[Federal Register Volume 83, Number 63 (Monday, April 2, 2018)]
[Notices]
[Pages 14074-14096]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-06568]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-82948; File No. SR-IEX-2018-06]
Self-Regulatory Organizations; Investors Exchange LLC; Notice of
Filing of Proposed Rule Change To Establish a New Optional Listing
Category on the Exchange, ``LTSE Listings on IEX''
March 27, 2018.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act''),\2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on March 15, 2018, the Investors Exchange LLC (``IEX'' or
the ``Exchange'') filed with the Securities and Exchange Commission
(the ``SEC'' or ``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.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Pursuant to the provisions of Section 19(b)(1) under the Act of
1934,\4\ and Rule 19b-4 thereunder,\5\ IEX is filing with the
Commission a proposed rule change to establish a new optional listing
category on the Exchange, which provides a differentiated choice for
issuers and investors that prefer listing standards explicitly designed
to promote long-term value creation. The text of the proposed rule
change is available at the Exchange's website at www.iextrading.com, at
the principal office of the Exchange, and at the Commission's Public
Reference Room.
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\4\ 15 U.S.C. 78s(b)(1).
\5\ 17 CFR 240.19b-4.
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II. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of and basis for the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
has prepared summaries, set forth in Sections A, B, and C below, of the
most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
(1) Overview
On June 17, 2016, the Commission granted the Exchange's application
for registration as a national securities exchange under Section 6 of
the Act,\6\ including approval of rules applicable to the
qualification, listing and delisting of companies on the Exchange. The
Exchange has since adopted additional rules to create a listing venue
to provide a new alternative for companies seeking to list their
securities for trading on a registered national securities exchange.\7\
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\6\ 15 U.S.C. 78f.
\7\ See, e.g., Securities Exchange Act Release No. 80453 (April
13, 2017), 82 FR 18507 (April 19, 2017); Securities Exchange Act
Release No. 81316 (August 4, 2017), 82 FR 37474 (August 10, 2017);
Securities Exchange Act Release No. 80905 (June 12, 2017), 82 FR
27748 (June 16, 2017).
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The Exchange is proposing to adopt rules to facilitate the creation
of a new optional listing category on the Exchange for common equity
securities, referred to as the ``LTSE Listings on IEX'' or ``LTSE
Listings.'' The proposed rules for LTSE Listings, to be contained in
new Chapter 14A of the Exchange's rules (the ``LTSE Listings Rules''),
were initially developed by LTSE Holdings, Inc. (together with its
affiliates, ``LTSE''), and provide a differentiated choice for issuers
and investors that prefer listing standards explicitly designed to
promote long-term value creation. The Exchange understands that LTSE
anticipates separately registering a subsidiary as a national
securities exchange in the future, but has entered into an arrangement
with the Exchange in order to make the LTSE Listings Rules available to
potential interested companies in advance of its own subsidiary's
registration as a national securities exchange.
Becoming subject to the LTSE Listings Rules would be an optional
election. Companies listed on the Exchange that do not elect to be
subject to the LTSE Listings Rules would not be required to comply with
Chapter 14A. However, companies that list on LTSE Listings (``LTSE
Listings Issuers'') would be subject to the LTSE Listings Rules, as
well as the quantitative listing requirements set forth in IEX Rule
Series 14.300, and all other applicable listing rules of the Exchange
set forth in Chapter 14 of the IEX Rulebook, except
[[Page 14075]]
as they may be specifically modified for LTSE Listings Issuers.
At this time, the Exchange is limiting the availability of LTSE
Listings to companies seeking to list on LTSE Listings concurrently
with their initial public offering (whether listing on LTSE Listings
only or dually listing on LTSE Listings and another national securities
exchange). The Exchange would not permit issuers already listed on
another national securities exchange to transfer to LTSE Listings.
The Exchange believes that the new LTSE Listings category will
introduce a differentiated choice for issuers and investors that prefer
listing standards explicitly designed to promote long-term value
creation, potentially enhancing opportunities for capital formation, as
well as contributing to greater competition for listings among national
securities exchanges. At the same time, as LTSE Listings will be an
entirely optional listing category, the introduction of LTSE Listings
will not impact companies that elect to list on the Exchange under its
existing listing rules.
(2) Background
(A) Concerns about Short-Termism in the Markets
Many academics, commentators, market participants,\8\ as well as
certain current and former members of the Commission \9\ have voiced
concerns regarding so-called ``short-termism'' and the risk that some
investors' focus on short-term results could put pressure on companies
to sacrifice long-term value creation in order to reach quarterly or
other short-term expectations.
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\8\ See, e.g., McKinsey & Company, McKinsey Global Institute,
Measuring the Economic Impact of Short-Termism (February 2017),
available at http://www.mckinsey.com/~/media/mckinsey/
global%20themes/long%20term%20capitalism/
where%20companies%20with%20a%20long%20term%20view%20outperform%20thei
r%20peers/measuring-the-economic-impact-of-short-termism.ashx (``Our
findings show that companies we classify as `long term' outperform
their shorter-term peers on a range of key economic and financial
metrics.''); Aspen Institute, American Prosperity Project (December
2016), available at https://assets.aspeninstitute.org/content/uploads/2017/01/American-Prosperity-Project_Policy-Framework_FINAL-1.3.17.pdf (``Perverse incentives in our corporate governance system
undermine the health of capitalism itself. Short-termism is baked
into our tax system and is evident in the decisions, regulations and
rules that govern corporations and capital markets. Changes to the
rules of the game are a necessary step to rebuild the public's trust
in our economic system.''); Martin Lipton, The New Paradigm (January
11, 2017), available at http://www.wlrk.com/docs/thenewparadigm.pdf
(``The economic impact of a short-term myopic approach to managing
and investing in businesses has become abundantly clear and has been
generating rising levels of concern across a broad spectrum of
stakeholders, including corporations, investors, policymakers and
academics. The proposition that short-term financial activists and
reactive corporate behavior spur sustainable improvements in
corporate performance, and thereby systemically increase rather than
undermine long-term economic prosperity and social welfare, has been
overwhelmingly disproved by the real world experience of corporate
decision-makers as well as a growing body of academic research.'');
Chief Justice Leo Strine, Who Bleeds When the Wolves Bite? A Flesh-
and-Blood Perspective on Hedge Fund Activism and Our Strange
Corporate Governance System (April 2017), available at https://ssrn.com/abstract=2921901 (``Rather, human investors would see great
benefit from reforms encouraging the agents responsible for their
money to adopt the long-term horizon held by their principals, i.e.,
human investors.''); Travis Baratko, A Times-Mirror Conversation
With Sen. Mark Warner, The Loudoun Times-Mirror (July 27, 2015),
available at http://www.loudountimes.com/news/article/a_loudoun_times_mirror_conversation_with_sen._mark_warner432
(quoting Senator Mark Warner as noting that ``[P]eople being
investors who are only focused on short-termism, too often you can
squeeze a quarterly profit out at the expense of a long-term value
proposition.'').
\9\ See, e.g., Jay Clayton, Hearing before the Senate Banking
Committee on the Nomination of Jay Clayton, of New York, to be a
Member of the Securities and Exchange Commission (March 23, 2017),
available at https://www.gpo.gov/fdsys/pkg/CHRG-115shrg24998/html/CHRG-115shrg24998.htm (``In my experience, certain companies view
the operational and other pressures inherent in quarterly earnings
as costly, including because they detract from long-term planning
and strategic initiatives''); Commissioner Daniel M. Gallagher,
Activism, Short-Termism, and the SEC: Remarks at the 21st Annual
Stanford Directors' College (June 23, 2015), available at https://www.sec.gov/news/speech/activism-short-termism-and-the-sec.html
(``[T]here seems to be a predominance of short-term thinking at the
expense of long-term investing. Some activists are swooping in,
making a lot of noise, and demanding one of a number of ways to
drive a short-term pop in value: spinning off a profitable division,
beginning a share buy-back program, or slashing capital expenditures
or research and development expenses.''); Commissioner Kara M.
Stein, Toward Healthy Companies and a Stronger Economy: Remarks to
the U.S. Treasury Department's Corporate Women in Finance Symposium
(April 30, 2015), available at https://www.sec.gov/news/speech/stein-toward-healthy-companies.html (``The heart of the argument is
that short-term pressures from certain investors, and markets in
general, compel companies to look narrowly at the short-term. As a
result, companies become overly focused on meeting quarterly
earnings targets. . .To meet these demands, companies have to cut
back on capital expenditures, research and development, workforce
training, and other investments that lead to new innovation, higher
productivity, and future growth.'').
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Commenters have pointed to the dramatically declining average
amount of time that an investor holds a stock as evidence of a greater
short-term focus.\10\ Share turnover data suggests that investors held
stocks for an average of about eight years in 1960, compared with about
eight months in 2015.\11\ While a great deal of this turnover may be
attributable to the growth of high-frequency trading strategies (which
accounted for about 50% of all U.S. trade volume in 2016),\12\ more
traditional institutional investors have shown reduced holding periods
as well. A 2013 survey showed that 96% of institutional investors
executed round-trip trades that lasted less than one month, with 23% of
their trading volume relating to trades that are held for less than
three months.\13\
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\10\ See, e.g., Dominic Barton, Capitalism for the Long Term,
Harvard Business Review (March 2011), available at https://hbr.org/2011/03/capitalism-for-the-long-term; Tragedy of the Horizon
Project, The Long and Winding Road: How Long-Only Equity Managers
Turn Over Their Portfolios Every 1.7 Years (February 2017),
available at http://www.tragedyofthehorizon.com/The-Long-And-Winding-Road.pdf; Martin Cremers, Ankur Pareek and Zacharias
Sautner, Short-Term Investors, Long-Term Investments, and Firm Value
(March 14, 2017), available at https://ssrn.com/abstract=2720248;
Alana Semuels, How to Stop Short-Term Thinking at America's
Companies, The Atlantic (December 30, 2016), available at https://www.theatlantic.com/business/archive/2016/12/short-term-thinking/511874; Roger L. Martin, Yes, Short-Termism Really is a Problem,
Harvard Business Review (October 9, 2015), available at https://hbr.org/2015/10/yes-short-termism-really-is-a-problem.
\11\ New York Stock Exchange, Annual Reported Volume, Turnover
Rate, Reported Trades (2004), available at http://www.nyxdata.com/nysedata/asp/factbook/viewer_edition.asp?mode=table&key=2206&category=4; World Bank,
Stocks Traded, Turnover Ratio of Domestic Shares (2015), available
at https://data.worldbank.org/indicator/CM.MKT.TRNR?end=2015&locations=US&start=1975 (hereinafter ``Turnover
Ratio of Domestic Shares'').
\12\ Ana Avramovic, Credit Suisse Market Commentary: We're All
High-Frequency Traders Now (March 15, 2017), available at https://edge.credit-suisse.com/edge/Public/Bulletin/Servefile.aspx?FileID=28410&m=-1290757752.
\13\ Bidisha Chakrabarty, Pamela C. Moulton and Charles
Trzcinka, Institutional Holding Periods (April 29, 2013), available
at https://scholarship.sha.cornell.edu/cgi/viewcontent.cgi?article=1001&context=conf.
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Some commenters believe that current public market dynamics subject
public companies to intense pressure to meet quarterly performance
targets, resulting in negative consequences for long-term value
creation.\14\ One study found that 80% of chief financial officers of
public companies acknowledge that they would forego long-term value
creation initiatives like research and development in order to avoid
missing quarterly targets.\15\ Further, a 2013
[[Page 14076]]
study found that companies projected to just miss their earnings per
share (``EPS'') forecasts by a few cents are significantly more likely
to repurchase shares than companies that beat their EPS forecasts by a
few cents, suggesting efforts to increase EPS through financial
engineering rather than growth.\16\ At the same time, this study found
that in the calendar year following repurchases, these same companies
decreased their number of employees, investment in research and
development, and capital expenditures, which the study authors found
suggests that these companies may have been willing to forego
investment in long-term growth in order to meet short-term financial
targets.\17\
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\14\ McKinsey Global Institute, Measuring the Economic Impact of
Short-Termism (February 2017), available at http://www.mckinsey.com/
~/media/mckinsey/global%20themes/long%20term%20capitalism/
where%20companies%20with%20a%20long%20term%20view%20outperform%20thei
r%20peers/measuring-the-economic-impact-of-short-termism.ashx. C.f.
James B. Stewart, Amazon Says Long Term And Means It, N.Y. Times
(December 16, 2011) (noting Amazon.com's willingness to invest in
long-term initiatives notwithstanding the impact on its short-term
quarterly earnings).
\15\ John R. Graham, Campbell R. Harvey, Shiva Rajgopal, Value
Destruction and Financial Reporting Decisions (September 6, 2006),
available at https://www0.gsb.columbia.edu/mygsb/faculty/research/pubfiles/12924/Rajgopal_value.pdf (``80% of survey participants
report that they would decrease discretionary spending on R&D,
advertising and maintenance to meet an earnings target'').
\16\ Heitor Almeida, Vyacheslav Fos, Mathias Kronlund, The Real
Effects of Share Repurchases (June 8, 2015), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2276156.
\17\ Id.
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The greater focus on short-term financial performance noted by
these commenters also coincides with a reduction in the number of
private companies seeking to undertake initial public offerings
(``IPOs'') and list their shares on the U.S. public markets. From 2001
through 2016, the U.S. averaged approximately one-third of the IPOs per
year than it did each year between 1998 and 2000.\18\ Calendar year
2016 had the fewest number of IPOs since the financial crisis years of
2008 and 2009,\19\ although there was a relative increase in 2017.\20\
The total number of listed companies in the United States also fell by
almost 50% in the twenty year period from 1996 through 2016, down from
over 8,000 companies listed on U.S. exchanges in 1996 to 4,333 in June
of 2016.\21\
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\18\ Jay R. Ritter, Initial Public Offerings: Updated Statistics
(August 8, 2017), available at https://site.warrington.ufl.edu/ritter/files/2017/08/IPOs2016Statistics.pdf.
\19\ Id.
\20\ Ernst & Young, Global IPO Trends: Q3 2017 (2017), available
at http://www.ey.com/Publication/vwLUAssets/ey-global-ipo-trends-q3-
2017/$FILE/ey-global-ipo-trends-q3-2017.pdf (noting 111 IPOs in the
U.S. through the third quarter of 2017, a 35% increase year-over-
year).
\21\ See U.S. Dept. of the Treasury, A Financial System that
Creates Economic Opportunities: Capital Markets at p. 21 (October
2017), available at https://www.treasury.gov/press-center/press-releases/Documents/A-Financial-System-Capital-Markets-FINAL-FINAL.pdf.
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This decline is driven by fewer companies going public, existing
public companies going private or merging with other public companies,
and those companies that undertake an IPO doing so at a much later
stage. Between 1980 and 2000, companies that went public typically did
so about 7.6 years after founding.\22\ Since then, that timespan has
grown longer; between 2001 and 2016, the average age of a company at
its IPO was nearly 12 years.\23\
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\22\ Ritter, supra note 18.
\23\ Id.
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The Exchange believes that these trends have significant
consequences for companies, investors, and the economy as a whole. A
2011 report by the IPO Task Force reported that ``up to 22 million jobs
may have been lost'' as a result of the decline in IPOs.\24\ The trend
toward companies staying private also limits the investment
opportunities for ordinary investors,\25\ as most retail investors are
not ``accredited investors'' eligible to invest in private placements
pursuant to Rule 506 of Regulation D \26\ under the Securities Act of
1933.\27\ Although institutional investors may provide the investment
capital that these companies need, some have voiced concerns that
private markets lack the transparency, liquidity, price discovery, and
protections of the public marketplace.\28\
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\24\ IPO Task Force, Rebuilding the IPO On-Ramp (October 20,
2011), available at https://www.sec.gov/info/smallbus/acsec/rebuilding_the_ipo_on-ramp.pdf.
\25\ See U.S. Dept. of the Treasury, A Financial System that
Creates Economic Opportunities: Capital Markets at p. 27 (October
2017), available at https://www.treasury.gov/press-center/press-releases/Documents/A-Financial-System-Capital-Markets-FINAL-FINAL.pdf (``If a company decides not to go public and instead
raises capital in the private market or as an exempt offering, it
could be subject to investor qualification requirements and/or
offering limitations. This could result in the average investor
being deprived of an opportunity to consider investing in that
enterprise.'').
\26\ 17 CFR 230.506.
\27\ 15 U.S.C. 77a et seq.
\28\ Commissioner Kara M. Stein, Lighting our Capital Markets
(July 11, 2017), available at https://www.sec.gov/news/speech/stein-lighting-our-capital-markets-071117.
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Although there are a number of potential causes for the decline in
the number of IPOs and the number of public companies,\29\ some
commenters believe that the short-term pressures placed on public
companies have discouraged some newer companies from conducting initial
public offerings,\30\ and have led others to go private.\31\ Indeed,
even when newer companies do undertake an IPO, in recent years many
have sought to do so in a way that limits the public market's short-
term pressures, by retaining for the founders much of the voting
control.\32\
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\29\ Jay R. Ritter, Xiaohui Gao Bakshi, Zhu, Zhongyan, Where
Have All the IPOs Gone? (August 26, 2013), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1954788 (hypothesizing
that economies of scope make it more attractive for companies to
sell themselves to a larger organization than remain independent);
Elisabeth de Fontenay, The Deregulation of Private Capital and the
Decline of the Public Company, Duke Law School Public Law & Legal
Theory Series No. 2017-33 (April 11, 2017), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2951158 (suggesting that
the easing of regulation on private securities offerings and
transactions have decreased the incentive for firms to become
public); PwC, Considering an IPO? The costs of going and being
public may surprise you (September 2012), available at http://www.pwc.com/us/en/deals/publications/assets/pwc-cost-of-ipo.pdf
(discussing cost of initial IPO and remaining public); Michael J.
Mauboussin, The Incredible Shrinking Universe of Stocks, Credit
Suisse Global Financial Strategies (March 22, 2017), available at
https://research-doc.credit-suisse.com/docView?language=ENG&format=PDF&sourceid=em&document_id=1072753661&serialid=h%2B%2FwLdU%2FTIaitAx1rnamfYsPRAuTFRGdTSF4HZIvTkA%3D
(suggesting causes including regulatory compliance costs, increased
merger and acquisition activity, and availability of late-stage
venture capital).
\30\ Avi Steinlauf, The Case for Staying Private (and Why IPOs
Are Overrated), Inc., available at https://www.inc.com/avi-steinlauf/why-we-are-staying-private.html (arguing that public
companies are subject to ``short-term market players [that] have no
vested long-term interest'' in the company, while ``private
organizations can preserve their focus on what is truly best for the
organization's overall success''); Maureen Farrell, America's Roster
of Public Companies Is Shrinking Before Our Eyes, Wall Street
Journal (January 6, 2017), available at https://www.wsj.com/articles/americas-roster-of-public-companies-is-shrinking-before-our-eyes-1483545879 (citing University of Michigan Ross School of
Business professor Jerry Davis, who believes that ``[t]he dangers of
being a public company are really evident,'' among them, ``having an
investor base that clamors for short-term stock gains''); Jonathan
Macey, As IPOs Decline, the Market is Becoming More Elitist, L.A.
Times (January 10, 2017), available at http://www.latimes.com/opinion/op-ed/la-oe-macey-ipo-democracy-20170110-story.html (Op-Ed
by professor Macey noting, among other things, that ``[o]ne drawback
to going public is shareholders' sometimes excessive focus on short-
term stock price fluctuations'').
\31\ See, e.g., Michael Dell, Going Private is Paying Off for
Dell, Wall Street Journal (November 24, 2014) (``As a private
company, Dell now has the freedom to take a long-term view. No more
pulling R&D and growth investments to make in-quarter numbers . . .
No more trade-offs between what's best for a short-term return and
what's best for the long-term success of our customers'').
\32\ Wall Street Journal Business Blog, The Big Number (August
17, 2015), available at https://www.wsj.com/articles/the-big-number-1439865699; Ken Bertsch, Snap and the Rise of No-Vote Common Shares,
Harvard Law School Forum on Corporate Governance and Financial
Regulation (May 26, 2017), available at https://corpgov.law.harvard.edu/2017/05/26/snap-and-the-rise-of-no-vote-common-shares.
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(B) Listing Standards for Long-Term Focused Companies and Investors
The Exchange believes that companies should be able to maintain a
public listing on an exchange that provides a differentiated choice for
issuers and investors that prefer listing standards explicitly designed
to promote long-term value creation. While all companies that may list
on the Exchange can focus on long-term value creation, providing a
listing category with listing rules that address some of
[[Page 14077]]
the concerns regarding short-termism could encourage greater
participation in the public markets by long-term focused companies and
investors, potentially increasing the number of companies willing to
become public.
The Exchange understands that LTSE engaged in a multiyear effort to
develop the LTSE Listings Rules based on its analysis of academic
research, market experience, and input from a wide variety of long-term
focused stakeholders. The LTSE Listings Rules are designed to promote
the interests of companies that seek to focus on long-term value
creation as well as the transparency and governance concerns of long-
term focused investors. LTSE's analysis found that, although individual
stakeholders may favor or disfavor particular LTSE Listings Rules,
long-term focused companies and investors' concerns with particular
LTSE Listings Rules were offset by the benefits they saw from the
package of the LTSE Listings Rules as a whole.
The Exchange acknowledges that many, if not all, of the proposed
requirements contained in the LTSE Listings Rules could be undertaken
voluntarily by any company even in the absence of the LTSE Listings
category. However, the Exchange understands that many long-term focused
investors indicated to LTSE that they would view a company that
affirmatively chose to list on an exchange (or listing category
thereof) that required compliance with these rules, therefore
subjecting itself to compliance as a regulatory condition to continued
listing, as demonstrating a greater commitment to long-term focus than
one that voluntarily undertook to abide by similar practices, but could
readily choose to change its practices thereafter. In addition, because
an exchange, as a self-regulatory organization, is required to monitor
and enforce compliance with its rules,\33\ the Exchange believes that
long-term focused investors appreciate and have confidence in the
oversight that a national securities exchange provides to ensure that a
company complies with its exchange listing obligations. Similarly, the
Exchange understands that many long-term focused companies believe that
they would be better able to withstand short-term pressures if they
were subject to rules that explicitly required them to disclose actions
promoting a long-term focus. Further, rather than each company acting
independently, requiring investors to analyze each company's governance
separately, investors familiar with LTSE Listings would quickly know
the rules that apply to an LTSE Listings Issuer.
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\33\ See 15 U.S.C. 78s(g)(1)(A).
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The Exchange has entered into an arrangement with LTSE to authorize
the Exchange to make the LTSE Listings Rules available as a listing
category of the Exchange. Through extensive discussions, LTSE has
provided the Exchange with background information on the purpose of
each of the LTSE Listings Rules, with which the Exchange agrees. As a
result, statements herein that describe the Exchange's belief are
informed by information provided by LTSE. Although the LTSE Listings
Rules were developed by LTSE, the Exchange will retain full self-
regulatory responsibility for determining initial and continuing
compliance with the Exchange's listing standards, including for those
companies that elect to be subject to the LTSE Listings Rules. In
conducting its LTSE Listings business, IEX will retain, as its agents,
a small number of staff that also are employed by LTSE (the ``LTSE
Listings Agents''), but will not receive regulatory services from LTSE
itself. The sole responsibility of LTSE Listings Agents will be to
provide IEX with expertise in interpreting the LTSE Listings Rules and
assistance in conducting the LTSE Listings business, and their
involvement will not extend to other matters within the Exchange's
jurisdiction. The LTSE Listings Agents will be subject to the
Exchange's oversight and regulatory authority as the responsible self-
regulatory organization.\34\
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\34\ Notwithstanding the services provided by the LTSE Listings
Agents to the Exchange, all actions taken by the Exchange will
ultimately be based on the Exchange's determination that the action
is appropriate and consistent with the Act, the Commission's rules
thereunder and the Exchange's rules. Pursuant to the Exchange's
retention of LTSE Listings Agents, the LTSE Listings Agents will
provide certain advisory, marketing, public communications, and
sales services to IEX in connection with LTSE Listings. For example,
LTSE Listings Agents will evaluate issuers seeking to list on the
Exchange under the LTSE Listings Rules and will assist in monitoring
LTSE Listings Issuers for compliance with the LTSE Listing Rules.
The Exchange expects that the LTSE Chief Regulatory Officer will be
a LTSE Listings Agent (and other LTSE regulatory personnel that do
not have direct involvement in LTSE's commercial operations may also
be retained by the Exchange to serve as LTSE Listings Agents). At
all times, LTSE Listings Agents will be subject to the satisfaction
and the oversight of the Exchange's Chief Regulatory Officer, with
all actions proposed by LTSE Listings Agents subject to the
Exchange's regulatory authority. Separately, the Exchange will
permit LTSE to use and redistribute written marketing, public
communications, and sales materials concerning the LTSE Listings
business, subject to the Exchange's consent (not to be unreasonably
withheld). Further, the Exchange's arrangement with LTSE Listings
Agents is subject to important restrictions designed to protect the
Exchange's responsibilities as a self-regulatory organization and
the confidentiality of its books and records pertaining thereto.
First, each LTSE Listings Agent is considered to be an agent of the
Exchange in connection with performance of services under the
Exchange's arrangement with LTSE, pursuant to Article XI, Section 4
of the Amended and Restated Operating Agreement of Investors'
Exchange LLC. Thus, as appropriate, information pertaining to the
self-regulatory function of the Exchange may be made available to a
LTSE Listings Agent to the extent necessary or appropriate to
properly discharge the self-regulatory responsibilities of the
Exchange. However, pursuant to the Exchange's arrangement with LTSE,
the Exchange will not share confidential regulatory information with
LTSE (other than with LTSE regulatory personnel that are LTSE
Listings Agents and that do not have direct involvement in LTSE's
commercial operations). Additionally, LTSE has agreed that each LTSE
Listings Agent will be required to consent in writing to the
application to them of the following provisions, which are
consistent with Article VII of the Bylaws of IEX Group, Inc.: Non-
interference with, and due regard for, the Exchange's self-
regulatory function; confidentiality of the Exchange's books and
records pertaining to its self-regulatory function; maintenance of
books and records related to services under the Exchange's
arrangement with LTSE and services provided to the Exchange by LTSE
Listings Agents at a location within the United States; compliance
with the federal securities laws and the rules and regulations
promulgated thereunder and cooperation with the SEC in respect of
the SEC's oversight responsibilities regarding the Exchange and the
self-regulatory functions and responsibilities of the Exchange; and
consent to jurisdiction of the United States federal courts, the SEC
and the Exchange for purposes of any suit, action or proceeding
arising out of or relating to services provided to the Exchange and
the Exchange's arrangement with LTSE.
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(3) Proposed LTSE Listings Rules
The proposed LTSE Listings Rules that would apply to LTSE Listings
Issuers fall into five general categories: (i) Board of directors and
committee requirements, (ii) rules requiring supplemental long-term
disclosures, (iii) rules requiring long-term alignment of executive
compensation, (iv) rules requiring long-term shareholder voting
structure, and (v) certain other rules that further encourage LTSE
Listings Issuers to focus on long-term value creation. In addition, the
Exchange is proposing rules that would clarify the application of
certain existing Exchange rules to LTSE Listings Issuers.
(A) Board of Directors and Committee Requirements
The proposed LTSE Listings Rules would create new requirements for
the boards of directors and board committees of LTSE Listings Issuers
designed to align the board with the objectives of the LTSE Listings
Rules. Specifically, the LTSE Listings Rules would require each LTSE
Listings Issuer to establish a board committee dedicated to overseeing
the issuer's strategies for creating and sustaining long-term growth
and a committee dedicated to selecting or recommending qualified
director nominees. The LTSE Listings Rules would also impose
[[Page 14078]]
additional obligations on audit committees and compensation committees
designed to increase oversight and transparency, among other things.
These corporate governance requirements are discussed further below.
(i) Long-Term Strategy and Product Committee
Proposed Rule 14A.405(c)(1) would require that each LTSE Listings
Issuer's board of directors maintain a committee specifically dedicated
to overseeing the LTSE Listings Issuer's strategic plans for long-term
growth (the ``LTSP Committee''). Proposed Rule 14A.405(c)(3) would
require that an LTSE Listings Issuer adopt a formal written LTSP
Committee charter (and that the LTSP Committee will review and reassess
the adequacy of the charter on an annual basis) specifying, among other
things, the scope of the LTSP Committee's responsibilities, and how it
will carry out those responsibilities, including structure, processes
and membership requirements, and that the LTSP Committee must report
regularly to the board of directors. The requirement to report
regularly is intended to ensure that the board of directors has insight
into the LTSP Committee's work and input into the LTSE Listings
Issuer's strategic objectives.
Although LTSE Listings Issuers would have some flexibility in
designing their LTSP Committee, in order to ensure that adequate board
focus is placed on long-term strategy, proposed Rule 14A.405(c)(4)
would require that the LTSP Committee include a minimum of three
members of the board and that a majority of the LTSP Committee members
be independent. This majority independence requirement is intended to
mitigate potential conflicts of interest and ensure that outside
perspectives are brought into discussions and decisions regarding the
company's long-term strategy.
Proposed Rule 14A.405(c)(3)(C) would require that the LTSP
Committee's charter be made available on or through the LTSE Listings
Issuer's website. The Exchange believes that increased transparency
about the LTSP Committee's functions and policies is in the best
interest of investors, and companies that hold themselves to a set of
long-term standards should make such information available. The
Exchange notes that Item 407 of Regulation S-K \35\ requires that a
public company's audit, nominating and compensation committee charters
be either available to security holders on the company's website or as
an appendix to its proxy or information statement provided to security
holders at least once every three fiscal years, or if the charter has
been materially amended since the beginning of the company's last
fiscal year. The Exchange understands that many long-term focused
investors expect to be able to readily access corporate governance
information, such as board committee charters, on a company's website
rather than by searching through a company's SEC filings, and
accordingly the Exchange believes that it is appropriate to explicitly
impose this requirement.
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\35\ 17 CFR 229.407.
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Proposed Rule 14A.405(c)(2) would provide LTSE Listings Issuers
with additional flexibility by permitting the board of directors to
allocate the LTSP Committee's responsibilities to committees of their
own denomination, provided that the committee (i) is subject to a
formal written charter that satisfies the requirements of proposed Rule
14A.405(c)(3), including that such committee report regularly to the
board of directors, and (ii) complies with the committee composition
requirements set forth in proposed Rule 14A.405(c)(4). However,
proposed Rule 14A.405(c)(1) would prohibit the LTSP Committee from
assuming any roles or responsibilities that are required to be
undertaken by an LTSE Listings Issuer's independent board committees,
since the LTSP Committee is not required to be composed of all
independent directors.
(ii) Nominating/Corporate Governance Committee
IEX Rule 14.405(e)(1)(A) requires that director nominees may be
selected (or recommended for selection by the board of directors) by
either independent directors constituting a majority of the board's
independent directors or a nominations committee compromised solely of
independent directors. With respect to LTSE Listings Issuers, proposed
Rule 14A.405(d)(1) would require that director nominees must be
selected (or recommended for selection by the board of directors) by a
nominating/corporate governance committee comprised solely of
independent directors, rather than independent directors constituting a
majority of the board's independent directors. The Exchange believes
that, in view of the differentiated focus of the LTSE Listings
category, requiring LTSE Listings Issuers to maintain a separate,
independent nominating/corporate governance committee would better
facilitate selection of directors that are aligned with such focus. In
addition, another national securities exchange has a substantially
similar requirement, requiring that listed companies select director
nominees through a separate nominating committee composed entirely of
independent directors.\36\
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\36\ See NYSE Listed Company Manual, Rule 303A.04.
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Notwithstanding the requirement that the nominating/corporate
governance committee be comprised solely of independent directors,
proposed Rule 14A.405(d)(2) would provide that the nominating/corporate
governance committee may include a non-independent director if the
board, under exceptional and limited circumstances, determines that
such individual's membership on the committee is required by the best
interests of an LTSE Listings Issuer and its shareholders and certain
other conditions are satisfied. In addition, proposed Rule
14A.405(d)(3) would provide that exclusively independent director
oversight of director nominations shall not be required in cases where
the right to nominate a director legally belongs to a third party;
provided that an LTSE Listings Issuer would still be obligated to
comply with all committee composition requirements. These limited
exceptions are consistent with exceptions contained in the Exchange's
corresponding rules for companies other than LTSE Listings Issuers.\37\
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\37\ See IEX Rules 14.405(e)(3) and (4).
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IEX Rule 14.405(e)(5) provides that the requirements regarding
director nominations set forth in IEX Rule 14.405 do not apply if the
issuer is subject to a binding obligation that requires a director
nomination structure inconsistent with IEX Rule 14.405 and such
obligation pre-dates the approval of IEX Rule 14.405. Proposed Rule
14A.405(d)(4), however, would provide that LTSE Listings Issuers may
not rely on this exception. The Exchange believes that this provision,
which would permit a nomination process and board composition based on
a pre-existing obligation that pre-dates when the IEX rules were
approved, is inconsistent with the goal of allowing longer-term
shareholders to gain voting rights over time and the flexibility is
unnecessary given that the required timing for the pre-existing
obligation is so limited.
Proposed Rule 14A.405(d)(6)(A) would require that each LTSE
Listings Issuer adopt a formal written nominating/corporate governance
committee charter (and that the nominating/corporate governance
committee review and reassess the adequacy of the formal written
charter
[[Page 14079]]
on an annual basis) specifying, among other things, the scope of the
nominating/corporate governance committee's responsibilities, and how
it will carry out those responsibilities, including structure,
processes and membership requirements, and that the nominating/
corporate governance committee must report regularly to the board of
directors. The explicit requirement to report regularly is intended to
ensure that the board of directors has insight into the nominating/
corporate governance committee's work.
Proposed Rule 14A.405(d)(6)(B) would require that the nominating/
corporate governance committee's charter be made available on or
through an LTSE Listings Issuer's website. The Exchange believes that
increased transparency about the nominating/corporate governance
committee's functions and policies is in the best interest of long-term
investors, and companies that hold themselves to a set of long-term
standards should make such information available. The Exchange notes
that Item 407 of Regulation S-K \38\ requires that a public company's
nominating committee charter be either available to security holders on
the company's website or as an appendix to its proxy or information
statement provided to security holders at least once every three fiscal
years, or if the charter has been materially amended since the
beginning of the company's last fiscal year. The Exchange understands
that many long-term focused investors expect to be able to readily
access corporate governance information, such as board committee
charters, on a company's website rather than by searching through a
company's SEC filings, and accordingly the Exchange believes that it is
appropriate to explicitly impose this requirement.
---------------------------------------------------------------------------
\38\ 17 CFR 229.407.
---------------------------------------------------------------------------
Proposed Rule 14A.405(d)(5) would provide LTSE Listings Issuers
additional flexibility by permitting the board of directors to allocate
the nominating/corporate governance committee's responsibilities to
committees of their own denomination, provided that the committee is
comprised entirely of independent directors and that such committee is
subject to a formal written charter that satisfies the requirements of
proposed Rule 14A.405(d)(6), including that such committee report
regularly to the board of directors.
(iii) Additional Audit Committee and Compensation Committee
Requirements
As is the case with all issuers listed on the Exchange, LTSE
Listings Issuers are required to comply with the audit committee and
compensation committee requirements set forth in IEX Rules 14.405(c)
and (d). LTSE Listings Issuers, however, would additionally be required
to comply with audit committee and compensation committee requirements
set forth in proposed Rule 14A.405.
Specifically, under proposed Rules 14A.405(a) and 14A.405(b)(2),
the audit committee and compensation committee charters must specify
that each committee will report regularly to the board of directors.
While the Exchange believes that it is inherent in any public company's
board and committee organizational structure that board committees
report regularly to the board, in view of the focus of the LTSE
Listings category, the Exchange also believes it is appropriate to make
this requirement explicit for LTSE Listings Issuers. In addition, the
charters of each of the audit committee and compensation committee must
be made available on or through an LTSE Listings Issuer's website. The
Exchange notes that Item 407 of Regulation S-K \39\ under the
Securities Act of 1933 \40\ requires that a public company's audit and
compensation committee charters be either available to security holders
on the company's website or as an appendix to its proxy or information
statement provided to security holders at least once every three fiscal
years, or if the charter has been materially amended since the
beginning of the company's last fiscal year. The Exchange understands
that many long-term focused investors expect to be able to readily
access corporate governance information, such as board committee
charters, on a company's website rather than by searching through a
company's SEC filings, and accordingly the Exchange believes that it is
appropriate to explicitly impose this requirement. The Exchange further
notes that another national securities exchange requires companies
listed on their exchange to meet similar requirements with respect to
their audit committee and compensation committee.\41\
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\39\ 17 CFR 229.407.
\40\ 15 U.S.C. 77a et seq.
\41\ See NYSE Listed Company Manual, Rules 303A.05(b) and
303A.07(b).
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In addition to the foregoing charter requirements, proposed Rule
14A.405(b)(2)(A)(ii) would require that the compensation committee
charter specify that the compensation committee must adopt executive
compensation guidelines. Proposed requirements with respect to
executive compensation guidelines are described under ``Long-Term
Alignment of Executive Compensation'' below. Proposed Rule
14A.405(b)(1) would provide LTSE Listings Issuers additional
flexibility by permitting the board of directors to allocate the
compensation committee's responsibilities to committees of their own
denomination, provided that the committee is comprised entirely of
independent directors and that such committee is subject to a formal
written charter that satisfies the requirements of IEX Rule
14.405(d)(1) and proposed Rule 14A.405(b)(2), including that such
committee report regularly to the board of directors.
(iv) Corporate Governance Guidelines
Pursuant to proposed Rule 14A.409, each LTSE Listings Issuer would
be required to adopt and disclose corporate governance guidelines.
These corporate governance guidelines would be required to address
director qualification standards, director responsibilities, director
access to management, and director orientation and continuing
education, among other things. In view of the differentiated focus of
the LTSE Listings category, the Exchange believes that increased
disclosure about the company's approach to corporate governance through
the adoption and disclosure of corporate governance guidelines is
appropriate for LTSE Listings Issuers. In addition, the Exchange notes
that the proposed corporate governance guideline requirements are
similar to the requirements imposed by the listing rules of another
national securities exchange.\42\
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\42\ See NYSE Listed Company Manual, Rule 303A.09.
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Although proposed Rule 14A.409 would generally track the New York
Stock Exchange's (``NYSE'') corporate governance guidelines
requirements, the LTSE Listings Rules would deviate from these
requirements in certain respects. Specifically, proposed Rule
14A.409(a)(4) would require that a significant portion--no less than
40%--of director compensation be paid in stock-based compensation tied
to long-term periods. An LTSE Listings Issuer would be required to
disclose in its corporate governance guidelines what it considers to be
``long-term'' for this purpose. In addition, this proposed rule would
require that LTSE Listings Issuers adopt director stock ownership
guidelines, which must include minimum ownership requirements that can
be met over the length of board service. These provisions are designed
to ensure that LTSE Listings Issuers
[[Page 14080]]
incentivize directors to focus on the long-term, but also provide LTSE
Listings Issuers with flexibility to design their own plans for
director compensation. In addition, the Exchange does not believe that
these requirements would impose a significant burden on LTSE Listings
Issuers, as the Exchange believes that issuers have already trended
toward having equity represent a large portion of director
compensation.\43\ Proposed Rule 14A.409(a)(4) would also provide that
LTSE Listings Issuers consider other means of aligning director
compensation with long-term strategies, including deferred share
delivery, vesting periods or similar measures.
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\43\ See Yaron Nili, Trends in Board of Director Compensation,
HLS Forum on Corporate Governance and Financial Regulation (April
13, 2015), available at https://corpgov.law.harvard.edu/2015/04/13/trends-in-board-of-director-compensation.
---------------------------------------------------------------------------
(B) Long-Term Strategy and Product Disclosures
The Exchange understands that LTSE's analysis indicated that long-
term investors generally value information regarding a company's long-
term plans and objectives, that may not otherwise be required to be
disclosed. In particular, this information could (i) provide long-term
investors with greater information upon which to evaluate a company's
progress toward long-term goals and (ii) allow companies to be
evaluated based on whether they are making prudent management and
strategic decisions that investors believe enhance long-term growth.
The proposed LTSE Listings Rules would therefore require--in addition
to and separate from all disclosures required under applicable
securities laws, the Commission's rules and the Exchange's other
rules--that LTSE Listings Issuers provide certain supplemental
disclosures regarding an LTSE Listings Issuer's long-term strategy and
products (the ``LTSP Disclosures'').\44\ The LTSP Disclosure
requirements are supplemental to and would not supersede or impact
other disclosure obligations. The LTSP Disclosures would be subject to
all securities law requirements just as other public company
disclosures. Proposed Rule 14A.207(a) would remind LTSE Listings
Issuers that all disclosures must comply with applicable law and
Commission rules and regulations, including rules and regulations
pertaining to the use and reconciliation of non-GAAP financial measures
and any securities law obligations regarding updating or correcting
prior public statements or disclosures.
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\44\ An LTSE Listings Issuer would be required to include its
LTSP Disclosures in its Annual Report Supplement. See infra Section
II.A.1.(3)(B)(v) (Location and Manner of LTSP Disclosures).
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(i) Disclosure of Long-Term Growth Strategy
Proposed Rule 14A.207(c) would require each LTSE Listings Issuer to
include in its LTSP Disclosures a discussion of the company's ``Long-
Term Growth Strategy.'' Long-Term Growth Strategy would be defined for
these purposes as ``the strategy, as determined by management and the
board of directors and approved by the LTSP Committee, that is focused
on achieving long-term growth.'' \45\ This requirement is designed to
increase transparency for shareholders on the strategic goals of the
company's managers and provide for greater alignment and accountability
between a company's long-term vision and investor expectations. By
disclosing a Long-Term Growth Strategy, managers have the opportunity
to explain to shareholders the long-term goals and objectives specific
to their company, and then be held responsible for achieving those
objectives. While the disclosure of the Long-Term Growth Strategy must
include the information described below, an LTSE Listings Issuer is
otherwise free to design its Long-Term Growth Strategy with the
explicit oversight and approval of its LTSP Committee.
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\45\ See proposed Rule 14A.002(a)(11).
---------------------------------------------------------------------------
Proposed Rule 14A.207(c)(1)(A) would require that each Long-Term
Growth Strategy disclosure describe how the LTSE Listings Issuer
defines ``long-term'' for purposes of its Long-Term Growth Strategy and
how it made this determination.\46\ Under proposed Rule
14A.207(c)(1)(B), LTSE Listings Issuers would be required to include in
the Long-Term Growth Strategy disclosure a discussion of the ``Leading
Indicators'' that the company uses to measure its progress toward its
long-term goals. ``Leading Indicators'' are defined as those
quantitative metrics, either financial or non-financial, that an LTSE
Listings Issuer's management uses to help it forecast revenue, profit,
or other common after-the-event measures of long-term success.\47\ By
way of example, a biotech company may use as a Leading Indicator the
number of patents it has obtained. A media company, on the other hand,
may prefer to use as a Leading Indicator the number of page views or ad
clicks its website has received.
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\46\ The Exchange understands that LTSE Listings Issuers in
different industries may have different definitions of ``long-
term.'' For example, a pharmaceutical company that must spend years
researching and testing the efficacy of a proposed new drug may have
a much longer definition of ``long-term'' than a clothing retailer.
\47\ See proposed Rule 14A.002(a)(10).
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LTSE Listings Issuers must also discuss key milestones that the
LTSE Listings Issuer aims to achieve with respect to its Leading
Indicators and must report on the progress the LTSE Listings Issuer has
made in achieving these key milestones. The LTSP Disclosures require
use of Leading Indicators and key milestones so that companies may
define and share with investors those long-term metrics that the
company itself views as critical to measuring its success, providing
investors insight into the company's internal analysis and allowing
investors to consider the company's progress towards these long-term
goals.
Proposed Rule 14A.207(c)(1)(C) would require that each Long-Term
Growth Strategy disclosure include a discussion of any changes to an
LTSE Listings Issuer's Long-Term Growth Strategy since its last
publication, including changes to Leading Indicators and/or key
milestones. An LTSE Listings Issuer's Long-Term Growth Strategy may
evolve as its business develops and new goals are created or changed.
This disclosure requirement would provide greater transparency by
ensuring that long-term investors are made aware of any such changes to
the issuer's Long-Term Growth Strategy and are able to measure an LTSE
Listings Issuer's progress toward these goals.
Pursuant to proposed Rule 14A.207(c)(2), the Long-Term Growth
Strategy must include details relating to different businesses of the
LTSE Listings Issuer if the information is material to the overall
strategy. The purpose of this proposed rule is to account for the fact
that issuers may have diverse businesses with different strategic
objectives. For example, a company may operate in multiple industries
or have products tailored to different markets. This rule requires LTSE
Listings Issuers to provide information relating to different
strategies if such information is material to the broader long-term
strategy.
While transparency into long-term strategy is an important goal and
critical for long-term focused investors, in certain situations the
Exchange understands that public disclosure of this information could
risk competitive harm to the company. In these limited situations,
proposed Rule 14A.207(c)(3) would provide an exemption. Specifically,
if an LTSE Listings Issuer's LTSP Committee makes a determination that
disclosure of any aspect of the LTSE Listings Issuer's Long-Term
[[Page 14081]]
Growth Strategy would be ``reasonably likely to result in material
harm'' to the company's competitive position, the LTSE Listings Issuer
could exclude such information from its LTSP Disclosures, so long as
the LTSE Listings Issuer complies with all applicable securities
laws.\48\ Any such determination would be required to be documented by
the LTSP Committee and made in accordance with its fiduciary duties. In
addition, proposed Rule 14A.405(c)(3)(B)(iv) would require that an LTSE
Listings Issuer's LTSP Committee develop and disclose in its charter a
process for making this determination and for determining that
withholding the disclosure would not contravene any applicable
securities laws. In order to ensure that investors are aware that the
LTSP Disclosures of an LTSE Listings Issuer relying on this exemption
are incomplete, proposed Rule 14A.207(c)(3) would require that such an
LTSE Listings Issuer disclose in its LTSP Disclosures that it is
withholding certain information as a result of competitive concerns. To
ensure that investors have the opportunity to assess the judgment of
the LTSP Committee regarding the withholding of competitive
information, upon the time that any withheld information is no longer
competitively sensitive, proposed Rule 14A.207(c)(3) would require that
an LTSE Listings Issuer disclose that information in its LTSP
Disclosures, even though this information may no longer be relevant to
its current Long-Term Growth Strategy.
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\48\ This proposed requirement has the same objective as
Instruction 4 of Item 402(b) of Regulation S-K, which provides that
an SEC reporting company is not required to disclose in SEC filings
certain information regarding compensation ``involving confidential
trade secrets or confidential commercial or financial information,
the disclosure of which would result in competitive harm for the
registrant.'' See also Question 118.04 of Regulation S-K Questions
and Answers of General Applicability (September 21, 2017), available
at https://www.sec.gov/divisions/corpfin/guidance/regs-kinterp.htm.
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(ii) Disclosure Related to Buybacks
As noted above,\49\ particular concern has been raised regarding
the risk that some companies pressured to meet short-term goals may
spend cash to repurchase their own shares rather than on making long-
term investments. As a result, the Exchange believes that some long-
term investors are particularly interested in enhanced disclosure
regarding companies' share repurchase activity. Proposed Rule
14A.207(d) would therefore require that each LTSE Listings Issuer
disclose certain information relating to ``Buybacks'' or issuer
repurchases in addition to those required to be disclosed pursuant to
Item 703 of Regulation S-K \50\ under the Securities Act of 1933.\51\
Specifically, under proposed Rule 14A.207(d) each LTSE Listings Issuer
would be required to disclose in its LTSP Disclosures its ``EPS Net of
Buybacks,'' defined in proposed LTSE Listings Rule 14A.002(a)(6) as the
quotient calculated by dividing (i) net income (as reported in the LTSE
Listings Issuer's financial statements in its most recent Annual
Report) by (ii) the sum of outstanding shares and shares that were
subject to a Buyback during the prior fiscal year. This disclosure
requirement is designed to provide investors with transparency into the
impact of Buybacks on a company earnings per share for any particular
period, i.e., by indicating what the company's earnings-per-share would
have been had the company not engaged in repurchases.
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\49\ See supra notes 16-17 and accompanying text.
\50\ 17 CFR 229.703.
\51\ 15 U.S.C. 77a et seq.
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(iii) Disclosure Related to Human Capital Investment
Proposed Rule 14A.207(e) would require that each LTSE Listings
Issuer disclose in its LTSP Disclosures the extent to which the LTSE
Listings Issuer's selling, general and administrative expenses
(``SG&A'') (as reported in the LTSE Listings Issuer's most recent
Annual Report) \52\ consisted of ``Human Capital Investment.'' For
these purposes, ``Human Capital Investment'' refers to the aggregate
amount an LTSE Listings Issuer spends on formal training of workers in
new skills to improve job performance, including, among other things,
fees or expenses related to personnel hired or retained to train
employees, training materials, tuition assistance and continuing
education or similar programs.
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\52\ ``Annual Report'' is defined in Proposed Rule 14A.002(a)(1)
as ``consistent with IEX Rule 14.207(d), the annual report made
available to Shareholders containing audited financial statements of
the LTSE Listings Issuer and its subsidiaries (which, for example,
may be on Form 10-K, 20-F, 40-F or N-CSR) within a reasonable period
of time following the filing of the annual report with the
Commission.''
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Each LTSE Listings Issuer must also disclose the amount spent on
Human Capital Investment per full-time equivalent employee. The
Exchange understands that long-term investors generally are interested
in this metric, and the disclosure requirement is thus designed to
enable long-term investors to conduct a comparative analysis of Human
Capital Investment per employee across LTSE Listings Issuers of
different sizes.
The costs related to Human Capital Investment are generally
accounted for within SG&A, and therefore considered an expense rather
than an investment. The Exchange understands that long-term focused
investors and companies believe that it is in the long-term interest of
companies to make investments in their workforce to retain them and
improve their skills. Although, as an accounting matter, these may be
viewed as a short-term costs, the Exchange believes that long-term
focused investors value information regarding the extent to which
companies are making investments in the long-term development and
success of its employees.
(iv) Disclosure Related to Research and Development
The Exchange understands that investments in research and
development (``R&D'') are generally considered long-term investments
for companies. LTSE's analysis indicated that additional data on R&D
investment is particularly sought after by long-term focused investors.
Therefore, proposed Rule 14A.207(f) would require that each LTSE
Listings Issuer disclose in its LTSP Disclosures the amount of R&D
spending that is short-term focused and the amount that is long-term
focused. This requirement is intended to provide investors with greater
transparency into an LTSE Listings Issuer's planning and goals around
R&D programs, particularly in light of the risk that a company may
under-invest in R&D in order to meet shorter-term financial metrics.
Because each company and industry differs in its definition of long-
term and short-term time horizons, proposed Rule 14A.207(f) provides
flexibility by allowing LTSE Listings Issuers to determine their own
definitions of short-term and long-term R&D programs, provided that an
LTSE Listings Issuer disclose the definitions used and the process by
which they determined them.
(v) Location and Manner of LTSP Disclosures
Proposed Rule 14A.207(b) would require an LTSE Listings Issuer to
make its LTSP Disclosures publicly available pursuant to a supplement
to the LTSE Listings Issuer's Annual Report (an ``Annual Report
Supplement''). The Annual Report Supplement must be distributed to
shareholders along with, and in the same manner as, the LTSE Listings
Issuer's Annual Report. In addition, an LTSE Listings Issuer would
[[Page 14082]]
be required to make the Annual Report Supplement available on or
through its website and include a statement in its Annual Report that
the LTSP Disclosures are available in the Annual Report Supplement and
provide the website address. These requirements are designed to
facilitate transparency and ensure that shareholders are aware of and
able to access an LTSE Listings Issuer's LTSP Disclosures. LTSE
Listings Issuers would also be required to notify IEX Regulation \53\
once its Annual Report Supplement has been made publicly available on
its website. This requirement is designed to help the Exchange monitor
for compliance with the LTSP Disclosure requirements.
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\53\ IEX Regulation is the department of the Exchange or
designated employees of the Exchange that supervise, administer, or
perform the regulatory functions of the Exchange, including the
administration of any regulatory services agreements with another
self-regulatory organization to which the Exchange is a party. See
IEX Rule 1.160(q).
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(vi) Review by LTSP Committee
Pursuant to proposed Rule 14A.207(b), the LTSP Disclosures would be
required to be reviewed and approved by the LTSP Committee on at least
an annual basis. Based on its review, the LTSP Committee must determine
whether to recommend to the board of directors that the LTSP
Disclosures be included in the Annual Report Supplement.\54\ Any board
and committee approvals should be reflected in board resolutions as
appropriate. This requirement is intended to increase alignment between
board members and company managers on the company's long-term focus and
helps to ensure that adequate board focus is placed on long-term
strategy.
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\54\ This proposed requirement is modeled after the audit
committee paradigm in Regulation S-K, which requires the audit
committee to state whether it recommends to the board of directors
that the audited financial statements be included in the annual
report on Form 10-K. See 17 CFR 229.407(d)(3)(i)(D).
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(vii) Disclosures Upon Initial Listing
As described above, an LTSE Listings Issuer would be required to
include its LTSP Disclosures in its Annual Report Supplement. However,
a newly public LTSE Listings Issuer may not provide its Annual Report
Supplement to shareholders until months after its initial public
offering. Therefore, to ensure that shareholders obtain information on
a timely basis, the LTSE Listings Rules would include transitional
disclosure provisions for newly listed issuers. Specifically, proposed
Rule 14A.207(g)(1) would provide that, no later than at the time of its
initial listing, an LTSE Listings Issuer must make the disclosure
required by proposed Rule 14A.207(c)(1) (Disclosure of Long-Term Growth
Strategy) publicly available on its website. Such disclosure must be
made in compliance with applicable rules and regulations relating to
the dissemination of free writing prospectuses. After its initial
listing, an LTSE Listings Issuer would provide this disclosure in its
Annual Report Supplement, as described above. Similarly, proposed Rule
14A.207(g)(2) would provide that, after initial listing, an LTSE
Listings Issuer must make the disclosures required by proposed Rule
14A.207(d) (Disclosure Related to Buybacks), Rule 14A.207(e)
(Disclosure Related to Human Capital Investment) and Rule 14A.207(f)
(Disclosure Related to Research and Development) publicly available on
its website by the earlier of when the company files its next Form 10-K
or Annual Report Supplement.\55\ After its initial listing, an LTSE
Listings Issuer would provide this disclosure in its Annual Report
Supplement, as described above.
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\55\ The disclosures are required to be made the ``earlier of''
when a company files a Form 10-K or Annual Report Supplement to
account for the fact that, for an IPO company, a 10-K filing may
significantly precede the first annual meeting.
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(C) Long-Term Alignment of Executive Compensation
The Exchange believes that long-term focused companies seek to
align the compensation of their Executive Officers \56\ with the long-
term performance of the company, while excessively short-term
compensation instruments could promote incentives that are not aligned
with long-term performance. Proposed Rule 14A.405(b)(3) would therefore
require that an LTSE Listings Issuer's compensation committee adopt a
set of executive compensation guidelines applicable to Executive
Officers that are designed to link executive compensation to the long-
term value of the LTSE Listings Issuer. The compensation committee
would be required to include in the executive compensation guidelines
general principles for determining the form and amount of Executive
Officer compensation (and for reviewing those principles, as
appropriate). In addition, the executive compensation guidelines would
be required to be consistent with certain minimum standards described
below. These requirements are intended to ensure that LTSE Listings
Issuers design their executive compensation plans in accordance with
specified long-term parameters, but also provide sufficient flexibility
to allow such issuers to remain competitive in crafting individual
compensation packages.
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\56\ IEX Rule 14.405(a)(1) defines ``Executive Officer'' for
these purposes as persons meeting the definition of ``officer''
under Rule 16a-1(f) under the Act.
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(i) Consistency With Long-Term Growth Strategy
Proposed Rule 14A.405(b)(3)(A) would require that the compensation
committee ensure that the time periods and performance metrics used to
determine Incentive-Based Compensation \57\ for Executive Officers are
consistent with an LTSE Listings Issuer's Long-Term Growth Strategy.
Since the members of the LTSP Committee would be the directors with the
greatest involvement in the LTSE Listings Issuer's Long-Term Growth
Strategy, the compensation committee may consult with the LTSP
Committee in assessing whether such time periods and performance
metrics are consistent with the LTSE Listings Issuer's Long-Term Growth
Strategy.
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\57\ Pursuant to proposed Rule 14A.002(a)(8), Incentive-Based
Compensation would be defined as ``any variable compensation, fees,
or benefits that serve as an incentive or reward for performance.''
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In addition, an LTSE Listings Issuer would be required to disclose
in its proxy statement or, if no proxy statement is filed, its Annual
Report Supplement, whether or not the compensation committee has
determined that the time periods and performance metrics used to
determine Incentive-Based Compensation for Executive Officers are
consistent with LTSE Listings Issuer's Long-Term Growth Strategy.
(ii) Long-Term Compensation and Vesting Periods
Proposed Rule 14A.405(b)(3)(B)(i) would prohibit an LTSE Listings
Issuer from providing Executive Officers with any Incentive-Based
Compensation that is tied to a financial or performance metric that is
measured over a time period of less than one year, or grant any time-
based equity compensation that has any portion that vests in less than
a year from the grant date (or from the hire date, in the case of new
hire grants). By requiring Incentive-Based Compensation and time-based
equity compensation to be tied to time periods of at least one year,
the LTSE Listings Rules are designed to require that LTSE Listings
Issuers avoid creating potential incentives to manage for short-term
results, encouraging management to focus on longer-term time horizons.
Proposed Rule 14A.405(b)(3)(B)(ii) would require that equity
compensation awarded to Executive Officers vest over a period (the
``Vesting Period'') of at
[[Page 14083]]
least five years. This minimum five-year Vesting Period is intended to
ensure that executive compensation is tied to long-term company
performance. In addition, while LTSE Listings Issuers would have
flexibility in determining the specific vesting schedule within the
Vesting Period (i.e., the percentage of total equity compensation
vested per year), the vesting schedule would be required to reflect the
long-term focus of the equity grant. For example, a ten-year vesting
schedule that vested 90% of the total equity compensation in the first
year would not be consistent with a long-term focus.
The Exchange understands, however, that there may be certain
situations in which accelerated vesting would be appropriate and would
not undermine the underlying purpose of this provision. As a result,
proposed Rule 14A.405(b)(3)(B)(ii) would allow for accelerated vesting
upon the death of an Executive Officer or the occurrence of a
disability that renders an Executive Officer permanently unable to
remain employed at the LTSE Listings Issuer in any capacity. Whether to
adopt exceptions of this type would be left to the discretion of the
LTSE Listings Issuer and would be required to be outlined in the
agreement providing the equity grant.
While the LTSE Listings Rules seek to maintain a long-term focus in
compensation, there may be exceptional circumstances in which the
payment of shorter-term Incentive-Based Compensation or shorter-term
Vesting Periods are consistent with this focus and may be required for
specific business purposes. Therefore, proposed Rule
14A.405(b)(3)(B)(iii) would provide that the compensation committee may
provide alternative time periods for incentive and equity compensation
if there is a business necessity and the LTSE Listings Issuer discloses
and explains such business necessity in the LTSE Listings Issuer's
proxy statement, or if the LTSE Listings Issuer does not file a proxy
statement, in the LTSE Listings Issuer's Annual Report Supplement. To
ensure that this exception remains limited, the rule would also
prohibit the amount of equity awards granted in the aggregate that
vests before the first anniversary of the grant date, or that does not
meet the minimum five-year vesting schedule, from exceeding 5% of the
total number of shares authorized for grant in any fiscal year.
Proposed Rule 14A.405(b)(3)(B)(iv) would provide that the
compensation committee must determine appropriate Vesting Periods and
amounts, as well as holding periods, for equity compensation awarded to
Executive Officers that apply following an Executive Officer's
retirement or resignation. Such Vesting Periods and amounts would also
be required to be consistent with the requirements set forth in
proposed Rule 14A.405(b)(3)(B)(ii) described above. The compensation
provisions of the LTSE Listings Rules are premised on the idea that
Executive Officers having financial interests in the long-term
performance of the company--even after their departure from the
company--will have a greater incentive to conduct business with long-
term performance in mind and to undertake efforts for effective
succession and departure planning. The Exchange understands that
business needs and market practice may vary for different companies in
different industries and sectors. Therefore, the specific schedule for
vesting and holding is left for determination by the individual LTSE
Listings Issuer, but each LTSE Listings Issuer is required to provide
such a schedule to promote these underlying purposes.
(iii) Exemption for Existing Agreements Prior to Listing
The Exchange appreciates that an issuer may have entered into
compensation arrangements prior to deciding whether to list on LTSE
Listings and recognizes that it may impose an undue burden on such
companies if they were required to unwind executive compensation plans
that have been in effect for an extended period of time in order to
list on LTSE Listings. Therefore, proposed Rule 14A.405(b)(3)(C) would
provide an exemption from the executive compensation requirements
contained in the LTSE Listings Rules for any executive compensation
that is subject to an existing written agreement entered into at least
one year prior to the initial listing of an LTSE Listings Issuer on the
Exchange. The proposed exemption for preexisting compensation
arrangements contains a one-year look-back period that is designed to
assure that the exempted compensation arrangements were bona fide
preexisting arrangements, and not entered into shortly before applying
for listing on LTSE Listings in order to avoid the restrictions
contained in the LTSE Listings Rules. In addition, the use of this
exemption must be disclosed in the Annual Report Supplement.
(iv) Smaller Reporting Companies
IEX Rule 14.405(d)(5) exempts ``Smaller Reporting Companies,'' as
defined in Rule 12b-2 under the Act,\58\ from certain compensation
committee requirements. Notwithstanding these exemptions that otherwise
apply to companies listed on the Exchange, proposed Rule 14A.405(b)(4)
would provide that an LTSE Listings Issuer that is a Smaller Reporting
Company must adopt the executive compensation guidelines described
above. In addition, such an issuer would be required to certify that it
has adopted a formal written compensation committee charter or board
resolution that specifies the additional compensation committee charter
requirements for LTSE Listings Issuers--that the compensation committee
must report regularly to the board of directors and adopt executive
compensation guidelines in accordance with proposed Rule 14A.405(b)(2).
The Exchange believes that, notwithstanding that Smaller Reporting
Companies may have less resources than other issuers, these
compensation committee requirements are an important feature of the
LTSE Listings Rules and are a key part of the differentiated choice
provided by the LTSE Listings category that long-term focused investors
find important, and that accordingly, Smaller Reporting Companies
electing to list on LTSE Listings should be required to comply with
such compensation committee requirements.
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\58\ See 17 CFR 240.12b-2.
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(D) Long-Term Shareholder Voting Structure
Consistent with the focus of the LTSE Listings category to provide
a differentiated choice for issuers and investors that prefer listing
standards explicitly designed to promote long-term value creation,
proposed Rule 14A.413(b) would require that LTSE Listings Issuers
maintain certain voting rights provisions in their corporate
organizational documents that provide all shareholders with the
ability, at the shareholders' option, to accrue additional voting power
over time. As described more fully below, these provisions are designed
to align with the long-term focus of the LTSE Listings category by
providing long-term investors in an LTSE Listings Issuer with a greater
role in corporate governance than short-term shareholders. The Exchange
believes that long-term investors in a public company are more likely
than short-term shareholders to exercise their voting rights in a
manner that prioritizes long-term growth over short-term results.
Specifically, as of the date of the company's initial listing on
LTSE
[[Page 14084]]
Listings, each holder of equity securities listed on LTSE Listings must
be entitled to an equal number of votes per share (the ``Initial Voting
Power'') on a per class basis.\59\ For each full calendar month in
which a shareholder maintains continuous record ownership of shares,
the voting power of such shares for so long as they are held of record
by such shareholder would increase by at least one twelfth (1/12th)
over the shares' Initial Voting Power on the last business day of the
month, up to an amount that is ten times their Initial Voting
Power.\60\ If, at any time, a shareholder transfers its shares out of
record ownership (whether for purposes of sale or otherwise), then on
the date of such transfer, such shares will revert to entitling the
shareholder to the Initial Voting Power of such shares. Because each
holder of a class of equity securities listed on LTSE Listings would
have an equal number of votes per share on the date of initial listing,
each investor would have an equal opportunity to obtain increased
voting rights over time and no shareholders would receive a preference
over others.
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\59\ The Exchange notes that all shares listed on LTSE Listings
must have a minimum level of Initial Voting Power and conform to the
voting rights set forth in proposed Rule 14A.413. However, proposed
Supplementary Material .01(a) to proposed Rule 14A.413 clarifies
that proposed Rule 14A.413(b) would not prevent an LTSE Listings
Issuer, so long as not inconsistent with IEX Rule 14.413, from (i)
maintaining multiple classes of securities, including shares that
have voting power per share in excess of the Initial Voting Power of
the securities listed on the Exchange, and/or (ii) establishing or
maintaining classes of shares not listed on the Exchange that do not
meet the requirements of proposed Rule 14A.413(b).
\60\ Pursuant to proposed Supplementary Material .01(b) to
proposed Rule 14A.413, an LTSE Listings Issuer would be permitted to
provide that the voting rights of shareholders holding of record
increase at a rate greater than one twelfth (1/12th) per month,
provided that the voting power of such shares may not increase to a
level that exceeds ten times their Initial Voting Power.
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(i) Mechanism for Tracking Holding Periods
The Exchange notes that tracking the ultimate beneficial ownership
and length of continued ownership may be difficult or impossible for
shares held through the common ``street name'' ownership system. Shares
held in street name are registered on the books of an issuer's transfer
agent in the name of a nominee selected by the Depository Trust
Company's (``DTC''), with DTC maintaining records of the number of
shares held for its various brokerage firm participants, and those
brokerage firms each maintaining records of the number of shares held
for its particular customers.\61\ As a result, an issuer reviewing its
own books and records maintained by its transfer agent may be unable to
definitively determine who its ultimate ``street name'' shareholders
are, or for how long they have held their shares.
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\61\ See generally Securities Exchange Act Release No. 76743
(December 22, 2015), 80 FR 81947 (December 31, 2015).
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In order to track ownership for purposes of those shareholders
opting to accrue additional voting power, the LTSE Listings Rules
require that LTSE Listings Issuers look to whether a beneficial owner
is also the holder of the shares in the LTSE Listings Issuer's records,
i.e., as a holder of record. A shareholder that purchases its shares
through a brokerage firm may initially receive shares held on its
behalf in street name through the brokerage firm. However, through a
Direct Registration Program (``DRP''),\62\ a shareholder maintaining
its shares in street name may request that its shares (or some portion
of its shares) be transferred to instead be held in record ownership on
the books of the issuer's transfer agent, or transferred back to its
brokerage account.\63\ For these purposes, a shareholder will be deemed
to have record ownership as of the date the shareholder appears as the
record owner on the books of the LTSE Listings Issuer directly, or
through a third-party transfer agent. In addition, for these purposes,
record owners of shares listed on LTSE Listings would include those
holding a physical paper certificate of such shares and those holding
such shares through a DRP.
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\62\ The Exchange's rules already require that any issuer listed
on the Exchange, including on the LTSE Listings, be eligible for a
DRP. See IEX Rule 14.208. Because the ability to transfer shares to
and from record ownership through a DRP is critical to tracking of
long-term shareholders' voting rights for LTSE Listings Issuers, the
exception contained in Rule 14.208(c) that allows certain foreign
issuers to list securities on the Exchange that are not eligible for
a DRP would not be available to LTSE Listings Issuers. See proposed
Rule 14A.208.
\63\ See Securities Exchange Act Release No. 76743 (December 22,
2015), 80 FR 81947 (December 31, 2015) at text accompanying n.92-93.
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Although requiring that shares be held in record ownership in order
to accrue additional voting rights may raise administrative burdens on
shareholders, the Exchange believes the ability for LTSE Listings
Issuers to verify and track the ownership of these shareholders for
purposes of calculating voting rights outweighs these burdens. In
addition, because only those shareholders that expect to hold their
shares for the long-term would opt to do so, the Exchange does not
believe that electronically transferring the shares through a DRP would
present a significant burden.
Calculating voting rights in accordance with the provisions of
proposed Rule 14A.413(b) will be novel to LTSE Listings Issuers and
their shareholders and may present challenges. However, the Exchange
understands that several transfer agents have indicated to LTSE that
they are able to develop software or systems to assist LTSE Listings
Issuers with tracking their shareholder voting rights as calculated in
accordance with proposed Rule 14A.413(b). In order to ensure that LTSE
Listings Issuers have such tools available to them and facilitate
accurate calculation of their shareholders' voting rights, proposed
Rule 14A.413(b)(5) would require that, prior to listing securities on
LTSE Listings, a prospective LTSE Listings Issuer must obtain from its
transfer agent a certification confirming that the transfer agent has
software or other systems or processes available to the LTSE Listings
Issuer that will enable the transfer agent and the LTSE Listings Issuer
to determine, as of a particular record date, the LTSE Listings
Issuer's shareholders' voting rights calculated in accordance with LTSE
Listings Rule 14A.413(b).
(ii) Shareholders Holdings Through Custodians
As noted above, in order to track ownership for purposes of those
shareholders opting to accrue additional voting power, the LTSE
Listings Rules require that LTSE Listings Issuers look to whether a
beneficial owner is also the holder of the shares in the LTSE Listings
Issuer's records, i.e., as a holder of record. The Exchange
understands, however, that for various reasons, including regulatory
requirements applicable to registered investment advisers and
registered investment companies,\64\ there may be shareholders that
maintain ownership of securities through a third-party custodian,
rather than in their own name. To accommodate such investors, proposed
Supplementary Material .01(e) to proposed Rule 14A.413 would permit an
LTSE Listings Issuer to recognize a shareholder as a holder of record
solely for purposes of proposed Rule 14A.413(b), therefore entitled to
increase its voting power over time, so long as the custodian for such
shareholder becomes the shareholder of record and maintains its record
[[Page 14085]]
ownership in a manner that indicates the name of the ultimate
beneficial owner. By way of example, if Investment Fund ABC maintains
custody of its assets through Bank XYZ, an LTSE Listings Issuer may
recognize Investment Fund ABC as the record holder of the shares of an
LTSE Listings Issuer solely for purposes of this rule if Bank XYZ
registers the shares on the books of the LTSE-Listed Issuer as being
owned by ``Bank XYZ, as custodian for Investment Fund ABC.'' The
Exchange believes that maintaining record ownership in this manner
would allow an LTSE Listings Issuer to track that [sic] the period of
time during which the shares have been held by the underlying investor,
even if held through the custodian, while meeting the needs of those
shareholders that wish to maintain custody of their assets through a
separate custodian.
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\64\ See, e.g., 17 CFR 275.206(4)-2 (with respect to registered
investment advisers) and 15 U.S.C. 80a-17(f) and 17 CFR 270.17f-1-f-
7 (with respect to registered investment companies).
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(iii) Technical Changes in Record Ownership
Because of the mechanics of tracking long-term ownership, the term
of ownership for purposes of LTSE Listings Issuers calculating a
shareholder's increased voting rights is tied not to the actual date of
a shareholder's acquisition or disposition of beneficial ownership, but
the date the shares are transferred into or out of record ownership,
i.e., the date that the name of the owner on the LTSE Listings Issuer's
books is changed. The Exchange acknowledges that this may result in
situations where technical changes to ownership structure could cause a
shareholder to lose any accrued long-term voting. As a general matter,
the Exchange believes that a bright-line rule that can be clearly and
consistently applied is preferable to the need to analyze the
surrounding circumstances regarding particular changes to record
ownership. Nonetheless, the Exchange recognizes that particular LTSE
Listings Issuers may wish to allow a shareholder to maintain any
accrued long-term voting that would otherwise be lost as a result of
technical changes. As a result, proposed Supplementary Material .01(d)
to proposed Rule 14A.413 would permit (but not require) an LTSE
Listings Issuer to adopt a process by which a shareholder may
demonstrate that, notwithstanding a technical change in record
ownership, a change in beneficial ownership for purposes of this rule
has not occurred. LTSE Listings Issuers choosing to do so may develop
their own list of changes for which such waivers may be granted, so
long as they are of a purely technical nature that clearly did not
involve a change of beneficial ownership (such as re-titling ownership
of shares due to a name change or a change from sole ownership to joint
ownership with a spouse) rather than an actual change of the person
holding voting and investment discretion.
(iv) Potential Evasion of Loss of Long-Term Voting Upon Sale
The ability to accrue long-term voting is intended to incentivize
those beneficial owners with voting and investment discretion over an
LTSE Listings Issuer's shares to become long-term shareholders, provide
a mechanism by which such long-term shareholders can evidence their
long-term ownership (i.e., by becoming record holders), and increase
the relative role of such long-term shareholders in the governance of
an LTSE Listings Issuer. There may be situations where it becomes
apparent to an LTSE Listings Issuer that, notwithstanding the record
holder of its shares remaining the same, the beneficial ownership has
changed, in an effort to evade the purposes of long-term voting. For
example, the Exchange recognized the risk that a person may create a
special-purpose entity (an ``SPE'') to hold shares of an LTSE Listings
Issuer and register the SPE as the owner of the shares on the books of
the LTSE Listings Issuer. Over time, the shares held by the SPE would
accrue additional voting rights. Ordinarily, once those shares are
transferred, they would lose any accrued long-term voting and revert to
their Initial Voting Power. However, if the person were to instead
transfer the ownership of the SPE to a third party, that transfer may
not result in a change of ownership of the underlying shares of the
LTSE Listings Issuer on the books and records of the LTSE Listings
Issuer's transfer agent.
To address this situation, proposed Supplementary Material .01(c)
to proposed Rule 14A.413 would permit (but not require) an LTSE
Listings Issuer to include provisions in its governance documents such
that if its board of directors adopted a resolution reasonably
determining that, notwithstanding technical compliance with the
provisions of an LTSE Listings Issuer's governance documents relating
to the increasing voting power of long-term shareholders and continuity
of record ownership, there has in fact been a change in beneficial
ownership with respect to shares held of record that would evade the
purposes of LTSE Listings Rule 14A.413(b), such shares may be treated
as being entitled only to their Initial Voting Power. Any LTSE Listings
Issuer that provides for such a process in its governance documents
must also provide a process through which a shareholder directly
affected by such a determination may challenge it. The Exchange
believes that, together, this should protect LTSE Listings Issuers from
an attempt by shareholders to improperly sell increased voting rights
to new shareholders, while affording affected shareholders with an
opportunity to present additional information demonstrating that a
change of beneficial ownership has not occurred.
(v) Consistency With the Exchange's Voting Rights Policy
The Exchange believes that LTSE Listings Rule 14A.413(b) is fully
consistent with IEX Rule 14.413 (the Exchange's ``Voting Rights
Policy''). The Voting Rights Policy provides that the voting rights of
existing shareholders of publicly traded common stock registered under
Section 12 of the Act may not be disparately reduced or restricted
through any corporate action or issuance. The Voting Rights Policy
provides examples of corporate actions or issuances that could violate
this policy, including the adoption of time-phased voting plans, which
could encompass structures whereby investors gain additional voting
rights over time.\65\ While the requirements of LTSE Listing Rule
14A.413(b) could be viewed as similar to time-phased voting plans, the
Exchange does not believe that complying with LTSE Listing Rule
14A.413(b) would be inconsistent with the Voting Rights Policy, which
bars a company already listed on the Exchange from undertaking the
prohibited corporate actions. Because LTSE Listings Issuers would be
required, as a pre-condition to listing on LTSE Listings, to already
have in place a voting rights structure as of its date of its initial
listing that complies with LTSE Listings Rule 14A.413(b), no new
corporate action that disparately reduces voting rights would be taken
[[Page 14086]]
subsequent to listing on the Exchange. In addition, pursuant to LTSE
Listings Rule 14A.413(b), all shareholders of the same class of LTSE
Listings Issuer's common stock listed on LTSE Listings will have the
same voting rights in that any shareholder is eligible to accrue
additional voting rights. To the extent that the effect of LTSE
Listings Rule 14A.413(b) is that those shareholders that elect not to
accrue additional voting power have their relative voting rights
reduced relative to those that elect to accrue additional voting power,
this impact is the result of a corporate action taken prior to listing
on LTSE Listings, known to investors prior to their determining to
purchase shares of an LTSE Listings Issuer, and the actions or
inactions of shareholders subsequent to listing. Thus, the Exchange
believes that compliance with LTSE Listings Rule 14A.413(b) will not
cause existing shareholders' voting rights to be disparately reduced or
restricted through any corporate action or issuance within the meaning
of IEX Rule 14.413.
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\65\ Another example of such a corporate action enumerated in
the Voting Rights Policy is the issuance of a new class of super-
voting stock. Proposed Supplementary Material .01(f) to proposed
Rule 14A.413 would provide that for purposes of LTSE Listings, a
class of securities shall be considered super-voting stock if (i)
the Initial Voting Power of such class of securities exceeds the
Initial Voting Power of any of the LTSE Listings Issuer's existing
classes of common stock listed on LTSE Listings or (ii) the rate at
which the voting power of such class may increase over time is
greater than the corresponding rate for any of the LTSE Listings
Issuer's existing classes of common stock listed on LTSE Listings.
An LTSE Listings Issuer would not be prohibited by proposed Rule
14.413 from issuing additional shares of a class of stock that is
listed on LTSE Listings or from issuing shares of a new class of
stock that does not constitute super-voting stock as described
above.
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In addition to the fact that the voting rights structure required
under LTSE Listings Rule 14A.413(b) must be in place prior to listing
on the Exchange, Supplementary Material .01 to IEX Rule 14.413 provides
that the Exchange's ``interpretations under the policy will be
flexible, recognizing that both the capital markets and the
circumstances and needs of the Exchange Companies change over time.''
Accordingly, the Exchange will interpret the policy flexibly with
regard to its consistency with an LTSE Listings Issuer's voting
structures designed to meet LTSE Listings Rule 14A.413(b). As the
Commission recognized in approving the voting rights policies of other
self-regulatory organizations that are substantively identical to IEX
Rule 14.413, ``there may be valid business or economic reasons for
corporations'' for companies to provide different voting rights to
different shareholders, and that the voting rights policies ``provide
issuers with a certain degree of flexibility in adopting corporate
structures, so long as there is a reasonable business justification to
so doing, and such transaction is not taken or proposed primarily with
the intent to disenfranchise.'' \66\ The Exchange believes that
providing long-term investors with an opportunity for a greater voice
in corporate governance is a reasonable business justification for an
issuer to adopt the long-term voting structure required by proposed
LTSE Listings Rule 14A.413(b) and that, because every shareholder has
the opportunity to elect to accrue additional voting power, the
structure would not be implemented with a primary purpose or intent to
disenfranchise particular shareholders.
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\66\ See Securities Exchange Act Release No. 35121 (December 19,
1994), 59 FR 66570 (December 27, 1994) (approving rule changes
adopting voting rights policies of the New York Stock Exchange,
American Stock Exchange, and National Association of Securities
Dealers).
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(E) Other Long-Term Requirements
The Exchange is proposing to include in the LTSE Listings Rules
certain other rules also designed to encourage LTSE Listings Issuers to
focus on long-term value creation. These proposed rules are described
further below.
(i) Earnings Guidance
Proposed Rule 14A.420(a) would provide that LTSE Listings Issuers
are generally prohibited from providing earnings guidance more
frequently than annually. For these purposes, ``Earnings Guidance''
would be defined as any public disclosure made to shareholders
containing a projection of the LTSE Listings Issuer's revenues, income
(including income loss), or earnings (including earnings loss) per
share.\67\ As noted above, LTSE's research indicates that pressure to
meet quarterly earnings guidance can cause managers to sacrifice long-
term growth for short-term performance.\68\ Proposed Rule 14A.420(a) is
intended to help companies alleviate the pressures surrounding the
quarterly earnings process with respect to guidance, with a goal to
ultimately shift the focus of both companies and investors toward
longer-term milestones.
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\67\ See proposed Rule 14A.002(a)(6).
\68\ See Graham, supra note 15; Yongtae Kim, Lixin (Nancy) Su,
Xindong (Kevin) Zhu, Does the Cessation of Quarterly Earnings
Guidance Reduce Investors' Short-Termism? (December 12, 2016),
available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2885624. See also Chairman Jay Clayton,
Hearing before the Senate Banking Committee on the Nomination of Jay
Clayton, of New York, to be a Member of the Securities and Exchange
Commission (March 23, 2017), available at https://www.gpo.gov/fdsys/pkg/CHRG-115shrg24998/html/CHRG-115shrg24998.htm (``In my
experience, certain companies view the operational and other
pressures inherent in quarterly earnings as costly, including
because they detract from long-term planning and strategic
initiatives.'').
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Notwithstanding the general prohibition on providing Earnings
Guidance more frequently than annually, proposed Rule 14A.420(a) would
permit an LTSE Listings Issuer to update previously issued Earnings
Guidance at any time if it believes that such disclosure would be
required (i) by IEX Rule 14.207(b)(1), which requires an issuer to
promptly disclose to the public any material information that would
reasonably be expected to affect the value of the issuer's securities
or influence investors' decisions; (ii) by other applicable law
(including any of the Commission reporting rules); or (iii) to make the
previously issued Earnings Guidance not misleading.
Proposed Rule 14A.420(b) would clarify that any Earnings Guidance
provided by an LTSE Listings Issuer, including updates and
supplementary disclosure related to Earnings Guidance, shall be
considered material information for purposes of IEX Rule 14.207(b)(1).
As a result, LTSE Listings Issuers would be required to comply with the
disclosure and notification requirements set forth therein when
disseminating such information.
(ii) Long-Term Stakeholder Policies
Proposed Rule 14A.425(a) would require that each LTSE Listings
Issuer develop and publish a policy regarding the LTSE Listings
Issuer's impact on the environment and community, and a policy
explaining the LTSE Listings Issuer's approach to diversity. The
Exchange believes that effective long-term planning is enhanced when
companies consider their impact on various stakeholders and the
sustainability of their business, and that long-term investors
generally value such information. Each LTSE Listings Issuer may have
different stakeholders and different views on these issues. The LTSE
Listings Rules would not impose any requirements on the content of
these policies. Rather, proposed Rule 14A.425(a) would only require
that LTSE Listings Issuers adopt and publish a policy, providing LTSE
Listings Issuers with flexibility in developing what they believe to be
appropriate policies for their business, and providing investors with
insight into an LTSE Listings Issuer's management of these issues.
Proposed Rule 14A.425(b) would require that each LTSE Listings
Issuer review the policies required by proposed Rule 14A.425(a) at
least annually and make such policies available on or through its
website. In addition, each LTSE Listings Issuer would be required to
disclose in its annual proxy statement or, if it does not file an
annual proxy statement, in its Annual Report Supplement, that these
policies are available on or through its website and provide the
website address. These requirements are intended to ensure that
investors are aware of and have access to an LTSE Listings Issuer's
stakeholder policies. Although these policies must be made publicly
available, proposed
[[Page 14087]]
Supplementary Material .01 to proposed Rule 14A.425 would provide that
the required stakeholder policies need not be stand-alone documents and
may be included as part of other LTSE Listings Issuer policies or
reports.
(iii) Website Requirements
Proposed Rule 14A.430 would require LTSE Listings Issuers to have
and maintain a publicly accessible website. In addition, to the extent
that an LTSE Listings Issuer would be required under any applicable
provision of the LTSE Listings Rules to make documents available on or
through its website, an LTSE Listings Issuer would be required to
ensure that the website is accessible from the United States, the
website clearly indicates in the English language the location of such
documents on the website and that such documents are available in a
printable version in the English language. The Exchange understands
that many long-term focused investors expect to be able to access
corporate governance and other information regarding companies in which
they have invested through the company's website, and accordingly the
Exchange believes that it is appropriate to explicitly impose this
website requirement. For transparency purposes, various proposed LTSE
Listings Rules, as discussed above, would require that materials be
made available on an LTSE Listings Issuer's website.\69\
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\69\ See proposed Rules 14A.207(a), 14A.207(f), 14A.405(a)(2),
14A.405(b)(1)(B), 14A.405(c)(2)(C), 14A.405(d)(2), 14A.405(d)(5)(B),
14A.407(a)(2)(B), 14A.409(b) and 14A.425(b).
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Proposed Rule 14A.430 is intended to specify in further detail the
manner in which LTSE Listings Issuers may satisfy these website posting
requirements. The Exchange notes that the foregoing website
requirements are substantially similar to the requirements imposed by
the listing rules of another national securities exchange.\70\
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\70\ See NYSE Listed Company Manual, Rule 307.00.
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(iv) Certification Requirements
Proposed Rule 14A.435 would require that LTSE Listings Issuers make
certain certifications to the Exchange. Specifically, proposed Rule
14A.435(a) would require LTSE Listings Issuers certify [sic], at or
before the time of listing, that all applicable listing criteria have
been satisfied. This requirement is substantively identical to IEX Rule
14.202(b), which requires all issuers listed on the Exchange to submit
such a certification. The Exchange proposes to repeat this requirement
in the LTSE Listings Rules to clarify that the certification must
include compliance with the LTSE Listings Rules, in addition to the
Exchange's other listing rules.
Proposed Rule 14A.435(b) would require that the CEO of each LTSE
Listings Issuer certify annually to the Exchange that the LTSE Listings
Issuer is in compliance with proposed Rule Series 14A.400, which
contain the corporate governance requirements of the LTSE Listings
Rules, qualifying the certification to the extent necessary. Various
IEX listing rules impose certification requirements,\71\ and IEX Rule
14.207 requires that a listed company must provide the Exchange with
prompt notification after an Executive Officer of the company becomes
aware of any noncompliance by the company with the corporate governance
requirements set forth in IEX Rule 14.400. However, given the unique
nature of the LTSE Listings Rules, the Exchange believes that adding an
annual certification requirement for LTSE Listings Issuers will assist
the CEO and senior management of such issuers in overseeing and
assuring compliance with LTSE Listings corporate governance
requirements on an ongoing basis. In addition, the Exchange notes that
another national securities exchange similarly requires that the CEO of
a company listed on that exchange certify annually that he or she is
not aware of any violation by the company of that exchange's corporate
governance listing standards.\72\ Proposed Rule 14A.435(b) would also
require each LTSE Listings Issuer CEO certify [sic] annually to the
Exchange that the LTSE Listings Issuer has designated an employee
responsible for ensuring that the voting power of the LTSE Listings
Issuer's securities is determined in accordance with proposed Rule
14A.413(b) (Long-Term Voting). The Exchange believes that such an
annual certification requirement would help ensure that LTSE Listings
Issuers establish internal systems reasonably designed to assure
compliance with LTSE Listing's long-term voting provisions.
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\71\ See, e.g., IEX Rule 14.202(b) (requiring a company listing
on the Exchange to certify, at or before the time of listing, that
all applicable listing criteria have been satisfied); IEX Rule
14.405(c)(1) (requiring each company listed on the Exchange to
certify that it has adopted a formal written audit committee charter
and that the audit committee will review and reassess the adequacy
of the formal written charter on an annual basis); IEX Rule
14.405(d)(1) (requiring each company listed on the Exchange to
certify that it has adopted a formal written compensation committee
charter and that the compensation committee will review and reassess
the adequacy of the formal written charter on an annual basis).
\72\ See NYSE Listed Company Manual, Rule 303A.12(a).
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(v) Issuer Designation Requirements and Dually-Listed Securities
The Exchange proposes to permit an LTSE Listings Issuer to list a
class of securities that, in connection with its initial public
offering, has been approved for listing on another national securities
exchange (``Dually-Listed Securities''). The Exchange expects that this
would foster competition among markets and further the development of
the national market system. The Exchange would make an independent
determination of whether such companies satisfy applicable listing
standards and would require such companies to enter into a dual-listing
agreement with the Exchange.\73\ In the event that a company chooses to
dually-list on both LTSE Listings and another national securities
exchange in connection with its IPO, the Exchange would expect such
other national securities exchange to be the LTSE Listings Issuer's
``Primary Listing Market.'' \74\ The Exchange is proposing certain
additional rules to facilitate dual-listings.
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\73\ The Exchange would also monitor the dually-listed LTSE
Listings Issuer for compliance with all applicable IEX Rules on an
ongoing basis, as it would for any other LTSE Listings Issuer.
\74\ Pursuant to proposed Rule 14A.002(a)(14), ``Primary Listing
Market'' would have the same meaning as that term is defined in the
Nasdaq Unlisted Trading Privileges national market system plan and
consistent with use of the term ``listing market'' in the
Consolidated Quotation Service and Consolidated Tape Association
national market system plans. Where an LTSE Listings Issuer is
dually-listed on another national securities exchange, the initial
trading of such issuer's securities on the Exchange would not occur
until after the completion of the opening auction for such
securities on the first day of listing on the Primary Listing
Market.
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Pursuant to proposed Rule 14A.210(b), an LTSE Listings Issuer that
has Dually-Listed Securities would be required to notify the Exchange
promptly if it receives oral or written notification from the other
national securities exchange on which the LTSE Listings Issuer's
Dually-Listed Securities are listed that such class of listed
securities has fallen below the continued listing requirements of such
other market. In addition, such an LTSE Listings Issuer would also be
required to notify the other national securities exchange on which its
Dually-Listed Securities are listed if it receives oral or written
notification that such class of listed securities has fallen below the
continued listing requirements of Chapter 14 of the IEX Rules or the
LTSE Listings Rules contained in Chapter 14A of the IEX Rules.
[[Page 14088]]
Proposed Supplementary Material .01 to proposed Rule 14A.210 would
clarify the application of certain IEX Rules, such as rules governing
trading halts, for Dually-Listed Securities, given the fact that the
Exchange would not be the Primary Listing Market. These proposed rules
are designed to avoid creating potential confusion for investors and
market participants with respect to Dually-Listed Securities. The
Exchange notes that these provisions are substantially consistent with
the rules of other national securities exchanges.\75\
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\75\ See Nasdaq Stock Market Equity Rules 5220 and IM-5220; CBOE
BZX Exchange, Inc. Rule 14.3(d) and Rule 14.3 Interpretation and
Policy .01.
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(F) Proposed Rules Clarifying Application of Existing Exchange Rules
In addition to proposed rules that would encourage LTSE Listings
Issuers to focus on long-term value creation, the Exchange is also
proposing rules that would clarify the application of certain existing
Exchange rules to LTSE Listings Issuers. These proposed rules are
described further below.
(i) Supplemental Nature of LTSE Listings Rules
Proposed Rule 14A.001(a) would provide that the LTSE Listings Rules
are supplemental listing standards applicable to LTSE Listings Issuers
and that LTSE Listings Issuers must also fully qualify for listing
under Chapter 14 of the Exchange's rules and the LTSE Listings Rules on
an initial and ongoing basis. This provision is intended to clarify
that LTSE Listings Issuers would be subject to the LTSE Listings Rules,
as well as all other applicable listing rules of the Exchange, except
as they may be specifically modified for LTSE Listings Issuers.
Proposed Rule 14A.001(b) would provide that LTSE Listings Issuers
may only list common equity securities on LTSE Listings. Although the
Exchange maintains listing rules relevant for other types of
securities, such as American Depositary Receipts, preferred stock,
rights and warrants, among others, such securities would not be
eligible for listing on LTSE Listings. The Exchange is proposing to
establish an LTSE Listings category to provide a differentiated choice
for issuers and investors that prefer listing standards explicitly
designed to promote long-term value creation. At this time, the
Exchange believes that, given that corporate governance and voting
rights are more typically associated with common equity than other
securities, it is most appropriate for a company electing to become
subject to the LTSE Listings Rules to list its common equity on LTSE
Listings.
(ii) Change of Control and Reverse Mergers
IEX Rule 14.102(a) provides that an Exchange-listed company must
apply for initial listing in connection with a transaction whereby the
Exchange-listed company combines with, or into, an entity that is not
listed on the Exchange, resulting in a change of control of the company
and potentially allowing such entity to obtain an Exchange listing. The
rule enumerates certain factors that the Exchange will consider in
determining whether a change of control has occurred, including, but
not limited to, changes in management, board of directors, voting
power, ownership and financial structure. Proposed Rule 14A.102(a)(1)
would impose an analogous requirement on LTSE Listings Issuers
combining with, or into, an entity that is not listed on LTSE Listings,
including an entity that is a not an LTSE Listings Issuer that is
otherwise listed on the Exchange. The Exchange would consider the same
factors enumerated in IEX Rule 14.102(a) when determining whether a
change of control has occurred for purposes of proposed Rule
14A.201(a)(1). Proposed Rule 14A.102(a)(1) would also require that any
combined entity applying for initial listing as permitted by this rule
must agree to comply with all applicable requirements of Chapter 14A,
including requirements relating to long-term voting set forth in
proposed Rule 14A.413.
Proposed Rule 14A.102(a)(2) would clarify the impact of a change of
control transaction on the proposed long-term voting provisions of LTSE
Listings. Specifically, proposed Rule 14A.102(a)(2) would provide that
if an initial listing following a change of control meets applicable
listing requirements and the LTSE Listings Issuer is the surviving
entity following the business combination, any shares of the LTSE
Listings Issuer that have accrued additional voting power pursuant to
proposed Rule 14A.413(b) prior to the business combination would retain
such additional voting power following the business combination. On the
other hand, if the non-LTSE Listings Issuer is the surviving entity or
a new entity is formed following the business combination, all shares
of the class or classes of securities to be listed on LTSE Listings
will have voting power equal to their Initial Voting Power at the time
of such listing. Any additional voting power accrued pursuant to Rule
14A.413(b) by the shareholders of the non-surviving LTSE Listings
Issuer prior to the business combination would not be retained.
IEX Rule 14.102(c) provides that a company that is formed by a
Reverse Merger \76\ is eligible to submit an application for initial
listing only if the combined entity has satisfied certain conditions.
Proposed Rule 14A.102(b) would clarify that such an entity would not be
eligible to apply for initial listing on LTSE Listings. The Exchange
does not believe a reverse merger company would be able to satisfy the
requirements of the LTSE Listings Rules.
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\76\ A ``Reverse Merger'' is generally defined as ``any
transaction whereby an operating company becomes an Exchange Act
reporting company by combining, either directly or indirectly, with
a shell company which is an Exchange Act reporting company, whether
through a reverse merger, exchange offer, or otherwise.'' See IEX
Rule 14.002(a)(27).
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(iii) General Procedures and Prerequisites for Initial and Continued
Listing on LTSE Listings
Proposed Rule 14A.200 would establish general procedures and
prerequisites for initial and continued listing on LTSE Listings. This
rule series is intended to supplement and clarify the application of
the general procedures and prerequisites set forth in the IEX Rule
Series 14.200.
IEX Rule 14.200(a) requires a company seeking the initial listing
of one or more classes of securities on the Exchange to participate in
a free confidential pre-application eligibility review by the Exchange
in order to determine whether it meets the Exchange's listing criteria.
If, upon completion of this review, the Exchange determines that a
company is eligible for listing, the Exchange will provide the company
with a clearance letter, notifying the company that it has been cleared
to submit an original listing application. Proposed Rule 14A.200(a)
would clarify that if a company is seeking a listing on LTSE Listings,
prior to providing a clearance letter, the Exchange must determine that
the company is eligible for listing under the LTSE Listings Rules, in
addition to the Exchange's other listing criteria.\77\
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\77\ As is the case with other companies applying for listing on
the Exchange, if the Exchange determines that a company is
ineligible for listing on LTSE Listings, the company may request a
review of IEX's determination pursuant to the process set forth in
IEX Rule 9.555.
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IEX Rule 14.200(b) outlines the applications and qualifications
process for companies that have received a clearance letter. A company
seeking to list on LTSE Listings would be required to follow this
process, including executing a listing agreement and listing
[[Page 14089]]
application, as required by IEX Rule 14.202(a). However, proposed Rule
14A.200(b) would clarify that a company seeking to list on LTSE
Listings would execute a listing agreement and listing application on
the forms designated by the Exchange for LTSE Listings Issuers. These
forms and applications would be available from IEX Regulation.
IEX Rule 14.200(c) provides prerequisites for applying to list on
the Exchange. A company seeking to list on LTSE Listings would be
required to satisfy these prerequisites, except as otherwise provided
by proposed Rule 14A.200(c). For example, IEX Rule 14.203(c) provides
that all securities initially listed on the Exchange, but for
securities which are in any event book-entry only, must be eligible for
a DRP, except that a foreign issuer is not subject to this requirement
if it submits to the Exchange a written statement from an independent
counsel in such company's home country certifying that a law or
regulation in the home country prohibits compliance with this
requirement. Because eligibility for a DRP is essential to the proper
functioning of LTSE Listings' long-term shareholder voting provisions,
proposed Rule 14A.200(c)(1) would provide that foreign issuers may not
rely on the exception in IEX Rule 14.203(c) from the DRP eligibility
requirement.
IEX Rule 14.203(d) provides that a company applying to list on the
Exchange must pay all applicable fees as described in Rule Series
14.600. Proposed Rule 14A.200(c)(3) would provide that in lieu of
paying all applicable fees as described in IEX Rule Series 14.600, a
company seeking the initial listing of one or more classes of
securities on LTSE Listings would be required to pay all applicable
fees as described in LTSE Listings Rule Series 14A.600. This provision
is intended to clarify that companies seeking to list on LTSE Listings
are not required to pay two separate listing fees.
Proposed Rule 14A.200(c)(2) would provide that at the time that a
company initially lists on LTSE Listings, the company may not already
have any security listed for trading either on the Exchange (i.e.,
listed on IEX pursuant to IEX listing rules other than Chapter 14A) or
on any other national securities exchange (unless dually listing on the
other national securities exchange concurrently). The Exchange is
initially limiting the availability of LTSE Listings to companies
seeking to list on LTSE Listings concurrently with their initial public
offering (whether listing on LTSE Listings only or dually-listing on
LTSE Listings and another national securities exchange concurrently).
The Exchange may in the future seek to expand the availability of LTSE
Listings to other companies seeking to list on LTSE Listings that are
otherwise already listed on a national securities exchange.
(iv) Exemptions From Certain Corporate Governance Requirements
IEX Rule 14.407 provides exemptions from the Exchange's corporate
governance rules for certain types of companies, sets forth phase-in
schedules for, among other things, initial public offerings and
companies emerging from bankruptcy and describes the applicability of
the corporate governance rules to Controlled Companies.\78\ Proposed
Rule 14A.407 would clarify the application of these rules with respect
to the LTSE Listings Rules, as described below.
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\78\ The term ``Controlled Company'' is defined in Rule
14.407(c)(1) as an Exchange-listed company of which more than 50% of
the voting power for the election of directors is held by an
individual, a group or another company.
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IEX Rule 14.407(a) provides exemptions to certain of the Exchange's
corporate governance requirements for asset-backed issuers and other
passive issuers, cooperatives, Foreign Private Issuers,\79\ limited
partnerships and management investment companies. Proposed Rule
14A.407(a) would provide that an LTSE Listings Issuer may not rely on
these exemptions with respect to the LTSE Listings Rules. The Exchange
believes that exemptions for these entities is either (i) not necessary
because LTSE Listings is only available for common equity or (ii) not
appropriate given that LTSE Listings is designed to require particular
minimum corporate governance. However, proposed Rule 14A.407(a) would
clarify that a Foreign Private Issuer that is able to meet all
applicable requirements of Chapter 14A, including the requirement to
distribute an Annual Report Supplement, would be permitted to list on
LTSE Listings.
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\79\ Pursuant to IEX Rule 14.002(a)(15), the term ``Foreign
Private Issuer'' as used in the Exchange's rules has the same
meaning as under Exchange Act Rule 3b-4.
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IEX Rule 14.407(b) allows a company listed on the Exchange to
phase-in its compliance with certain Exchange rules over a period of
time in certain situations, including for initial public offerings,
companies emerging from bankruptcy, transfers from other markets, and
companies ceasing to be a Smaller Reporting Company. These phase-in
schedules would apply to LTSE Listings Issuers in the same manner as
they would apply to other companies listed on the Exchange. In addition
to these phase-in schedules, proposed Rule 14A.407(b) would provide
that an LTSE Listings Issuer that is listing in connection with its
initial public offering or that is emerging from bankruptcy is
permitted to phase-in its compliance with the requirement that the LTSP
Committee be comprised of a majority of independent directors.
Specifically, this rule would provide that at least one member of the
LTSP Committee must be an independent director at the time of listing
and a majority of the members of the LTSP Committee must be independent
within 90 days of listing. This phase-in schedule is substantially
similar to the corresponding phase-in schedules applicable to other
board committees.\80\
---------------------------------------------------------------------------
\80\ See IEX Rule 14.407(b)(1).
---------------------------------------------------------------------------
IEX Rule 14.407(c) outlines how the Exchange's listing rules apply
to a Controlled Company. This rule provides that a Controlled Company
is generally exempt from requirements to establish a compensation
committee and requirements relating to independent director oversight
of director nominations. These exemptions would apply to LTSE Listings
Issuers in the same manner as they would apply to other companies
listed on the Exchange. In addition to these exemptions, proposed Rule
14A.407(c)(1) would provide that a Controlled Company is exempt from
the additional compensation committee and nominating/corporate
governance committee requirements under proposed LTSE Listings Rules
14A.405(b) and 14A.405(d), except for the requirement to adopt
executive compensation guidelines under proposed Rule 14A.405(b)(3).
Proposed Rule 14A.407(c)(2) would provide that to the extent that a
Controlled Company does not have a compensation committee, the
independent directors on the LTSP Committee or the independent
directors of the board of directors must be responsible for adopting
the executive compensation guidelines.
(v) Notification of Noncompliance
IEX Rule 14.410 provides that a company listed on the Exchange must
provide the Exchange with prompt notification after an Executive
Officer of the company becomes aware of any noncompliance by the
company with the requirements of Rule Series 14.400, which outlines the
general corporate governance requirements for companies listed on the
Exchange. Proposed Rule 14A.410 would supplement this requirement by
requiring an LTSE Listings Issuer to provide the Exchange
[[Page 14090]]
with prompt notification after an Executive Officer of the LTSE
Listings Issuer becomes aware of any noncompliance by the LTSE Listings
Issuer with the requirements of LTSE Listings Rule Series 14A.400,
which contains the supplemental corporate governance requirements for
LTSE Listings Issuers.
(vi) Shareholder Approval Calculation
IEX Rule 14.412 sets forth the circumstances in which an Exchange-
listed company is required to obtain shareholder approval prior to the
issuance of securities in connection with the (1) the acquisition of
the stock or assets of another company; (2) a change of control; (3)
equity-based compensation of officers, directors, employees, or
consultants; and (4) private placements. In some cases, such approval
is required, among other potential triggers, if the common stock being
issued ``has or will have upon issuance voting power equal to or in
excess of 20% of the voting power outstanding before the issuance . .
.'' (the ``Shareholder Approval Threshold'').\81\ The Exchange believes
that the purpose of this aspect of the rule is to ensure that existing
shareholders have a voice in transactions that would materially dilute
the voting power of their shares.
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\81\ IEX Rule 14.412(a)(1)(A). Shareholder approval may also be
required if the number of shares of common stock to be issued is or
will be equal to or in excess of 20% of the number of shares of
common stock outstanding before the issuance of the stock or
securities. See IEX Rule 14.412(a)(1)(B).
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Ordinarily, determining whether an issuance equals or exceeds the
Shareholder Approval Threshold would be a simple calculation: The
issuer would multiply the number of shares to be issued by the voting
power of such shares and divide by the voting power of the shares
outstanding before the issuance. If this number equals or exceeds the
Shareholder Approval Threshold, shareholder approval would be required.
However, shares listed on LTSE Listings (or that are of the same class
of securities that are listed on LTSE Listings) may accrue voting power
over time. As a result, even if the voting power of newly issued shares
of an LTSE Listings Issuer is less than the Shareholder Approval
Threshold at the time of the issuance, it may potentially be greater
than the Shareholder Approval Threshold after a certain period of time,
depending on how many of the new shares are registered in record name
and accrue additional voting power over time, relative to the number of
existing shareholders that do so.
IEX Rule 14.412 requires that a company listed on the Exchange
receive shareholder approval in advance of the ``potential issuance of
common stock'' where the ``common stock has or will have upon issuance
voting power'' that would exceed the Shareholder Approval Threshold.
The Exchange notes that, by its terms, IEX Rule 14.412 therefore could
be read to look only to the voting power of the shares upon issuance,
rather than the potential voting power of those shares after some
period of time.\82\ However, certain interpretations and supplementary
material relating to other aspects of IEX Rule 14.412 do look to the
potential for changes to the securities being issued, even past the
initial issuance.\83\ As a result, in light of the potential increased
future voting power of new shares to be issued, the Exchange believes
that it is appropriate, in calculating the Shareholder Approval
Threshold, to require that LTSE Listings Issuers assign a greater level
of voting power to the newly issued shares than the Initial Voting
Power of those shares, on the presumption that the ultimate voting
power of those shares will increase over time.
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\82\ See, e.g., IEX Rule 14.412(a)(1)(A).
\83\ Specifically, for the purposes of determining the number of
shares to be issued in an offering of future-priced securities, the
Exchange staff will ``look to the maximum potential issuance of
common shares.'' See Supplementary Material .04 to IEX Rule 14.412.
Future-priced securities are securities that are convertible into
common stock at a conversion price that is linked to the market
price of the underlying common stock at the time of conversion. In
such cases, the lower the price of the company's common stock at the
time of conversion, the more shares of common stock the holder of
the future-priced security would receive.
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The Exchange notes, however, that because shareholders that obtain
shares in a transaction may or may not elect to hold their shares in
record ownership, and may hold them in such manner for varying lengths
of time, it is not possible to determine with precision how many shares
issued in any transaction would accumulate additional voting power or
the extent of voting power those shares will eventually attain. One
potential approach would be to assume that all of the new shares in a
proposed issuance will be registered in record name and held in that
form for ten years, thereby accruing the maximum additional voting
power (i.e., ten times the Initial Voting Power).\84\ Under that
approach, when conducting the shareholder approval calculation, the
issuer would multiply the voting power of the shares to be issued (the
numerator of this calculation) by ten and would then divide that number
by the existing voting power of the shares outstanding (the denominator
of this calculation). The Exchange believes that issuers would then be
required to obtain shareholder approval frequently, because they would
be required to assume a much higher voting power for the shares to be
issued (to account for potential future voting power), but would also
be required to assume that the voting power of the outstanding shares
remains the same. The Exchange believes that this approach would not be
appropriate because the Exchange believes that it would be extremely
unlikely that all shares of a new issuance will be held in record name
by the same shareholder uninterrupted for ten years.\85\ In addition,
the Exchange believes that it would be even more unlikely for all
shares of a new issuance to accrue votes up to the maximum amount while
the shares outstanding remain static and do not accrue any additional
votes. Given what the Exchange believes is the extremely low
probability of this occurrence, the Exchange believes that requiring
issuers to make these particular assumptions will result in LTSE
Listings Issuers needing to obtain shareholder approval for
transactions that would not be materially dilutive to existing
shareholders nor would it be consistent with the objective of the rule,
as it would effectively impose a Shareholder Approval Threshold of 2%
instead of the 20% (if one were to calculate based solely on the
Initial Voting Power of the shares at the time of their issuance). The
Exchange does not believe that imposing the burden of obtaining
shareholder approval (including the
[[Page 14091]]
monetary costs as well as time and uncertainty) would be justified for
transactions that the Exchange believes are unlikely to be materially
dilutive to the voting power of existing shareholders.
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\84\ This approach would be similar to the approach required for
calculating the number of shares that may be issued pursuant to an
offering of future-priced securities, as discussed supra note 83.
However, the Exchange believes that this approach would not be
appropriate for determining whether the voting power of an issuance
by an LTSE Listings Issuer would exceed the Shareholder Approval
Threshold. In addition to the reasons described below, the Exchange
believes purchasers of convertible securities have a strong economic
incentive to exercise their conversion rights and acquire common
stock at some point in time. If the price of the underlying common
stock has declined at the time of conversion, the number of shares
of common stock that will be issued (and thus the dilution of
existing shareholders) could increase significantly. While the
Exchange believes that LTSE Listings Issuers will attract more long-
term focused shareholders, not all shareholders will be long-term or
have the incentive, economic or otherwise, to register their shares
in record name and accrue additional voting power, and the Exchange
therefore believes that, for a variety of reasons, many shareholders
will never elect to do so.
\85\ As discussed above, supra note 11, the average holding
period in 2015 was approximately eight months. Although the Exchange
expects a longer average holding period for LTSE Listings Issuers,
the Exchange believes that assuming a full ten-year holding period
for all shareholders of LTSE Listings Issuers would not be
reasonable.
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Proposed Rule 14A.412 would take what the Exchange believes to be a
more reasonable and balanced approach that is aligned with the purpose
of this requirement, while still taking into account the potential
increased future voting power of new shares to be issued.\86\
Specifically, for LTSE Listings Issuers that have been listed on LTSE
Listings for at least five years, the numerator of the shareholder
approval calculation would be determined by multiplying the number of
shares to be issued by the product of the Initial Voting Power for such
shares and a ``Long-Term Voting Factor,'' rather than just the Initial
Voting Power of such shares. The Long-Term Voting Factor is intended to
estimate the extent of the increase in voting power that the new shares
to be issued are likely to obtain based on the percentage of increased
voting power that existing issued shares have already obtained. This
percentage would be applied to the new shares to be issued, thus
estimating the likely voting power that the new shares would obtain
over time.
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\86\ The Exchange has included examples demonstrating how an
LTSE Listings Issuer would conduct the shareholder approval
calculations under proposed Rule 14A.412, as compared to alternative
approaches considered, in Exhibit 3.
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The Long-Term Voting Factor would be calculated by dividing, as of
the Shareholder Approval Calculation Date (defined below), the voting
power outstanding attributable to the LTSE-Listings Issuer's shares
listed on LTSE Listings by the combined Initial Voting Power of those
shares. This number will be equal to one if none of the LTSE Listings
Issuer's shareholders have accrued additional voting power and will
increase beyond one at a rate proportional to the number of additional
votes attributable to LTSE Listings' long-term voting mechanics. In
other words, the Long-Term Voting Factor represents the effect of long-
term voting on the LTSE Listings Issuer's outstanding voting power as
of the Shareholder Approval Calculation Date. For example, if an LTSE
Listings Issuer has 1,000,000 shares outstanding on the Shareholder
Approval Calculation Date, each with an Initial Voting Power of one
vote per share, and as a result of increases in voting power over time,
those shares have a total of 3,000,000 votes, the Long-Term Voting
Factor would be 3.0. The formula would then assume that new shares to
be issued would similarly achieve three votes per share over some
period of time in the future. Given that the Exchange is unable to
predict how many shareholders will actually elect to hold their shares
in record ownership and thereby accrue additional voting power, or how
long such shareholders would hold their shares, the Exchange believes
that it is reasonable to look to the LTSE Listings Issuer's prior
experience and apply that same experience to the new shares to be
issued.
For LTSE Listings Issuers that have been listed on LTSE Listings
for fewer than five years, the numerator in the shareholder approval
calculation would be the greater of (i) the number of shares to be
issued multiplied by the product of the Initial Voting Power for such
shares and the Long-Term Voting Factor or (ii) the number of shares to
be issued multiplied by the Initial Voting Power of such shares further
multiplied by two. This effectively applies a minimum Long-Term Voting
Factor of two to LTSE Listings Issuers that have been listed on LTSE
for fewer than five years, even where the LTSE Listings Issuer has an
actual Long-Term Voting Factor of less than two. The Exchange believes
that imposing this minimum multiple of two is appropriate because the
actual Long-Term Voting Factor that these companies would have
experienced during their short period of time of being public companies
is likely to be lower than longer-listed issuers and may not be
representative of the longer-term growth in voting power that the new
shares may ultimately attain.\87\
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\87\ If the LTSE Listings category is approved, the Exchange
will periodically assess whether a five year cut-off for applying a
minimum Long-Term Voting Factor and the minimum Long-Term Voting
Factor of two continue to be appropriate, or whether either should
be modified based on its experience with LTSE Listings Issuers. For
example, the Exchange will consider when the rate of growth of the
voting power of an LTSE Listings Issuer's shares typically becomes
relatively stable, and at what level. The Exchange notes that any
such modification would be subject to the provisions of Section
19(b)(1) under the Act and Rule 19b-4 thereunder. See 15 U.S.C.
78s(b)(1) and 17 CFR 240.19b-4.
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As stated above, it is difficult to predict with any level of
certainty how many shareholders will register their shares in record
name and accrue additional voting power; however, the Exchange believes
that applying a minimum multiple of two for companies that have been
listed on LTSE for less than five years is reasonable and
conservatively estimates the relative potential voting power of the new
shares to be issued. This belief is informed by the Exchange's
understanding of current shareholder turnover data, such as that in
2015 (albeit for non-LTSE Listings Issuers), investors held a stock for
an average of about eight months.\88\ A minimum Long-Term Voting Factor
of two, however, the Exchange believes conservatively assumes a much
longer average holding period. By way of example, an LTSE Listings
Issuer would only have actually achieved a Long-Term Voting Factor of
two, even after five years, if 20% of its outstanding shares were
registered in the name of their shareholders on the books of the
company in the first month following the issuer's IPO and such shares
remained registered to those same investors without any interim
transfers throughout the five-year period, and no other shares were
added during that period.\89\ Both the factor of two and the five-year
threshold are being imposed on the basis of the Exchange's best
judgment, which the Exchange believes balances the need to recognize
that the shares' voting power can increase with the burden faced by
companies seeking shareholder approval.
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\88\ See Turnover Ratio of Domestic Shares, supra note 11.
\89\ If the LTSE Listings category is approved, the Exchange
will periodically assess whether the minimum Long-Term Voting Factor
of two for LTSE Listings Issuers listed for less than five years
should be modified based on its experience with LTSE Listings
Issuers. The Exchange notes that any such modification would be
subject to the provisions of Section 19(b)(1) under the Act and Rule
19b-4 thereunder. See 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4.
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Proposed Rule 14A.412(b) would also clarify how to calculate the
denominator in the shareholder approval calculation. IEX Rule
14.412(e)(2) currently provides that the denominator (voting power
outstanding) refers to the ``aggregate number of votes which may be
cast by holders of those securities outstanding which entitle the
holders thereof to vote generally on all matters submitted to the
Company's security holders for a vote.'' The calculation would be the
same for LTSE Listings Issuers, except that proposed Rule 14A.412(b)
would provide that this calculation must be made as of the Shareholder
Approval Calculation Date, which would be the date on which an LTSE
Listings Issuer enters into a binding agreement to conduct a
transaction that may require shareholder approval under IEX Rule 14.412
(i.e., the acquisition of stock of assets of another company or a
private placement). The Exchange already expects Exchange-listed
issuers to conduct this calculation as of this date; \90\ however,
because the shares of
[[Page 14092]]
an LTSE Listings Issuer may accrue voting power over time, unlike the
shares of other Exchange-listed companies, the Exchange believes it is
important to explicitly specify in the LTSE Listings Rules the date on
which this calculation must be performed.
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\90\ The Exchange understands that other national securities
exchanges similarly expect their listed issuers to conduct the
shareholder approval calculation under those exchanges'
substantially similar rules as of this date.
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The provisions described above are designed to clarify how the
shareholder approval calculation under IEX Rule 14.412 would be
conducted by an LTSE Listings Issuer. All other provisions of IEX Rule
14.412 would continue to apply, including, for example, the financial
viability exception in IEX Rule 14.412(f).
(vii) Failure To Meet LTSE Listings Standards
Pursuant to IEX Rule 14.500(a), securities of an Exchange-listed
company that do not meet the listing standards set forth in Chapters 14
and 16 of the Exchange's rulebook are subject to potential delisting
from the Exchange. IEX Rule Series 14.500 sets forth procedures for the
independent review, suspension and delisting of companies that fail to
satisfy such standards. Proposed Rule 14A.500(a) would provide that a
failure to meet the listing standards set forth in the LTSE Listings
Rules would be treated as a failure to meet the listing standards set
forth in Chapter 14 of the Exchange's rulebook for purposes of IEX Rule
Series 14.500. As a result, the procedures set forth in the IEX Rule
Series 14.500 would apply to any LTSE Listings Issuer that fails to
comply with the listing standards in the LTSE Listings Rules, in
addition to other applicable listing standards in the Exchange's
rulebook.
IEX Rule 14.501(d) provides that if a company fails to satisfy the
Exchange's listing standards, the type of deficiency at issue will
determine whether the company will be immediately suspended or
delisted, whether the company will have an opportunity to submit a plan
to regain compliance or whether the company is entitled to an automatic
cure or compliance period before a delisting determination is issued.
Proposed Rule 14A.500(b) would provide that a failure to satisfy one or
more of the LTSE Listings Rules will be treated as a deficiency for
which a company may submit a plan to regain compliance in accordance
with the Exchange's rules. Like all companies listed on the Exchange,
LTSE Listings Issuers will be fully subject to IEX rules related to
noncompliance and delisting, as set forth in Chapter 14 of the
Exchange's rules.
Proposed Rule 14A.500(c) would provide that in the event that an
LTSE Listings Issuer becomes subject to delisting from LTSE Listings
for failure to satisfy one or more LTSE Listings Rules but is otherwise
in compliance with all other applicable listing rules of the Exchange,
the Exchange may permit such issuer to remain listed on the Exchange,
provided that such issuer will cease to be listed on LTSE Listings and
will cease to be an LTSE Listings Issuer.\91\ In such cases, the
Exchange would assess whether the issuer is in compliance with the
Exchange's continued listing criteria (other than continued listing
criteria applicable solely to LTSE Listings Issuers); however, the
issuer would not need to resubmit a listing application to remain
listed on the Exchange.
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\91\ Regardless of whether or not the Exchange permits an LTSE
Listings Issuer to remain listed on the Exchange in such
circumstances, the Exchange would expect the issuer to comply with
any disclosure obligations relating to the receipt of a notification
of deficiency or delisting determination as set forth in IEX Rule
14.501(c) and Item 3.01 of Form 8-K with respect to the termination
of its listing on LTSE Listings.
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(viii) Listing Fees for LTSE Listings Issuers
Proposed Rule Series 14A.600 is currently marked ``Reserved.'' The
Exchange intends to file a separate proposed rule change with the
Commission under Section 19 of the Act that would addresses [sic]
listing fees applicable to LTSE Listings Issuers.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act in general,\92\ and further the objectives
of Section 6(b)(5) of the Act,\93\ in particular, in that it is
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system and, in general, to
protect investors and the public interest.
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\92\ 15 U.S.C. 78f.
\93\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
As discussed in detail in the Purpose section above, the Exchange
believes that there is growing concern among market observers that
pressures to meet short-term expectations have resulted in negative
consequences for companies, investors and the economy as a whole. The
Exchange believes that the LTSE Listings Rules would remove impediments
to a free and open market and protect investors and the public interest
by providing the marketplace with a differentiated listing venue choice
that seeks to encourage greater focus by companies and investors on the
long-term. Specifically, the LTSE Listings Rules are intended to better
enable companies to focus on long-term value creation, potentially
enhancing opportunities for capital formation, and are also intended to
foster transparency and effective corporate governance, which would
benefit all investors, particularly those with a long-term focus. In
addition, because listing on LTSE Listings and becoming subject to the
LTSE Listings Rules is a voluntary election, the LTSE Listings Rules
are not designed to permit unfair discrimination among issuers.
The following subsections provide additional detail on how the LTSE
Listings Rules are designed to further the objectives of Section 6(b)
of the Act.
(1) Board of Directors and Committee Requirements
As described in the Purpose section under ``Board of Directors and
Committee Requirements,'' the proposed LTSE Listings Rules would impose
additional obligations on the boards of directors and board committees
of LTSE Listings Issuers. For example, the LTSE Listings Rules would
require each LTSE Listings Issuer to establish a board committee
dedicated to overseeing the issuer's strategies for creating and
sustaining long-term growth (i.e., an LTSP Committee). Among other
things, the LTSP Committee would be required to review and approve an
LTSE Listings Issuer's LTSP Disclosures, including the disclosure of
its Long-Term Growth Strategy, on at least an annual basis. The
Exchange believes that these requirements would protect investors and
the public interest because it would help LTSE Listings Issuers focus
on long-term goals. The LTSE Listings Rules would also require LTSE
Listings Issuers to establish an independent committee dedicated to
selecting or recommending qualified director nominees (i.e., a
nominating/corporate governance committee). In addition, the LTSE
Listings Rules would require the LTSP Committee, the nominating/
corporate governance committee, the compensation committee and the
audit committee to report regularly to the board of directors and would
require that the charters of such committees be made available on or
through the LTSE Listings Issuer's website. The Exchange believes that
these requirements are consistent with the protection of investors and
the public interest
[[Page 14093]]
because they are designed to support the governance structure
objectives of LTSE Listings.
(2) Long-Term Strategy and Product Disclosures
As described in the Purpose section under ``Long-Term Strategy and
Product Disclosures,'' the proposed LTSE Listings Rules would require
LTSE Listings Issuers to provide investors with LTSP Disclosures, which
are supplemental disclosures regarding an LTSE Listings Issuer's long-
term strategy and products. Specifically, the LTSP Disclosures would
include disclosures relating to an LTSE Listings Issuer's Long-Term
Growth Strategy, Buybacks, Human Capital Investment and research and
development. These disclosures would be in addition to the disclosures
required under the Act, the Commission's rules thereunder and the
Exchange's other rules. The Exchange believes that the LTSP Disclosures
would be consistent with the aims of the existing disclosure
requirements of the Act--to ensure that investors receive full and
accurate information so that they can make informed investment
decisions--and are thereby consistent with the protection of investors
and the public interest. Specifically, the Exchange believes that the
LTSP Disclosure requirements would ensure that investors receive
sufficient information to evaluate a company's progress toward meeting
long-term goals. Although only LTSE Listings Issuers would be subject
to these requirements, these requirements would not unfairly
discriminate among issuers as only those companies electing to be
subject to the LTSE Listings Rules would be subject to these
requirements.
(3) Long-Term Alignment of Executive Compensation
As described in the Purpose section under ``Long-Term Alignment of
Executive Compensation,'' the LTSE Listings Rules would require that an
LTSE Listings Issuer's compensation committee adopt a set of executive
compensation guidelines applicable to Executive Officers that are
designed to link executive compensation to the long-term value of the
LTSE Listings Issuer. The Exchange believes that these requirements are
consistent with the protection of investors and the public interest,
consistent with Section 6(b)(5) of the Act, because they would help
ensure that Executive Officers are incentivized to take actions that
would enhance the long-term growth of an LTSE Listings Issuer, rather
than short-term results. In addition, the Exchange believes that
requiring a stronger link between a company's long-term performance and
its executive compensation is designed to prevent fraudulent and
manipulative acts and practices, by incentivizing executives to act in
the long-term interest of LTSE Listings Issuers and limiting the extent
to which executives could personally profit from efforts to effect
short-term performance.
(4) Long-Term Shareholder Voting Structure
As described in the Purpose section under ``Long-Term Shareholder
Voting Structure,'' the LTSE Listings Rules would require that LTSE
Listings Issuers maintain voting rights provisions in their corporate
organizational documents that provide shareholders with the ability, at
the shareholders' option, to accrue additional voting power over time.
The Exchange believes that these requirements are consistent with the
protection of investors and the public interest because they would
provide a mechanism by which long-term shareholders can have greater
influence in corporate governance. The Exchange believes that long-term
shareholders are more likely than short-term investors to exercise
their governance rights in a manner that prioritizes long-term growth
over short-term results, and thus it is in the public interest and
furthers the protection of investors for longer-term investors to have
a greater role in corporate governance. In this regard, the Commission
has noted that, ``when the interests of long-term investors and short-
term traders conflict . . . its clear responsibility is to uphold the
interests of long-term investors.'' \94\ Further, the Exchange believes
that, consistent with Section 6(b)(5) of the Act, the long-term voting
rights provisions would not be unfairly discriminatory, as any
shareholder of an LTSE Listings Issuer would have equal opportunity to
elect to move their shares into registered form and accrue additional
voting rights. Further, by requiring that the length of a shareholder's
ownership be consistently measured through the shareholder's record
ownership on an LTSE Listings Issuer's books, transferred to and from
``street name'' through a DRP, the Exchange believes that the system
will foster cooperation and coordination with persons engaged in
regulating, clearing, settling, and processing information with respect
to, and facilitating transactions in securities, consistent with
Section 6(b)(5) of the Act.
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\94\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37495, 37500 (June 29, 2005).
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(5) Other Long-Term Requirements
As described in the Purpose section under ``Other Long-Term
Requirements,'' the LTSE Listings Rules would include certain other
rules designed to encourage LTSE Listings Issuers to focus on long-term
value creation. For example, the LTSE Listings Rules would provide that
LTSE Listings Issuers are generally prohibited from providing Earnings
Guidance more frequently than annually. The Exchange believes that this
requirement is consistent with the protection of investors and the
public interest by enhancing the ability of companies to withstand
short-term pressures and focus on long-term growth, and is designed to
prevent fraudulent and manipulative acts and practices, such as the
risk that a company could take actions to artificially meet prior
Earnings Guidance.
The LTSE Listings Rules would also require that each LTSE Listings
Issuer develop and publish a policy regarding an LTSE Listings Issuer's
impact on the environment and community, and a policy explaining an
LTSE Listings Issuer's approach to diversity. The Exchange believes
that this requirement is consistent with the protection of investors
and the public interest by ensuring that companies consider their
impact on various stakeholders and the sustainability of their
business.
The LTSE Listings Rules would require LTSE Listings Issuers to have
and maintain a publicly accessible website. Documents required to be
posted on this website under the LTSE Listings Rules would be required
to be made available in a printable version in the English language.
The Exchange believes that these requirements are consistent with the
protection of investors and the public interest by ensuring that
investors and the public have access to the disclosures and other
documents required by the LTSE Listings Rules.
The LTSE Listings Rules would require LTSE Listings Issuers to make
certain certifications to the Exchange. Specifically, LTSE Listings
Issuers would be required to certify, at or before the time of listing,
that all applicable listing criteria, including listing criteria under
the LTSE Listings Rules, have been satisfied. In addition, the LTSE
Listings Rules would require the CEO of each LTSE Listings Issuer to
certify annually to the Exchange that the LTSE Listings Issuer is in
compliance with proposed Rule Series 14A.400, which would contain the
corporate governance
[[Page 14094]]
requirements of the LTSE Listings Rules, qualifying the certification
to the extent necessary. The Exchange believes that these certification
requirements are consistent with the protection of investors and the
public interest and are designed to prevent fraudulent and manipulative
acts and practices. As discussed in the Purpose section, given the
unique nature of the LTSE Listings Rules, the Exchange believes that
adding an annual certification requirement for LTSE Listings Issuers
will assist the CEO and senior management of such issuers in ensuring
compliance with LTSE Listings corporate governance requirements on an
ongoing basis.
(6) Proposed Rules Clarifying Application of Existing Exchange Rules
As described in the Purpose section under ``Proposed Rules
Clarifying Application of Existing Exchange Rules,'' the LTSE Listings
Rules would include a number of rules that would clarify the
application of existing Exchange rules to LTSE Listings Issuers. In
general, these rules would provide that LTSE Listings Issuers must
comply with both the LTSE Listings Rules as well as all other
applicable rules of the Exchange. However, these rules would also
explain any deviations from this general principle. For example,
although the Exchange maintains listing rules relevant for various
types of securities, including American Depositary Receipts, preferred
stock, rights and warrants, among others, the LTSE Listings Rules would
clarify that only common equity securities would be eligible for
listing on LTSE Listings. Similarly, although the Exchange maintains a
number of exemptions from certain corporate governance requirements for
certain types of issuers (e.g., Foreign Private Issuers), certain
exemptions would not be available for LTSE Listings Issuers. The
Exchange believes that these rules are consistent with protecting
investors and the public interest because they would provide
transparency to issuers and investors on how the Exchange's existing
rules would apply to an LTSE Listings Issuer. Although these rules
discriminate between issuers listed on LTSE Listings and other issuers
listed on the Exchange, as well as between the type of security listed,
the Exchange believes that the rules are not unfairly discriminatory,
as companies are free to elect whether to list on LTSE Listings and be
subject to its additional requirements.
Another example of a proposed rule that would clarify the
application of existing Exchange rules to LTSE Listings Issuers is
proposed Rule 14A.412, which would clarify how an LTSE Listings Issuer
would conduct the shareholder approval calculation in IEX Rule 14.412.
The Exchange believes that this proposed Rule would further the
objectives of Section 6(b)(5) of the Act because it would ensure that
the long-term voting mechanics of the LTSE Listings Rules are taken
into account when conducting this calculation. As discussed in the
Purpose section, the Exchange believes that the proposed approach
appropriately balances the reasonably likely potential dilution to
existing shareholders without imposing a disparately burdensome
shareholder approval requirement on LTSE Listings Issuers. The fact
that shares may accrue voting power over time means that shares may be
issued that have voting power that is less than the Shareholder
Approval Threshold at the time of issuance, but potentially greater
than the Shareholder Approval Threshold after a certain period of time.
This would increase the dilution to the shareholders that held shares
prior to that issuance. Although such existing shareholders would also
have the ability to accrue additional voting power, to protect such
shareholders and promote just and equitable principles of trade,
proposed Rule 14A.412 would require LTSE Listings Issuers to take into
account the likely voting power growth that the potential new shares
would obtain over time (i.e., the Long-Term Voting Factor) when
determining whether an issuance covered by IEX Rule 14.412 would
require shareholder approval.
For purposes of proposed Rule 14A.412, the assumed growth in voting
power for the potential new shares is equal to the actual growth in
voting power that the existing shares have obtained; however, shares of
relatively new LTSE Listings Issuers may not have had time to accrue
additional voting power. In other words, the Long-Term Voting Factor
may be lower than what it would otherwise be for an LTSE-Listings
Issuer that has been listed on LTSE Listings for a longer period of
time. As a result, proposed Rule 14A.412 provides that LTSE Listings
Issuers that have been listed for fewer than five years must assume a
minimum Long-Term Voting Factor of two.\95\ The Exchange believes that
this provision further protects investors and helps ensure that the
shareholder approval calculation in IEX Rule 14.412 appropriately
balances the interests of existing shareholders in having a vote on
potentially dilutive share issuances with the burden of holding a
shareholder meeting under circumstances when material dilution is
unlikely. The Exchange believes that this approach is consistent with
the policy objectives of IEX Rule 14.412 as discussed in the Purpose
section.
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\95\ As noted in the Purpose section, if the LTSE Listings
category is approved, the Exchange will periodically assess whether
the minimum Long-Term Voting Factor of two should be modified based
on its experience with LTSE Listings Issuers. The Exchange notes
that any such modification would be subject to the provisions of
Section 19(b)(1) under the Act and Rule 19b-4 thereunder. See 15
U.S.C. 78s(b)(1) and 17 CFR 240.19b-4.
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Proposed Rule 14A.500(c) would provide that in the event that an
LTSE Listings Issuer becomes subject to delisting from LTSE Listings
for failure to satisfy one or more LTSE Listings Rules but is otherwise
in compliance with all other applicable listing rules of the Exchange,
the Exchange may permit such issuer to remain listed on the Exchange,
provided that such issuer will cease to be listed on LTSE Listings and
will cease to be an LTSE Listings Issuer.\96\ The Exchange would assess
whether such an issuer is in compliance with the Exchange's continued
listing criteria (other than continued listing criteria applicable
solely to LTSE Listings Issuers), and this provision would allow such
an issuer to remain listed on the Exchange without going through the
process of reapplying for an Exchange listing, which the Exchange
believes would be disruptive to the issuer and its investors. As a
result, the Exchange believes that this proposed rule would further the
objectives of Section 6(b)(5) of the Act by, among other things,
helping to remove impediments to and perfect the mechanism of a free
and open market.
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\96\ The Exchange believes that this provision is similar to
rules of other national securities exchanges that permit an issuer
receiving a delisting determination to transfer to a separate
segment of such exchange, subject to compliance with the continued
listing standards of the separate segment. See Nasdaq FAQ
Identification No. 474 (7/31/2012). Accordingly, the Exchange does
not believe that this aspect of the LTSE Listings Rules raises any
new or novel issues and is consistent with requirements of Section
6(b)(5) of the Act.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act. To the contrary,
the Exchange believes that the proposed rule change will enhance
competition between exchange listing markets in furtherance of Section
11A(a)(1)(C)(ii) of the Act \97\ and consistent with Section 6(b)(8) of
the
[[Page 14095]]
Act \98\ because it will provide issuers with an alternative with a
differentiated offering as compared to the other listing rules existing
on other national securities exchanges and the Exchange itself.
Moreover, as a new listing venue, the Exchange expects to face intense
competition from existing exchanges. Consequently, the degree to which
a new listing category on the Exchange could impose any burden on
intermarket competition is extremely limited, and the Exchange does not
believe that such listing category would impose any burden on competing
venues that is not necessary or appropriate in furtherance of the
purposes of the Act. In addition, there is no barrier to other
exchanges adopting similar listing standards. To the extent LTSE
Listings is successful in attracting issuers to the list on the
Exchange, other exchanges or potential new entrants could respond by
adopting their own rules that are designed to foster long-term value
creation.
---------------------------------------------------------------------------
\97\ 15 U.S.C. 78k-1(a)(1)(C)(ii).
\98\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------
The Exchange also does not believe that the proposed rule change
will result in any burden on intramarket competition since becoming
subject to the supplemental standards in the LTSE Listings Rules is
completely voluntary. Issuers can elect to list on the Exchange without
listing on LTSE Listings, or can elect to become subject to the
heightened standards of the LTSE Listings Rules. The Commission and
Congress have in other contexts recognized that companies may elect to
be subject to greater compliance obligations than strictly required, or
elect not to rely on exemptions that may otherwise be available. For
example, in adopting the Jumpstart Our Business Startups Act,\99\
Congress provided that emerging growth companies could, but were not
required to, elect to rely on exemptions from various securities law
requirements.\100\ Similarly, the Commission provides that classes of
companies, such as Smaller Reporting Companies, may but are not
required to provide particular disclosures.\101\ Similarly, other
national securities exchanges have adopted categories for listed
companies that elect to become subject to higher standards than other
companies listed on such national securities exchange.\102\
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\99\ Public Law 112-106, 126 Stat. 306 (2012).
\100\ For example, emerging growth companies may, but ``need not
present more than 2 years of audited financial statements in order
for the registration statement of such emerging growth company with
respect to an initial public offering of its common equity
securities to be effective . . .'' See Securities Act Section
7(a)(2)(A); 15 U.S.C. 77g(a)(2)(A).
\101\ See, e.g., Regulation S-K, Item 10(f); 17 CFR 229.10(f)
(``[a] smaller reporting company may comply with either the
requirements applicable to smaller reporting companies or the
requirements applicable to other companies for each item, unless the
requirements for smaller reporting companies specify that smaller
reporting companies must comply with the smaller reporting company
requirements'').
\102\ See generally Nasdaq Rule 5000 series (containing more
stringent listing standards for issuers listed on the ``Nasdaq
Global Select Market'' as compared to those listed on the ``Nasdaq
Global Market'' or the ``Nasdaq Capital Market'').
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The Exchange also does not believe that the proposal will impose
any burden on competition between LTSE Listings Issuers that is not
necessary or appropriate in furtherance of the purposes of the Act
because all companies electing to list on LTSE Listings will be subject
to the same standards. Furthermore, where appropriate, the LTSE
Listings Rules are designed to provide LTSE Listings Issuers with
flexibility to implement the minimum standards contained in the LTSE
Listings Rules in ways that are best suited for that issuer's business.
Finally, the Exchange does not believe that the transfer agent
certification requirement under proposed Rule 14A.413(b)(5) will impose
a burden on competition with respect to transfer agents. While not all
transfer agents will be able to implement the required software or
other systems or processes, any transfer agent can choose to invest the
resources necessary to implement such software or other systems or
processes. Moreover, as noted above, as a new listing venue, the
Exchange expects to face intense competition from existing exchanges.
Consequently, the degree to which a new listing category on the
Exchange could impose any burden on competition among transfer agents
is extremely limited, and the Exchange does not believe that such
listing category would impose any burden on transfer agents that is not
necessary or appropriate in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-IEX-2018-06 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-IEX-2018-06. 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 (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of such filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File
[[Page 14096]]
Number SR-IEX-2018-06 and should be submitted on or before April 23,
2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\103\
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\103\ 17 CFR 200.30-3(a)(12).
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Jill Peterson,
Assistant Secretary.
[FR Doc. 2018-06568 Filed 3-30-18; 8:45 am]
BILLING CODE 8011-01-P