Company’’).
Limited Underwriting Members would therefore
also have the right to nominate, and vote for,
candidates for election as Member Representative
Directors under the By-Laws, as do current
Members. See id. Article II (Annual Election of
Member Representative Directors and Other Actions
by Nasdaq Members). Given that the existing ByLaw provisions apply equally to Limited
Underwriting Members, the proposal is similarly
consistent with section 6(b)(3) of the Act.
76 See supra notes 13 and 14 and accompanying
text.
77 See supra note 24.
78 See supra note 31.
79 See supra note 23.
80 See supra note 28.
81 15 U.S.C. 78f(b)(2) and 15 U.S.C. 78f(c).
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21633
forth in General 1 through General 9 to
Limited Underwriting Members while
excluding the application of others.82
The Exchange seeks to apply only
specific rules to Limited Underwriter
Members that fall under areas related to
general provision definitions and
standards, organization and
administration, membership and access,
registration requirements, discipline,
regulation, and membership fees.83 As
stated by the Exchange, it proposes to
apply only those rules it believes are
appropriate to a firm serving as a
principal underwriter, and will, among
other things, provide the Exchange with
authority to require information from
such underwriters thereby aiding in its
oversight of its market and helping to
ensure fair and orderly markets.84 The
Exchange has also stated that firms
registering as a Limited Underwriting
Members would still be subject to all
applicable rules of the Commission and
any other SRO of which it is a member,
including FINRA.85
Specifically, among others, the
Exchange has proposed to apply General
1 to Limited Underwriting Members
because it contains defined terms and
standards that currently apply to
Members that are equally applicable to
Limited Underwriting Members as
well.86 The Exchange also proposes to
subject Limited Underwriting Members
to General 2 (with the exception of
sections 6(a) and 22) because it relates
to organization and administration
including, among others, limitations on
affiliations 87 and requirements to have
an exchange representative.88 The
Exchange is applying General 3 (with
the exception of Section 1032 that
applies to members who trade on
Nasdaq’s Market Center) because
82 See proposed Nasdaq General 3, Section
1031(c)(1).
83 See supra notes 33–35.
84 See supra note 63.
85 See supra note 37. Proposed General 3, Section
1031(c)(2) would require a Limited Underwriting
Member to, at all times, be a member of FINRA. See
supra note 30.
86 See supra notes 38–39 and accompanying text.
87 General 2, Section 4 states that no member or
person associated with a member shall be the
beneficial owner of greater than twenty percent
(20%) of the then-outstanding voting securities of
the Nasdaq Stock Market, Inc. The Commission
previously has stated that ownership and voting
restrictions are consistent with the Act and that
these ownership limitations should minimize the
potential that a person could improperly interfere
with or restrict the ability of the Commission or the
Exchange to effectively carry out their regulatory
oversight responsibilities under the Act. See Nasdaq
Exchange Registration Order, supra note 75, at
3551–52. For the same reasons, the Commission
believes it is appropriate to apply General 2,
Section 4 to the limited underwriting membership
class.
88 See supra notes 40–41 and accompanying text.
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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.89
General 4, which includes
registration, qualification, and
continuing education requirements for
Members and persons engaged in the
securities business of a Member, would
also apply to Limited Underwriting
Members and their associated persons.90
General 4 would apply in the same
manner as it applies to current Members
and their associated persons.91 Under
the proposal, Limited Underwriting
Members must at all times be members
of FINRA and their associated persons
shall at all times be properly qualified
and registered under FINRA rules.92
Associated persons of Limited
Underwriting Members would therefore
also be subject to FINRA’s registration
and qualification requirements that
includes examination requirements for
persons involved in underwriting and
supervision of underwriting as well as
FINRA continuing education
requirements.93
The Exchange has additionally
proposed to subject Limited
Underwriting Members to General 5
which contains the Exchange’s
disciplinary rules,94 with the exception
of Rules 8211 (submission of trading
data), 9400 (expedited client suspension
proceedings for violations of General 9,
Section 53 concerning disruptive
quoting and trading activity), and 9557
(procedures for regulating activities on
FINRA carrying and clearing
members).95 General 5, Rule 8210
provides, among other things, the
Exchange with authority to require
information from Exchange Members,
persons associated with Exchange
Members, and persons subject to the
Exchange’s jurisdiction for ‘‘the purpose
of an investigation, complaint,
examination or proceeding authorized
by the Nasdaq By-Laws or Rules,
Nasdaq Regulation Department
including FINRA staff.’’ 96 General 5,
Rule 9000 Series also provides, among
other things, the process and procedural
89 See
supra notes 44–45.
supra note 46.
91 See Amendment No. 3, supra note 12, at 10.
92 See proposed General 3, Section 1031(c).
93 See supra note 48 and accompanying text.
94 See supra notes 49–52.
95 See supra note 51.
96 See supra note 50. In its filing, the Exchange
states that while it may request information from
non-Members, including non-Member underwriters,
they are not required to respond to these requests
unlike companies going public on the Exchange and
Members. See supra note 16 and accompanying
text.
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90 See
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requirements for review of disciplinary
matters including the opportunity for a
hearing.
The disciplinary rules that will be
applicable to Limited Underwriting
Members and their associated persons
(with the exception of Rules 8211, 9400,
and 9557 that are not relevant to the
new membership type as described
above) 97 are the same as those that
apply to existing Members of the
Exchange and associated persons of
such Members. The Commission
previously found that the Exchange’s
disciplinary rules are consistent with
the requirements of sections 6(b)(6) and
6(b)(7) of the Act in that they provide
a fair procedure for the disciplining of
members and persons associated with
members.98 For similar reasons, the
Commission believes that, consistent
with the requirements of sections 6(b)(6)
and 6(b)(7),99 the Exchange’s
disciplinary rules and procedures
should provide a fair procedure for the
disciplining of Limited Underwriting
Members and persons associated with
such members, and for prohibiting or
limiting access with respect to services
offered by the Exchange. The
Commission also believes for similar
reasons as previously found, consistent
with the requirements of section 6(b)(1)
of the Act,100 that the proposed rules
should provide the Exchange with the
ability to enforce compliance as to
Limited Underwriting Members and
their associated persons with the
provisions of the Act, the rules and
regulations thereunder, and the rules of
the Exchange.101
The Exchange has also proposed to
subject Limited Underwriting Members
to General 9, Sections 1, 20, and 21.
General 9, Section 1 includes general
standards by which Members must
abide, such as requiring Members to
observe high standards of commercial
honor and just and equitable principles
of trade. General 9, Section 20 requires
Members to establish and maintain a
system to supervise the activities of
each registered representative and
associated person. General 9, Section 21
requires, among other things, for
Members to test that their supervisory
procedures are reasonably designed to
achieve compliance with applicable
97 See
supra notes 49–52 and accompanying text.
Nasdaq Exchange Registration Order, supra
note 75, at 3558. Any changes to the disciplinary
rules since the original approval would have had
to be submitted to the Commission under section
19(b) of the Act and be consistent with the Act, in
particular with Section 6.
99 See 15 U.S.C. 78(b)(6) and (7).
100 See 15 U.S.C. 78(b)(1).
101 See Nasdaq Exchange Registration Order,
supra note 75, at 3558.
98 See
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securities laws and regulations and
applicable Exchange rules and requires
an annual certification as to those
procedures and processes.102 As the
Exchange states, applying provisions
related to supervision would provide
the Exchange with authority to assess
whether a Limited Underwriting
Member has an adequate supervisory
system and written supervisory
procedures in place as to its
activities.103 Further, applying
standards of just and equitable
principles of trade to Limited
Underwriting Members is consistent
with the requirements in section 6(b)(5)
of the Act which states rules of the
exchange must be designed to promote
such principles.104
The Exchange has also proposed to
exclude certain rules in addition to the
ones discussed above.105 As the
Exchange described in its proposal and
above, many of the excluded rules are
not relevant to underwriting activities of
Limited Underwriting Members because
these rules apply to those Members that
have trading rights on the Exchange in
Nasdaq’s Market Center 106 and Limited
Underwriting Members would have no
rights to directly transact on the
Exchange.107 As to the exclusion of
General 6, as the Exchanges states, these
rules generally relate to FINRA
arbitration rules and Limited
Underwriting Member activities would
be subject to such arbitration rules by
virtue of being FINRA members.108
The Exchange states it is proposing a
limited ruleset to apply the rules it
believes are most critical, including
providing the Exchange authority to
require information directly from
102 See supra note 55. The Exchange’s General 9,
Sections 20 and 21 incorporate by reference several
FINRA rules on these matters. Although the
Exchange acknowledges that certain other sections
of General 9 could apply to underwriters, the
Exchange states it has excluded the other rules in
General 9 because it is targeting limited inclusion
of the rules it deems critical. The Exchange further
noted that many of the standards in General 9 are
FINRA rules that are incorporated by reference into
the Exchanges rules and therefore Limited
Underwriting Members would be subject to such
FINRA rules as a result of their FINRA membership.
See supra note 58.
103 See supra note 56.
104 15 U.S.C. 78f(b)(5).
105 See supra note 66 and accompanying text.
106 See Nasdaq General 7 and General 8
(governing consolidated audit trail and connectivity
requirements, respectively); Equity Rules and
Options Rules (with the exception of Equity 7,
Section 10). See also supra notes 64–66 and
accompanying text.
107 See supra note 62. See also Amendment No.
2, supra note 11, at 13784. Limited Underwriting
Members could access the Exchange via other
means, such as trading through another Member but
have no direct access to trade on the Exchange. See
supra note 66.
108 See supra note 65.
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Limited Underwriting Members, to
enhance its oversight and deter
potential violative conduct.109 The
Commission believes that the
application of only specific Exchange
rules to Limited Underwriting Members
and the exclusion of certain other rules,
as proposed by the Exchange, are
reasonable and strikes the appropriate
balance between regulating Limited
Underwriting Members and not
imposing a burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act.110 The
limited ruleset is consistent with the
purpose of a limited underwriting
membership that does not confer any
access to trading on the Exchange and
only permits such member to act as a
principal underwriter for a company
applying to initially list on the
Exchange.111
Further, as described above, in
conjunction with the new limited
underwriting membership class,
proposed Listing Rule 5210(m) will
require a company to use, as a
prerequisite for applying for initial
listing on the Exchange with an
underwriter, a principal underwriter
that is either a Member or Limited
Underwriting Member. The Commission
has previously stated that listing
standards provide the means for an
exchange to screen issuers that seek to
become listed, and to provide listed
status only to those that are bona fide
companies with sufficient public float,
investor base, and trading interest to
provide the depth and liquidity
necessary to promote fair and orderly
markets.112 As the Exchange states, it
relies on underwriters to ensure shares
are placed in a way that is reasonably
109 See supra note 63. See also Amendment No.
2, supra note 11, at 13783. The Exchange
represented that as it adopts new rules over time,
it also would consider whether to apply such rules
to Limited Underwriting Members. See supra note
63.
110 15 U.S.C. 78f(b)(8).
111 See proposed General 3, Section 1031(b). The
Exchange has represented that it 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. The Exchange acknowledged
that there are other existing rules that it could
propose to apply to the new class of limited
underwriting membership, but stated it is only
proposing a narrow rule set to enhance its oversight
with respect to the role the underwriter plays in
connection with a company listing on the
Exchange. See supra note 63.
112 See, e.g., Securities Exchange Act Release Nos.
95220 (July 7, 2022), 87 FR 41780, 41785 (July 13,
2022) (SR–NASDAQ–2022–027) (order approving
direct listing with a capital raise); 86314 (July 5,
2019), 84 FR 33102, 33110 (July 11, 2019) (SR–
NASDAQ–2019–009) (order approving revisions to
initial listing standard calculations related to
liquidity).
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designed to allow liquid trading,113 and
the proposal will allow it to require
responses from underwriters that
currently are not Members of the
Exchange in response to investigative
inquires.114 The requirement in Listing
Rule 5210(m) can help to support the
Exchange in determining a company’s
suitability for listing in order to, among
other things, prevent fraudulent and
manipulative acts and practices and
maintain fair and orderly markets.
As described above, the proposal
should provide greater transparency and
certainty with respect to the ability of,
and the manner in which, the Exchange
is able to obtain information necessary
to meet its regulatory obligations and
ensure fair and orderly markets in
connection with the listing of securities
of a company applying for initial listing
on the Exchange with a transaction
involving an underwriter. Based on the
above, the Commission finds that the
proposed rule change is reasonably
designed, consistent with section 6(b)(5)
of the Act, among others, to prevent
fraudulent and manipulative and
practices, promote just and equitable
principles of trade, and, in general,
protect investors and the public
interest.115
Finally, as is described above, the
Exchange has proposed to apply Equity
7, Section 10 to Limited Underwriting
Members, as this section includes the
membership and application fees
applicable to Limited Underwriting
Members.116 The Exchange has
proposed 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
have no direct trading rights on the
Exchange.117 Limited Underwriting
Members would be subject to same
$2,000 application fee (per Equity 7,
Section 10(b)) and $4,000 yearly
membership fee (per Equity 7, Section
10(a)) as other Members are currently
charged.118 The Commission believes
that the proposed fees applicable to
Limited Underwriting Members, in
addition to the exclusion of the member
trading fee, is consistent with Section
6(b)(4) in that it provides for the
113 See supra note 15. See also Securities
Exchange Act Release No. 86314 (July 5, 2019) 84
FR 33102, 33111 (July 11, 2019) (stating that the
proposal ‘‘should allow the Exchange to more
accurately determine whether a security has
adequate distribution and liquidity and is thus
suitable for listing and trading on the Exchange’’).
114 See supra notes 16–18.
115 15 U.S.C. 78f(b)(5).
116 See supra note 25.
117 See supra notes 25–26.
118 See supra note 27.
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equitable allocation of reasonable dues,
fees, and other charges among its
members.119
For the forgoing reasons, the
Commission finds that the proposed
rule change, as modified by Amendment
Nos. 2 and 3, is consistent with the Act.
IV. Solicitation of Comments on
Amendment No. 3 to the Proposed Rule
Change
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether Amendment No. 3 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
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,
119 15 U.S.C. 78f(b)(4). The Exchange has also
proposed to delay implementation of its proposal
until sixty days after publication of the
Commission’s approval order of the filing discussed
herein. See supra note 67. This appears to be
reasonable to allow underwriters representing
companies that have applied, or about to apply, to
list to become a Limited Underwriting Member or
Member if not already a Member or in the
alternative allow a company to select an alternative
underwriter if such underwriter firm chooses not to
become a Limited Underwriting Member or
Member.
E:\FR\FM\28MRN1.SGM
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21636
Federal Register / Vol. 89, No. 61 / Thursday, March 28, 2024 / Notices
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. 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
April 18, 2024.
V. Accelerated Approval of the
Proposed Rule Change, as Modified by
Amendment Nos. 2 and 3
The Commission finds good cause to
approve the proposed rule change, as
modified by Amendment Nos. 2 and 3,
prior to the thirtieth day after the date
of publication of notice of the filing of
Amendment Nos. 2 and 3 in the Federal
Register. In Amendment No. 2, the
Exchange amended the proposal to,
among other things, (i) exclude Section
1032 of General 3, a new provision,
from the rules the Exchange proposes to
apply to Limited Underwriting Members
under General 3, Section 1031(c); (ii)
add General 9, Section 21 to the rules
the Exchange proposes to apply to
Limited Underwriting Members under
General 3, Section 1031(c); (iii) update
existing rule language in Equity 7,
Section 10 to reflect changes in current
text; (iv) remove a proposed exemption
from registration for certain banking
representatives associated with Limited
Underwriting Members; and (v) add
language to General 3, Section
1031(c)(2) to clarify that associated
persons of Limited Underwriting
Members shall at all times be properly
qualified and registered under FINRA
rules.120 Amendment No. 2 also made
some numbering updates, provided
additional rationale for the inclusion
and exclusion of certain rules, and
provided additional language in the
statutory basis.121 Amendment No. 2
120 See
supra note 9.
id. Amendment No. 2 also removed
proposed rule language from proposed General 3,
Section 1032(a), which provided that any person
shall be eligible to become an associated persons of
a Limited Underwriting Member, and removed
General 4 from the list of rules applicable to
Limited Underwriting Members in proposed
General 3, General 1031(c)(1). As discussed below,
these provisions were put back into the proposal in
Amendment No. 3. Additionally, some of the
changes described in Amendment No. 2 were
originally proposed in Amendment No. 1 but
included in Amendment No. 2 since Amendment
No. 2 superseded Amendment No. 1. See supra
notes 8 and 11.
was published for comment in the
Federal Register and no comments were
received.122
In its Amendment No. 3, the
Exchange added back proposed rule
language to General 3, Section
1032(a)(2) that was in the original
proposal about the eligibility of any
person to become an associated person
of a Limited Underwriting Member,
except such persons as are excluded
under General 3, Rule 1002(b).123 In
Amendment No. 3, the Exchange also
provided additional language on the
consistency of General 3, Section
1032(a)(1) and (a)(2) with the
requirements of section 6(b)(2) of the
Act.124 In Amendment No. 3, the
Exchange also amended the proposal to
add General 4 (Registration
Requirements) back into the list of rules
that a Limited Underwriting Member
and their associated persons must
comply with, as originally proposed.125
The proposed rule language changes to
the proposal, as described above, are
identical to provisions that were in the
original proposal and published for
comment.126 No comments were
received in response to that Notice.
Amendment No. 3 also excluded
General 5, Rule 9400 from the list of
rules that Limited Underwriting
Members must comply with because
that rule relates to expedited procedures
for certain trading activity and Limited
Underwriting Members have no trading
rights on the Exchange.127 Amendment
No. 3 also provided updates and other
clarifying changes to, and justification
for, the proposed rule change in
addition to adding the provisions
described above.128
The Commission believes
Amendment Nos. 2 and 3 will help to
strengthen the Exchange proposal and
support its consistency with the Act.
Amendment Nos. 2 and 3 assist the
Commission in evaluating the
Exchange’s proposal and in determining
that it is consistent with the Act.
Amendment Nos. 2 and 3 also have
raised no new or novel issues.
Accordingly, the Commission finds
good cause, pursuant to section 19(b)(2)
of the Act,129 to approve the proposed
ddrumheller on DSK120RN23PROD with NOTICES1
121 See
VerDate Sep<11>2014
20:27 Mar 27, 2024
Jkt 262001
122 See supra note 11. The Commission notes that
the full 21-day comment period has already ended.
123 See supra note 28.
124 See Amendment No. 3, supra note 12, at 12–
13.
125 See supra notes 35 and 46.
126 See Notice, supra note 3. As noted above,
these provisions were removed from the proposal
in Amendment No. 2. See Amendment No. 2, supra
note 11.
127 See supra note 51.
128 See Amendment No. 3, supra note 12.
129 15 U.S.C. 78s(b)(2).
PO 00000
Frm 00154
Fmt 4703
Sfmt 4703
rule change, as modified by Amendment
Nos. 2 and 3, on an accelerated basis.
VI. Conclusion
It is therefore ordered, pursuant to
section 19(b)(2) of the Act,130 that the
proposed rule change (SR–NASDAQ–
2023–022), as modified by Amendment
Nos. 2 and 3, be, and hereby is,
approved on an accelerated basis.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.131
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024–06579 Filed 3–27–24; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–99848; File No. SR–NYSE–
2024–17]
Self-Regulatory Organizations; New
York Stock Exchange LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Amend the
Connectivity Fee Schedule
March 22, 2024.
Pursuant to section 19(b)(1) 1 of the
Securities Exchange Act of 1934
(‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that on March 15,
2024, New York Stock Exchange LLC
(‘‘NYSE’’ or the ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the self-regulatory
organization. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend the
Connectivity Fee Schedule (‘‘Fee
Schedule’’) regarding colocation
services and fees to update the list of
included data products. The proposed
rule change is available on the
Exchange’s website at www.nyse.com, at
the principal office of the Exchange, and
at the Commission’s Public Reference
Room.
130 Id.
131 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
1 15
E:\FR\FM\28MRN1.SGM
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]]>Agencies
[Federal Register Volume 89, Number 61 (Thursday, March 28, 2024)]
[Notices]
[Pages 21629-21636]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-06579]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-99846; File No. SR-NASDAQ-2023-022]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing of Amendment No. 3 and Order Granting Accelerated
Approval of a Proposed Rule Change, as Modified by Amendment Nos. 2 and
3, To Create a New, Non-Trading Limited Underwriter Membership Class
and Impose Related Requirements for Principal Underwriting Activity
March 22, 2024.
I. Introduction
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 (``Notice'').
---------------------------------------------------------------------------
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
approve or 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
modified by Amendment No. 1, in its entirety.\9\ On January 26, 2024,
the Commission extended the time period for approving or disapproving
the proposal to March 27, 2024.\10\ The proposed rule change, as
modified by Amendment No. 2, was published for comment in the Federal
Register on February 23, 2024.\11\ On March 18, 2024, the Exchange
filed Amendment No. 3 to the proposed rule change.\12\ The Commission
has received no comment letters on the proposed rule change. The
Commission is publishing this notice to solicit comments on Amendment
No. 3 from interested persons and is approving the proposed rule
change, as modified by Amendment Nos. 2 and 3, on an accelerated basis.
---------------------------------------------------------------------------
\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
(``Amendment No. 1''). In Amendment No. 1, the Exchange, among other
things: (i) removed a proposed exemption from registration for
certain investment banking representatives associated solely with
Limited Underwriting Members; (ii) removed proposed rule language
from proposed General 3, Section 1032(a), which provided that any
person shall be eligible to become associated persons of a Limited
Underwriting Member; (iii) removed General 4 from the list of rules
applicable to Limited Underwriting Members in proposed General 3,
Section 1031(c)(1); and (iv) revised proposed General 3, Section
1031(c)(2) to clarify that associated persons of Limited
Underwriting Members shall at all times be properly qualified and
registered under the Financial Industry Regulatory Authority
(``FINRA'') rules. Further, the Exchange provided additional reasons
it is not proposing to apply certain existing rules to Limited
Underwriting Members.
\9\ Amendment No. 2 is available at https://www.sec.goc/comments/sr-nasdaq-2023-022/srnasdaq2023022-414859-982462.pdf. In
Amendment No. 2, the Exchange, among other things: (i) updated the
numbering in Listing Rule 5210 to account for recently added rule
language and a related reference to Listing Rule 5210 in proposed
General 3, Section 1031(b); (ii) excluded General 3, Section 1032
from the rules the Exchange proposes to apply to Limited
Underwriting Members (see infra note 14 and accompanying text) under
proposed General 3, Section 1031(c)(1); (iii) added General 9,
Section 21 to the rules the Exchange proposes to apply to Limited
Underwriting Members under proposed General 3, Section 1031(c)(1);
(iv) updated Equity 7, Section 10 to reflect a recent change in the
membership fee; and (v) added a statutory basis for the imposition
of fees. Amendment No. 2 superseded Amendment No. 1, so the changes
made in Amendment No. 1, unless otherwise amended, are incorporated
into Amendment No. 2. See supra note 8.
\10\ See Securities Exchange Act Release No. 99433, 89 FR 6559
(Feb. 1, 2024).
\11\ See Securities Exchange Act Release No. 99557 (Feb. 16,
2024), 89 FR 13779 (``Amendment No. 2'').
\12\ Amendment No. 3 is available at https://www.sec.gov/comments/sr-nasdaq-2023-022/srnasdaq2023022-447779-1145462.pdf
(``Amendment No. 3''). In Amendment No. 3, the Exchange modified the
proposal by: (i) adding back proposed rule language from the
original proposal to General 3, Section 1031(a)(2) about eligibility
to become an associated person and modifying the title of General 3,
Section 1031(a) to reflect that change; (ii) adding back language
from the original proposal to include General 4 (Registration
Requirements), which includes registration, qualification, and
continuing education requirements, to the list of rules applicable
to Limited Underwriting Members in General 3, Section 1031(c)(1);
and (iii) excluding General 5, Rule 9400 from the list of rules
applicable to Limited Underwriting Members in General 3, Section
1031(c)(1) for the reasons described below. Amendment No. 3 also
updated the purpose section to reflect the changes described above,
made other clarifying changes, and added a statutory basis
explanation for consistency with section 6(b)(2) of the Act.
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change, as Modified by Amendment
Nos. 2 and 3
The Exchange is proposing to amend its rules to create a new
limited membership class for underwriters that are FINRA members
seeking only to serve as a principal underwriter for a company applying
to list on the Exchange (and not seeking access to transact on the
Exchange) 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 \13\ or a broker or dealer
admitted to limited underwriting membership in the Exchange (``Limited
Underwriting Member'').\14\ The Exchange states that
[[Page 21630]]
underwriters play a critical role as gatekeepers to the capital markets
in connection with the trading of newly issued securities and that it
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 market place.\15\
According to the Exchange, notwithstanding the important role of
underwriters, it does not currently require underwriters of companies
that are going public on the Exchange to be Members of the Exchange,
and as such, does not have authority to require responses to
investigative inquiries or to enforce its rules directly against non-
Member underwriters.\16\ The Exchange states that this proposal would
provide the Exchange with authority to directly obtain information from
Limited Underwriting Members,\17\ whether pre- or post-initial public
offering.\18\ The Exchange states that by creating a new, limited
underwriting membership class, it will provide firms seeking only to
perform principal underwriting activity on the Exchange (and not
seeking access to trade via the Nasdaq Market Center) \19\ with the
option of selecting a membership that is less burdensome (i.e., to
become a Limited Underwriting Member rather than a Member).\20\
---------------------------------------------------------------------------
\13\ The Exchange defines the term ``member'' or ``Nasdaq
Member'' (hereinafter referred to as ``Member'') to mean any
registered broker or dealer that has been admitted to membership in
the Exchange. See Nasdaq General 1, Section 1(b)(11). See also
Nasdaq Listing Rule 5005(a)(24) (defining ``Member'' to mean a
broker or dealer admitted to membership in Nasdaq).
\14\ See infra note 23. The Exchange states that ``principal
underwriter'' will have the same definition used in Rule 405
promulgated under the Securities Act of 1933 (``Securities Act''),
which is an underwriter in privity of contract with the issuer of
the securities as to which he is underwriter, and that 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. The Exchange states it
proposes to apply the proposed requirements to a principal
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. See Amendment No.
2, supra note 11, at 13780 n.11.
\15\ See Amendment No. 2, supra note 11, at 13780. The Exchange
states that it highlighted the important role of underwriters as
gatekeepers in the initial public offering (``IPO'') process and the
applicability of market rules and the federal securities laws in its
recent Equity Regulatory Alert (``Nasdaq Alert''), available at
https://www.nasdaqtrader.com/MicroNews.aspx?id=ERA2022-9. In the
Nasdaq Alert, among other things, the Exchange highlighted that
``Nasdaq members, as well as members of other self-regulatory
organizations, that underwrite IPOs, and that play other roles in
the offering process, should expect heightened focus when an IPO
experiences unusual price movements.'' See also 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 (similar
regulatory alerts issued by the New York Stock Exchange and FINRA,
respectively).
\16\ See Amendment No. 2, supra note 11, at 13781. The Exchange
states, however, that it has broad discretionary authority over the
initial and continued listing of securities in the Exchange and over
its Members 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. According
to the Exchange, it may request information from companies that are
going public on the Exchange and from Members who are permitted to
trade on the Exchange, who are required to respond to those
requests. The Exchange also states it may request information from
non-Members, including non-Member underwriters, but they are not
required to respond to these requests. See id. at 13781 n.17.
\17\ See infra note 23 and accompanying text.
\18\ See Amendment No. 2, supra note 11, at 13781 n.17. The
Exchange explains in its proposal that in the fall of 2022 it
observed, immediately following the pricing of certain IPOs on the
Exchange, instances of unusually high price spikes immediately
followed by dramatic price declines to at or below the offering
price. This occurred mostly with respect to small cap companies with
offerings of less than $25 million. According to the Exchange, these
extreme spikes may occur ``in the opening trade on an exchange or in
continuous trading on the day of, or days immediately following the
listing.'' Id. at 13780.
\19\ The Exchange defines ``Nasdaq Market Center'' to mean the
automated system for order execution and trade reporting owned and
operated by Nasdaq. See Nasdaq Equity 1, Section 1(a)(3).
\20\ The Exchange submitted a revised Membership Application as
Exhibit 3, in which the Exchange 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.
---------------------------------------------------------------------------
The Exchange proposes to amend several of its rules in conjunction
with the adoption of the new limited underwriting membership class.
First, the Exchange proposes to amend its Listing Rule 5210
(Prerequisites for Applying to List on the Nasdaq Stock Market) 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.\21\ In
proposed Listing Rule 5210(m), the Exchange will also specify that
``principal underwriter'' shall have the same definition used in Rule
405 promulgated under the Securities Act.\22\ Second, the Exchange
proposes to add a definition of ``Limited Underwriting Member'' to
General 1 (General Provisions), Section 1 to mean a broker or dealer
admitted to limited underwriting membership in Nasdaq.\23\ Third, as
discussed in more detail below, the Exchange also proposes to add a
new, limited underwriting membership rule, proposed Section 1031 to
General 3 (Membership and Access), within which, the Exchange proposes
to set forth the rules that will be applicable to Limited Underwriting
Members and their associated persons, the requirements for persons
eligible to become Limited Underwriting Members, and rules on Limited
Underwriting Member access to the Exchange.\24\ Finally, the Exchange
proposes to amend Equity 7, Section 10 to exempt Limited Underwriting
Members from being assessed a trading rights fee.\25\ The Exchange
states that Limited Underwriting Members would not be eligible to trade
on the Exchange, and 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.\26\ Under the
proposal, Limited Underwriting Members would be 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)).\27\
---------------------------------------------------------------------------
\21\ See Amendment No. 2, supra note 11, at 13781. The Exchange
states that this rule would cross reference the definition of
``Limited Underwriting Member'' in General 1, Section 1. The
Exchange further states that this proposed rule change primarily
impacts membership rules and other non-listing rules, which would
apply to the underwriters themselves. See id.
\22\ See id.
\23\ See id. at 13781-82.
\24\ See id.
\25\ See id. at 13782-83. Specifically, the Exchange proposes to
exempt Limited Underwriting Members from the trading rights fee of
$1,250 per month that is charged to Members. See id.
\26\ See id.
\27\ See id. These are the application and yearly membership
fees that currently apply to Members.
---------------------------------------------------------------------------
Specifically, as to proposed General 3, Section 1031 requirements
on eligibility for membership, the Exchange proposes to state in
General 3, Section 1031(a)(1) 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 General
3, Rule 1002(b) and in General 3, Section 1031(a)(2) that any person
shall be eligible to become an associated persons of a Limited
Underwriting Member, except such persons as are excluded under General
3, Rule 1002(b).\28\ The Exchange states that proposed General 3,
Section 1031(a) is consistent with the existing rules for persons
eligible to become Members and associated persons of Members in General
3, Rule 1002(a).\29\ Further, under the proposal to be eligible for
membership, Limited Underwriting
[[Page 21631]]
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.\30\
---------------------------------------------------------------------------
\28\ See id.; Amendment No. 3, supra note 12, at 3-4 and 7-8.
According to the Exchange, General 3, Rule 1002(b) provides, in
relevant part, 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 Exchange 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. See id. at 13781 n.20; Amendment No. 3, supra note 12, at
3-4 and 7-8.
\29\ See Amendment No. 3, supra note 12, at 8.
\30\ See Amendment No. 2, supra note 11, at 13782. According to
the Exchange, Limited Underwriting Members would 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 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 states it relies
substantially upon FINRA's determination to approve the applicant
for FINRA membership when the Exchange evaluates the applicant for
Exchange membership. See id. at 13782 n.23.
---------------------------------------------------------------------------
Proposed General 3, Section 1031(b) will also provide 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, as set forth
in proposed Listing Rule 5210(m).\31\ Proposed General 3, Section
1031(c)(1) also states that, for purposes of interpreting and applying
the rules applicable to Limited Underwriting Members (as described
below), references to ``Member,'' ``Members,'' or ``membership'' shall
be functionally equivalent to ``Limited Underwriting Member,''
``Limited Underwriting Members,'' or ``limited underwriting
membership,'' respectively.\32\
---------------------------------------------------------------------------
\31\ See id. Proposed Listing Rule 5210(m) applies to companies
seeking to initially list on the Exchange in connection with a
transaction involving an underwriter. See also supra notes 21-22 and
accompanying text.
\32\ See Amendment No. 2, supra note 11, at 13782.
---------------------------------------------------------------------------
The Exchange proposes to apply a limited ruleset to its newly
proposed limited underwriting membership class.\33\ Specifically, the
Exchange proposes to provide in new General 3, Section 1031(c)(1) that
Limited Underwriting Members and their associated persons are subject
only to the following rules: \34\ 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 4 (Registration Requirements);
General 5 (Discipline), with the exception of Rules 8211, 9400, and
9557; General 9 (Regulation), Sections 1, 20, and 21; and Equity 7,
Section 10 (Pricing Schedule, Membership Fees).\35\ The Exchange states
that it proposes 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.\36\ The Exchange further states that a firm
registering as a Limited Underwriting Member on the Exchange would
remain subject to all applicable rules of the Commission and any other
self-regulatory organization (``SRO'') of which it is a member,
including the FINRA.\37\
---------------------------------------------------------------------------
\33\ See id. at 13781. The Exchange states that Members, unlike
Limited Underwriting Members, are subject to all of the Exchange's
rules (which includes the limited ruleset applicable to the newly
proposed limited underwriting membership class). See id. at 13781
n.21.
\34\ There are multiple sections and rules under the various
``General Rules'' numerical provisions. References to ``rules''
herein generally include all the sections and rules within the
applicable General numerical provisions that would apply to Limited
Underwriter Members with the exceptions noted.
\35\ See id. at 13781; Amendment No. 3, supra note 12, at 4-5.
\36\ See Amendment No. 2, supra note 11, at 13781.
\37\ See id.
---------------------------------------------------------------------------
In its proposal, the Exchange set forth its reasons for including
the specified rules in General 3, Section 1031(c)(1) that apply to
Limited Underwriting Members. As to its proposal to apply General 1 to
Limited Underwriting Members and their associated persons,\38\ the
Exchange states that General 1 provides defined terms that would be
applicable to Limited Underwriting Members and will also add a
definition of ``Limited Underwriting Member'' to General 1.\39\ The
Exchange also proposes to apply General 2 (with the exception of
Sections 6(a) and 22) to Limited Underwriting Members and their
associated persons.\40\ The Exchange states that the rules in General 2
relate to organization and administration including requirements
surrounding fees, limitations on affiliations, and a requirement for an
executive representative, among other obligations.\41\ The Exchange
proposes to specifically exclude General 2, Sections 6(a) and Section
22, as 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, according to the Exchange, is not
accurate in the case of Limited Underwriting Members, and General 2,
Section 22 relates to sponsored participants \42\ and client access to
the Nasdaq Market Center via a Member, which, according to the
Exchange, is not applicable to underwriting activity.\43\
---------------------------------------------------------------------------
\38\ See id. at 13782.
\39\ See id.
\40\ See id.
\41\ See id.
\42\ See Nasdaq General 2, Section 22.
\43\ See Amendment No. 2, supra note 11, at 13782.
---------------------------------------------------------------------------
The Exchange also proposes to subject Limited Underwriting Members
and their associated persons to General 3 with the exception of Section
1032.\44\ The Exchange states that 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.\45\ In addition, the Exchange states that General 4
specifies registration, qualification, and continuing education
requirements, including requirements for persons engaged in the
securities business of a Member, and proposed to apply General 4 to
Limited Underwriting Members and their associated persons.\46\ The
Exchange states these requirements apply in the same manner as such
registration, qualification, and continuing education requirements that
apply to current Members.\47\ Limited Underwriting Members and their
associated persons would also be subject to FINRA's registration and
qualification rules, 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).\48\
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\44\ The proposed rule change would also add new Section 1031 to
General 3, as described above, that is applicable to limited
underwriting memberships. See supra note 24 and accompanying text.
The Exchange states that it proposes to specifically exclude General
3, Section 1032 because such section includes requirements related
to Nasdaq Market Center Participant registration, which, according
to the Exchange, is inapplicable to Limited Underwriting Members
because they are not permitted to transact on the Nasdaq Market
Center. See Amendment No. 2, supra note 11, at 13782.
\45\ See Amendment No. 2, supra note 11, at 13781.
\46\ See Amendment No. 3, supra note 12, at 4-5 and 9-10.
\47\ See id. at 10.
\48\ See Amendment No. 2, supra note 11, at 13783. See also
FINRA Rules 1210 (Registration Requirements) and 1220 (Registration
Categories).
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Limited Underwriting Members and their associated persons would
also have to comply with General 5 (with the exception of Rules 8211,
9400, and 9557), which, according to the Exchange, is critical to
subject Limited Underwriting Members to, as it contains the Exchange's
disciplinary rules.\49\ In particular, the Exchange notes General 5,
Rule 8210 that provides the Exchange with authority to require
information
[[Page 21632]]
from its Members.\50\ The Exchange is proposing to specifically exclude
General 5, Rules 8211, 9400, and 9557, which the Exchange represents
are not relevant to underwriting activity because these rules relate,
respectively, to trading data, expedited client suspension proceedings
for violations of General 9, Section 53 (concerning disruptive quoting
and trading), and FINRA carrying or clearing members.\51\ The Exchange
also states that the excluded rules from General 5 are inapplicable to
Limited Underwriting Members because such members are not permitted to
transact on the Exchange.\52\
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\49\ See Amendment No. 2, supra note 11, at 13783. According to
the Exchange, 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. See id. at 13782 n.22.
\50\ See id. at 13782. Nasdaq General 5, Rule 8210 states
information must be provided by a member or persons associated with
a member or subject to Nasdaq's jurisdiction ``[f]or the purpose of
an investigation, complaint, examination or proceeding authorized by
the Nasdaq By-Laws or Rules, Nasdaq Regulation Department, including
FINRA staff.'' Nasdaq General 5, Rule 8210(a).
\51\ See id. at 13782; Amendment No. 3, supra note 12, at 10-11.
\52\ See Amendment No. 3, supra note 12, at 11.
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Further, the Exchange proposes to subject Limited Underwriting
Members and their associated persons to General 9, Sections 1, 20, and
21.\53\ The Exchange states that it believes it is important to subject
Limited Underwriting Members to General 9, Section 1, which includes
general standards by which Members must abide, including the
requirement to observe just and equitable principles of trade.\54\ The
Exchange further states that 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, to identify
principals who must establish, maintain, and enforce a system of
supervisory control policies and procedures that, among other things,
test that the member's supervisory procedures are reasonably designed
with respect to the activities of the member and its associated
persons, and to achieve compliance with applicable securities laws and
regulations, and with applicable Nasdaq rules.\55\ The Exchange states
its belief that 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.\56\ The Exchange
states that it does not propose to apply other sections of General 9,
except for Sections 1, 20, and 21, to Limited Underwriting Members at
this time.\57\ The Exchange states that although it acknowledges
certain other sections of General 9 could be applied to underwriters,
it is targeting limited inclusion of rules that it deems critical.\58\
Finally, the Exchange proposes to include Equity 7, Section 10 in
General 3, Section 1031(c)(1).\59\ The Exchange states that Equity 7,
Section 10 includes the membership and application fees applicable to
Limited Underwriting Members.\60\
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\53\ See Amendment No. 2, supra note 11, at 13782.
\54\ See id.
\55\ See id.
\56\ See id.
\57\ See id.
\58\ See id. The Exchange further states that many of the
standards in General 9 are FINRA rules that are incorporated by
reference into the Exchange's rules; therefore, Limited Underwriting
Members would be subject to such FINRA rules by virtue of their
FINRA membership. See id. See, e.g., Nasdaq General 9, Section 30
(incorporating by reference FINRA Rule 4511).
\59\ See Amendment No. 2, supra note 11, at 13782.
\60\ See id. The Exchange acknowledges that there are
additional, existing rules that it could propose to apply to Limited
Underwriting Members but it is proposing to apply only a narrow
ruleset, as it does not intend to create comprehensive rules to
regulate underwriting activity. See id. at 13781-82.
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The Exchange states that it 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.\61\ The Exchange states
that the Exchange 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.\62\ The Exchange states that it 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.\63\
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\61\ See id. at 13782.
\62\ See id.
\63\ See id. at 13781. The Exchange represents that it will
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. See id. at 13781-82.
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The Exchange, in addition to the excluded rules described above,
has not proposed to apply the following rules to Limited Underwriting
Members at this time: General 6; General 7; General 8; Equity Rules
(with the exception of Equity 7, Section 10); and Options Rules.\64\
Specifically, the Exchange states that 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 and that 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.\65\ The Exchange also states
that 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, and 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.\66\
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\64\ See id. at 13783.
\65\ See id.
\66\ See id. The Exchange states that 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. See id.
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Finally, the Exchange is proposing to make the proposed rule change
described herein operative 60 days after publication of the
Commission's approval order of SR-NASDAQ-2023-022 in the Federal
Register, as 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.\67\
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\67\ See id.
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III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change, as modified by Amendment Nos. 2 and 3, is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange.\68\ Specifically, the
Commission finds that the proposed rule change, as modified by
Amendment Nos. 2 and 3, is consistent with section 6 of the Act. In
particular, the Commission finds that the proposal, as modified by
Amendment Nos. 2 and 3, is consistent with section 6(b)(5) \69\ of the
Act, which requires, among other
[[Page 21633]]
things, that the Exchange's rules be designed to prevent fraudulent and
manipulative acts and practices, promote just and equitable principles
of trade, 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; and are not designed to permit
unfair discrimination between customers, issuers and brokers, or
dealers.\70\ Further, the Commission finds that the proposed rule
change, as amended, is consistent with (i) section 6(b)(1) of the
Act,\71\ which requires, among other things, that a national securities
exchange be able to comply and enforce compliance by its members and
persons associated with its members, with the provisions of the Act,
the rules and regulation thereunder, and the rules of the exchange,
(ii) section 6(b)(2) of the Act \72\ which requires that exchange rules
provide that any registered broker or dealer or natural person
associated with a registered broker or dealer may become a member of
such exchange and any person may become associated with a member
thereof, and (iii) sections 6(b)(6) \73\ and 6(b)(7) \74\ of the Act,
which require, among other things, that a national securities exchange
provide appropriate discipline for violations of the Act, rules and
regulations thereunder and exchange rules and fair procedures for the
disciplining of members and persons associated with its members and the
prohibition or limitation by the exchange of any person with respect to
access to services offered by the exchange or a member thereof.\75\
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\68\ In approving this proposed rule change, as modified by
Amendment Nos. 2 and 3, the Commission has considered the proposed
rule change's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\69\ 15 U.S.C. 78f(b)(5).
\70\ See id. In addition, the Commission finds that the proposed
rule change as to the applicable fees is consistent with section
6(b)(4) of the Act that requires the Exchange's rules to provide for
the equitable allocation of reasonable dues, fees, and other charges
among its members and issuers and other persons using its
facilities. 15 U.S.C. 78f(b)(4).
\71\ 15 U.S.C. 78f(b)(1).
\72\ 15 U.S.C. 78f(b)(2).
\73\ 15 U.S.C. 78f(b)(6).
\74\ 15 U.S.C. 78f(b)(7).
\75\ The Commission previously found that the provisions on
Nasdaq Member voting for the Exchange Board of Directors ``including
that twenty percent of the directors be `Member Representative
Directors' and the means by which they are elected by members
provides for the fair representation of members in the selection of
directors and the administration of the Exchange consistent with the
requirement of section 6(b)(3) of the Act.'' See Securities Exchange
Act Release No. 53128 (Jan. 13, 2006), 71 FR 3550, 3553 (Jan. 23,
2006) (Commission order approving Nasdaq for registration as a
national securities exchange) (``Nasdaq Exchange Registration
Order''). The By-Laws of Nasdaq apply to Limited Underwriting
Members as they do to current Members. See, e.g., Nasdaq By-Laws
Article 1(t) (defining ``Nasdaq Member'' as ``any registered broker
or dealer that has been admitted to membership in the national
security exchange operated by the Company''). Limited Underwriting
Members would therefore also have the right to nominate, and vote
for, candidates for election as Member Representative Directors
under the By-Laws, as do current Members. See id. Article II (Annual
Election of Member Representative Directors and Other Actions by
Nasdaq Members). Given that the existing By-Law provisions apply
equally to Limited Underwriting Members, the proposal is similarly
consistent with section 6(b)(3) of the Act.
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The proposal, as modified by Amendment Nos. 2 and 3, amends the
rules of the Exchange to provide for a new limited underwriting
membership class and would require companies applying to initially list
on the Exchange in connection with a transaction involving an
underwriter to use a principal underwriter that is either a Member or
Limited Underwriting Member of the Exchange.\76\ The Exchange has
proposed to add Section 1031 to General 3 (Membership and Access) that
sets forth the requirements applicable to Limited Underwriting Members
including certain limitations on Limited Underwriting Members.\77\ In
particular, a limited underwriting membership provides no rights to
trade on the Exchange and such limited underwriting membership is
solely for the purpose of allowing a firm that is not otherwise a
Member to serve as a principal underwriter for a company seeking to
initially list on the Exchange.\78\ A Limited Underwriting Member is
defined to mean a broker or dealer admitted to limiting underwriting
membership in the Exchange.\79\ As described above, similar to the
existing eligibility requirements for Members and their associated
persons, General 3, Section 1031(a) provides that any registered broker
or dealer is eligible for a limited underwriting membership and any
person shall be eligible to become an associated person of a Limited
Underwriting Member, except for those registered broker or dealers or
persons that are excluded under General 3, Rule 1002(b).\80\ These
provisions on eligibility are consistent with the Act, including
section 6(b)(2) of the Act, which requires the rules of an exchange to
provide that any registered broker or dealer or natural person
associated with a broker or dealer may become a member of such exchange
or associated with a member thereof subject to the provisions of
section 6(c) of the Act.\81\
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\76\ See supra notes 13 and 14 and accompanying text.
\77\ See supra note 24.
\78\ See supra note 31.
\79\ See supra note 23.
\80\ See supra note 28.
\81\ 15 U.S.C. 78f(b)(2) and 15 U.S.C. 78f(c).
---------------------------------------------------------------------------
In its proposal, as modified by Amendment Nos. 2 and 3, the
Exchange seeks to apply certain of its rules as set forth in General 1
through General 9 to Limited Underwriting Members while excluding the
application of others.\82\ The Exchange seeks to apply only specific
rules to Limited Underwriter Members that fall under areas related to
general provision definitions and standards, organization and
administration, membership and access, registration requirements,
discipline, regulation, and membership fees.\83\ As stated by the
Exchange, it proposes to apply only those rules it believes are
appropriate to a firm serving as a principal underwriter, and will,
among other things, provide the Exchange with authority to require
information from such underwriters thereby aiding in its oversight of
its market and helping to ensure fair and orderly markets.\84\ The
Exchange has also stated that firms registering as a Limited
Underwriting Members would still be subject to all applicable rules of
the Commission and any other SRO of which it is a member, including
FINRA.\85\
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\82\ See proposed Nasdaq General 3, Section 1031(c)(1).
\83\ See supra notes 33-35.
\84\ See supra note 63.
\85\ See supra note 37. Proposed General 3, Section 1031(c)(2)
would require a Limited Underwriting Member to, at all times, be a
member of FINRA. See supra note 30.
---------------------------------------------------------------------------
Specifically, among others, the Exchange has proposed to apply
General 1 to Limited Underwriting Members because it contains defined
terms and standards that currently apply to Members that are equally
applicable to Limited Underwriting Members as well.\86\ The Exchange
also proposes to subject Limited Underwriting Members to General 2
(with the exception of sections 6(a) and 22) because it relates to
organization and administration including, among others, limitations on
affiliations \87\ and requirements to have an exchange
representative.\88\ The Exchange is applying General 3 (with the
exception of Section 1032 that applies to members who trade on Nasdaq's
Market Center) because
[[Page 21634]]
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.\89\
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\86\ See supra notes 38-39 and accompanying text.
\87\ General 2, Section 4 states that no member or person
associated with a member shall be the beneficial owner of greater
than twenty percent (20%) of the then-outstanding voting securities
of the Nasdaq Stock Market, Inc. The Commission previously has
stated that ownership and voting restrictions are consistent with
the Act and that these ownership limitations should minimize the
potential that a person could improperly interfere with or restrict
the ability of the Commission or the Exchange to effectively carry
out their regulatory oversight responsibilities under the Act. See
Nasdaq Exchange Registration Order, supra note 75, at 3551-52. For
the same reasons, the Commission believes it is appropriate to apply
General 2, Section 4 to the limited underwriting membership class.
\88\ See supra notes 40-41 and accompanying text.
\89\ See supra notes 44-45.
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General 4, which includes registration, qualification, and
continuing education requirements for Members and persons engaged in
the securities business of a Member, would also apply to Limited
Underwriting Members and their associated persons.\90\ General 4 would
apply in the same manner as it applies to current Members and their
associated persons.\91\ Under the proposal, Limited Underwriting
Members must at all times be members of FINRA and their associated
persons shall at all times be properly qualified and registered under
FINRA rules.\92\ Associated persons of Limited Underwriting Members
would therefore also be subject to FINRA's registration and
qualification requirements that includes examination requirements for
persons involved in underwriting and supervision of underwriting as
well as FINRA continuing education requirements.\93\
---------------------------------------------------------------------------
\90\ See supra note 46.
\91\ See Amendment No. 3, supra note 12, at 10.
\92\ See proposed General 3, Section 1031(c).
\93\ See supra note 48 and accompanying text.
---------------------------------------------------------------------------
The Exchange has additionally proposed to subject Limited
Underwriting Members to General 5 which contains the Exchange's
disciplinary rules,\94\ with the exception of Rules 8211 (submission of
trading data), 9400 (expedited client suspension proceedings for
violations of General 9, Section 53 concerning disruptive quoting and
trading activity), and 9557 (procedures for regulating activities on
FINRA carrying and clearing members).\95\ General 5, Rule 8210
provides, among other things, the Exchange with authority to require
information from Exchange Members, persons associated with Exchange
Members, and persons subject to the Exchange's jurisdiction for ``the
purpose of an investigation, complaint, examination or proceeding
authorized by the Nasdaq By-Laws or Rules, Nasdaq Regulation Department
including FINRA staff.'' \96\ General 5, Rule 9000 Series also
provides, among other things, the process and procedural requirements
for review of disciplinary matters including the opportunity for a
hearing.
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\94\ See supra notes 49-52.
\95\ See supra note 51.
\96\ See supra note 50. In its filing, the Exchange states that
while it may request information from non-Members, including non-
Member underwriters, they are not required to respond to these
requests unlike companies going public on the Exchange and Members.
See supra note 16 and accompanying text.
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The disciplinary rules that will be applicable to Limited
Underwriting Members and their associated persons (with the exception
of Rules 8211, 9400, and 9557 that are not relevant to the new
membership type as described above) \97\ are the same as those that
apply to existing Members of the Exchange and associated persons of
such Members. The Commission previously found that the Exchange's
disciplinary rules are consistent with the requirements of sections
6(b)(6) and 6(b)(7) of the Act in that they provide a fair procedure
for the disciplining of members and persons associated with
members.\98\ For similar reasons, the Commission believes that,
consistent with the requirements of sections 6(b)(6) and 6(b)(7),\99\
the Exchange's disciplinary rules and procedures should provide a fair
procedure for the disciplining of Limited Underwriting Members and
persons associated with such members, and for prohibiting or limiting
access with respect to services offered by the Exchange. The Commission
also believes for similar reasons as previously found, consistent with
the requirements of section 6(b)(1) of the Act,\100\ that the proposed
rules should provide the Exchange with the ability to enforce
compliance as to Limited Underwriting Members and their associated
persons with the provisions of the Act, the rules and regulations
thereunder, and the rules of the Exchange.\101\
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\97\ See supra notes 49-52 and accompanying text.
\98\ See Nasdaq Exchange Registration Order, supra note 75, at
3558. Any changes to the disciplinary rules since the original
approval would have had to be submitted to the Commission under
section 19(b) of the Act and be consistent with the Act, in
particular with Section 6.
\99\ See 15 U.S.C. 78(b)(6) and (7).
\100\ See 15 U.S.C. 78(b)(1).
\101\ See Nasdaq Exchange Registration Order, supra note 75, at
3558.
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The Exchange has also proposed to subject Limited Underwriting
Members to General 9, Sections 1, 20, and 21. General 9, Section 1
includes general standards by which Members must abide, such as
requiring Members to observe high standards of commercial honor and
just and equitable principles of trade. General 9, Section 20 requires
Members to establish and maintain a system to supervise the activities
of each registered representative and associated person. General 9,
Section 21 requires, among other things, for Members to test that their
supervisory procedures are reasonably designed to achieve compliance
with applicable securities laws and regulations and applicable Exchange
rules and requires an annual certification as to those procedures and
processes.\102\ As the Exchange states, applying provisions related to
supervision would provide the Exchange with authority to assess whether
a Limited Underwriting Member has an adequate supervisory system and
written supervisory procedures in place as to its activities.\103\
Further, applying standards of just and equitable principles of trade
to Limited Underwriting Members is consistent with the requirements in
section 6(b)(5) of the Act which states rules of the exchange must be
designed to promote such principles.\104\
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\102\ See supra note 55. The Exchange's General 9, Sections 20
and 21 incorporate by reference several FINRA rules on these
matters. Although the Exchange acknowledges that certain other
sections of General 9 could apply to underwriters, the Exchange
states it has excluded the other rules in General 9 because it is
targeting limited inclusion of the rules it deems critical. The
Exchange further noted that many of the standards in General 9 are
FINRA rules that are incorporated by reference into the Exchanges
rules and therefore Limited Underwriting Members would be subject to
such FINRA rules as a result of their FINRA membership. See supra
note 58.
\103\ See supra note 56.
\104\ 15 U.S.C. 78f(b)(5).
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The Exchange has also proposed to exclude certain rules in addition
to the ones discussed above.\105\ As the Exchange described in its
proposal and above, many of the excluded rules are not relevant to
underwriting activities of Limited Underwriting Members because these
rules apply to those Members that have trading rights on the Exchange
in Nasdaq's Market Center \106\ and Limited Underwriting Members would
have no rights to directly transact on the Exchange.\107\ As to the
exclusion of General 6, as the Exchanges states, these rules generally
relate to FINRA arbitration rules and Limited Underwriting Member
activities would be subject to such arbitration rules by virtue of
being FINRA members.\108\
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\105\ See supra note 66 and accompanying text.
\106\ See Nasdaq General 7 and General 8 (governing consolidated
audit trail and connectivity requirements, respectively); Equity
Rules and Options Rules (with the exception of Equity 7, Section
10). See also supra notes 64-66 and accompanying text.
\107\ See supra note 62. See also Amendment No. 2, supra note
11, at 13784. Limited Underwriting Members could access the Exchange
via other means, such as trading through another Member but have no
direct access to trade on the Exchange. See supra note 66.
\108\ See supra note 65.
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The Exchange states it is proposing a limited ruleset to apply the
rules it believes are most critical, including providing the Exchange
authority to require information directly from
[[Page 21635]]
Limited Underwriting Members, to enhance its oversight and deter
potential violative conduct.\109\ The Commission believes that the
application of only specific Exchange rules to Limited Underwriting
Members and the exclusion of certain other rules, as proposed by the
Exchange, are reasonable and strikes the appropriate balance between
regulating Limited Underwriting Members and not imposing a burden on
competition not necessary or appropriate in furtherance of the purposes
of the Act.\110\ The limited ruleset is consistent with the purpose of
a limited underwriting membership that does not confer any access to
trading on the Exchange and only permits such member to act as a
principal underwriter for a company applying to initially list on the
Exchange.\111\
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\109\ See supra note 63. See also Amendment No. 2, supra note
11, at 13783. The Exchange represented that as it adopts new rules
over time, it also would consider whether to apply such rules to
Limited Underwriting Members. See supra note 63.
\110\ 15 U.S.C. 78f(b)(8).
\111\ See proposed General 3, Section 1031(b). The Exchange has
represented that it 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. The Exchange
acknowledged that there are other existing rules that it could
propose to apply to the new class of limited underwriting
membership, but stated it is only proposing a narrow rule set to
enhance its oversight with respect to the role the underwriter plays
in connection with a company listing on the Exchange. See supra note
63.
---------------------------------------------------------------------------
Further, as described above, in conjunction with the new limited
underwriting membership class, proposed Listing Rule 5210(m) will
require a company to use, as a prerequisite for applying for initial
listing on the Exchange with an underwriter, a principal underwriter
that is either a Member or Limited Underwriting Member. The Commission
has previously stated that listing standards provide the means for an
exchange to screen issuers that seek to become listed, and to provide
listed status only to those that are bona fide companies with
sufficient public float, investor base, and trading interest to provide
the depth and liquidity necessary to promote fair and orderly
markets.\112\ As the Exchange states, it relies on underwriters to
ensure shares are placed in a way that is reasonably designed to allow
liquid trading,\113\ and the proposal will allow it to require
responses from underwriters that currently are not Members of the
Exchange in response to investigative inquires.\114\ The requirement in
Listing Rule 5210(m) can help to support the Exchange in determining a
company's suitability for listing in order to, among other things,
prevent fraudulent and manipulative acts and practices and maintain
fair and orderly markets.
---------------------------------------------------------------------------
\112\ See, e.g., Securities Exchange Act Release Nos. 95220
(July 7, 2022), 87 FR 41780, 41785 (July 13, 2022) (SR-NASDAQ-2022-
027) (order approving direct listing with a capital raise); 86314
(July 5, 2019), 84 FR 33102, 33110 (July 11, 2019) (SR-NASDAQ-2019-
009) (order approving revisions to initial listing standard
calculations related to liquidity).
\113\ See supra note 15. See also Securities Exchange Act
Release No. 86314 (July 5, 2019) 84 FR 33102, 33111 (July 11, 2019)
(stating that the proposal ``should allow the Exchange to more
accurately determine whether a security has adequate distribution
and liquidity and is thus suitable for listing and trading on the
Exchange'').
\114\ See supra notes 16-18.
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As described above, the proposal should provide greater
transparency and certainty with respect to the ability of, and the
manner in which, the Exchange is able to obtain information necessary
to meet its regulatory obligations and ensure fair and orderly markets
in connection with the listing of securities of a company applying for
initial listing on the Exchange with a transaction involving an
underwriter. Based on the above, the Commission finds that the proposed
rule change is reasonably designed, consistent with section 6(b)(5) of
the Act, among others, to prevent fraudulent and manipulative and
practices, promote just and equitable principles of trade, and, in
general, protect investors and the public interest.\115\
---------------------------------------------------------------------------
\115\ 15 U.S.C. 78f(b)(5).
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Finally, as is described above, the Exchange has proposed to apply
Equity 7, Section 10 to Limited Underwriting Members, as this section
includes the membership and application fees applicable to Limited
Underwriting Members.\116\ The Exchange has proposed 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 have no direct trading rights on the Exchange.\117\ Limited
Underwriting Members would be subject to same $2,000 application fee
(per Equity 7, Section 10(b)) and $4,000 yearly membership fee (per
Equity 7, Section 10(a)) as other Members are currently charged.\118\
The Commission believes that the proposed fees applicable to Limited
Underwriting Members, in addition to the exclusion of the member
trading fee, is consistent with Section 6(b)(4) in that it provides for
the equitable allocation of reasonable dues, fees, and other charges
among its members.\119\
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\116\ See supra note 25.
\117\ See supra notes 25-26.
\118\ See supra note 27.
\119\ 15 U.S.C. 78f(b)(4). The Exchange has also proposed to
delay implementation of its proposal until sixty days after
publication of the Commission's approval order of the filing
discussed herein. See supra note 67. This appears to be reasonable
to allow underwriters representing companies that have applied, or
about to apply, to list to become a Limited Underwriting Member or
Member if not already a Member or in the alternative allow a company
to select an alternative underwriter if such underwriter firm
chooses not to become a Limited Underwriting Member or Member.
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For the forgoing reasons, the Commission finds that the proposed
rule change, as modified by Amendment Nos. 2 and 3, is consistent with
the Act.
IV. Solicitation of Comments on Amendment No. 3 to the Proposed Rule
Change
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether Amendment No. 3
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,
[[Page 21636]]
Washington, DC 20549 on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of the Exchange. 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 April 18, 2024.
V. Accelerated Approval of the Proposed Rule Change, as Modified by
Amendment Nos. 2 and 3
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment Nos. 2 and 3, prior to the thirtieth
day after the date of publication of notice of the filing of Amendment
Nos. 2 and 3 in the Federal Register. In Amendment No. 2, the Exchange
amended the proposal to, among other things, (i) exclude Section 1032
of General 3, a new provision, from the rules the Exchange proposes to
apply to Limited Underwriting Members under General 3, Section 1031(c);
(ii) add General 9, Section 21 to the rules the Exchange proposes to
apply to Limited Underwriting Members under General 3, Section 1031(c);
(iii) update existing rule language in Equity 7, Section 10 to reflect
changes in current text; (iv) remove a proposed exemption from
registration for certain banking representatives associated with
Limited Underwriting Members; and (v) add language to General 3,
Section 1031(c)(2) to clarify that associated persons of Limited
Underwriting Members shall at all times be properly qualified and
registered under FINRA rules.\120\ Amendment No. 2 also made some
numbering updates, provided additional rationale for the inclusion and
exclusion of certain rules, and provided additional language in the
statutory basis.\121\ Amendment No. 2 was published for comment in the
Federal Register and no comments were received.\122\
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\120\ See supra note 9.
\121\ See id. Amendment No. 2 also removed proposed rule
language from proposed General 3, Section 1032(a), which provided
that any person shall be eligible to become an associated persons of
a Limited Underwriting Member, and removed General 4 from the list
of rules applicable to Limited Underwriting Members in proposed
General 3, General 1031(c)(1). As discussed below, these provisions
were put back into the proposal in Amendment No. 3. Additionally,
some of the changes described in Amendment No. 2 were originally
proposed in Amendment No. 1 but included in Amendment No. 2 since
Amendment No. 2 superseded Amendment No. 1. See supra notes 8 and
11.
\122\ See supra note 11. The Commission notes that the full 21-
day comment period has already ended.
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In its Amendment No. 3, the Exchange added back proposed rule
language to General 3, Section 1032(a)(2) that was in the original
proposal about the eligibility of any person to become an associated
person of a Limited Underwriting Member, except such persons as are
excluded under General 3, Rule 1002(b).\123\ In Amendment No. 3, the
Exchange also provided additional language on the consistency of
General 3, Section 1032(a)(1) and (a)(2) with the requirements of
section 6(b)(2) of the Act.\124\ In Amendment No. 3, the Exchange also
amended the proposal to add General 4 (Registration Requirements) back
into the list of rules that a Limited Underwriting Member and their
associated persons must comply with, as originally proposed.\125\ The
proposed rule language changes to the proposal, as described above, are
identical to provisions that were in the original proposal and
published for comment.\126\ No comments were received in response to
that Notice. Amendment No. 3 also excluded General 5, Rule 9400 from
the list of rules that Limited Underwriting Members must comply with
because that rule relates to expedited procedures for certain trading
activity and Limited Underwriting Members have no trading rights on the
Exchange.\127\ Amendment No. 3 also provided updates and other
clarifying changes to, and justification for, the proposed rule change
in addition to adding the provisions described above.\128\
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\123\ See supra note 28.
\124\ See Amendment No. 3, supra note 12, at 12-13.
\125\ See supra notes 35 and 46.
\126\ See Notice, supra note 3. As noted above, these provisions
were removed from the proposal in Amendment No. 2. See Amendment No.
2, supra note 11.
\127\ See supra note 51.
\128\ See Amendment No. 3, supra note 12.
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The Commission believes Amendment Nos. 2 and 3 will help to
strengthen the Exchange proposal and support its consistency with the
Act. Amendment Nos. 2 and 3 assist the Commission in evaluating the
Exchange's proposal and in determining that it is consistent with the
Act. Amendment Nos. 2 and 3 also have raised no new or novel issues.
Accordingly, the Commission finds good cause, pursuant to section
19(b)(2) of the Act,\129\ to approve the proposed rule change, as
modified by Amendment Nos. 2 and 3, on an accelerated basis.
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\129\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\130\ that the proposed rule change (SR-NASDAQ-2023-022), as
modified by Amendment Nos. 2 and 3, be, and hereby is, approved on an
accelerated basis.
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\130\ Id.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\131\
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\131\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-06579 Filed 3-27-24; 8:45 am]
BILLING CODE 8011-01-P
