[Federal Register Volume 84, Number 151 (Tuesday, August 6, 2019)]
[Notices]
[Pages 38321-38323]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-16722]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86537; File No. SR-NASDAQ-2019-060]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing of Proposed Rule Change To Amend Rules 4120 and 4753
July 31, 2019.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on July 18, 2019, The Nasdaq Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the Exchange.
The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 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
The Exchange proposes to amend Rules 4120 and 4753 to permit the
Exchange to declare a regulatory halt in a security that traded in the
over-the-counter market prior to the initial pricing on the Exchange
and to allow for the initial pricing of such securities through the IPO
Cross.
The text of the proposed rule change is available on the Exchange's
website at http://nasdaq.cchwallstreet.com, at the principal office of
the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Nasdaq proposes to amend Rule 4120 to permit the Exchange to
declare a regulatory halt in a security that traded in the over-the-
counter market (the ``OTC market'') prior to the initial pricing on the
Exchange. Nasdaq also proposes to amend Rule 4753 to allow for the
initial pricing on the Exchange of such securities through the IPO
Cross where a broker-dealer is willing to serve in the role of
financial advisor to the issuer and perform the functions under Rule
4120(c)(8) that are ordinarily performed by an underwriter with respect
to an initial public offering. Finally, the proposed change would state
that where a security previously traded in the OTC market pursuant to
FINRA Form 211 is initially priced using the IPO Cross, the fourth tie-
breaker for each of the Current Reference Price disseminated in the
Nasdaq Order Imbalance Indicator and the price at which the Nasdaq Halt
Cross will occur shall be the most recent transaction price in the
over-the-counter market.
Background
In 2014, Nasdaq first adopted rules to allow the use of the Nasdaq
IPO Cross to initiate trading in securities that have not been listed
on a national securities exchange or traded in the over-the-counter
market pursuant to FINRA Form 211 (the ``OTC market'') immediately
prior to the initial pricing and described the role of financial
advisors in that process.\3\ At that time, the Exchange added new Rule
4120(c)(9) \4\ to set forth the process by which trading commences in
such securities. Under that rule, securities of companies that have not
previously been listed on a national securities exchange or traded in
the OTC market pursuant to FINRA Form 211 immediately prior to listing
on Nasdaq can be launched for trading using the same crossing mechanism
[[Page 38322]]
available for IPOs outlined in Rule 4120(c)(8) and Rule 4753 (the ``IPO
Cross''). Prior to that rule change, securities of companies that were
not conducting IPOs were released using the Halt Cross outlined in Rule
4120(c)(7), which differed from the IPO Cross.\5\
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\3\ Securities Exchange Act Release No. 71931 (April 11, 2014),
79 FR 21829 (April 17, 2014) (SR-NASDAQ-2014-032) (the ``2014 Rule
Change'').
\4\ In 2014, Nasdaq filed SR-NASDAQ-2014-081 modifying the
functions that are performed by an underwriter with respect to an
initial public offering and renumbered certain paragraphs of Rule
4120. Securities Exchange Act Release No. 73399 (October 21, 2014),
79 FR 63981 (October 27, 2014) (approving SR-NASDAQ-2014-81). All
references in this filing are to the renumbered rules, as currently
in effect.
\5\ The Halt Cross process has a shorter quoting period (five
minutes) and provides no ability to extend the quoting period in the
event trading interest or volatility in the market appears likely to
have a material impact on the security, unless there is an order
imbalance as defined in the rule. See the 2014 Rule Change for
additional details on the differences between the Halt Cross and the
IPO Cross.
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The 2014 Rule Change extended the safeguards contained in the IPO
Cross to securities that have not been listed on a national securities
exchange or traded in the OTC market immediately prior to the initial
pricing and established that a broker-dealer serving in the role of
financial advisor to the issuer could serve in the same capacity for
such securities as the underwriter does for IPOs. Specifically, Rule
4120(c)(9) provides that the IPO Cross process described in Rules 4120
and 4753 is available to securities that have not been listed on a
national securities exchange or traded in the OTC market immediately
prior to the initial pricing where ``a broker-dealer serving in the
role of financial advisor to the issuer of the securities being listed
is willing to perform the functions under Rule 4120(c)(8) that are
performed by an underwriter with respect to an initial public
offering.'' \6\ Rule 4753 provides the definition of Current Reference
Price and a description of the calculation of the price at which the
Nasdaq Halt Cross will occur.\7\
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\6\ Subsequent to the 2014 Rule Change Nasdaq expanded and
elaborated the functions that are performed by an underwriter with
respect to an initial public offering. See footnote 4, above. Rule
4120(c)(9) requires a broker-dealer serving in the role of a
financial advisor to the issuer of the securities being listed to
perform all such functions in order for the issuer to utilize the
IPO Cross for the initial pricing of the security.
\7\ Rules 4753(a)(3)(A) and 4753(b)(2)(D).
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When Nasdaq added Rule 4120(c)(9) in 2014, it cross-referenced Rule
4753 but did not modify it. In 2019, Nasdaq amended Rule 4753 to
elaborate the role of a financial advisor to the issuer of a security
that has not been listed on a national securities exchange or traded in
the OTC market immediately prior to the initial pricing.\8\ Nasdaq has
successfully employed the IPO Cross for securities that have not been
listed on a national securities exchange or traded in the OTC market
pursuant to FINRA Form 211 immediately prior to the initial pricing
since 2014 and continues to believe that financial advisors to issuers
seeking to utilize that process are well placed to perform the
functions that are currently performed by underwriters with respect to
an initial public offering.
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\8\ Securities Exchange Act Release No. 85156 (February 15,
2019), 84 FR 5787 (February 22, 2019) (SR-NASDAQ-2019-001).
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Proposed Rule Change
Nasdaq now proposes to amend Rules 4120 and 4753, based on the same
rationale that supported the 2014 Rule Change, to permit the Exchange
to declare a regulatory halt in a security that traded in the over-the-
counter market prior to the initial pricing on the Exchange.
The Exchange proposes to delete the clause ``or traded in the over-
the-counter market pursuant to FINRA Form 211'' in Rule 4120 before
``immediately prior to the initial pricing.'' The proposed amendment
would thus enable the Exchange to declare a regulatory halt for a
security that is having its initial listing on the Exchange that was
traded in the OTC market immediately prior to its initial pricing on
the Exchange.
Nasdaq believes that it would be consistent with the protection of
investors and the public interest for the Exchange, as a primary
listing exchange, to have to authority to declare a regulatory halt for
a security that was previously traded in the OTC market prior to its
initial pricing on Nasdaq. An OTC market security that will be listed
on a primary listing exchange will be removed from the OTC trading list
on the day prior to its initial pricing on the Exchange. However, on
the day of its initial listing, such security can trade on an unlisted
trading permit (``UTP'') basis before the first transaction on the
primary listing exchange. The Exchange believes that permitting the
Exchange to declare a regulatory halt in such securities before trading
on the Exchange begins would avoid potential price disparities or
anomalies that may occur during any UTP trading before the first
transaction on the primary listing exchange.
More specifically, the Exchange believes that quoting and trading
in the pre-market of an OTC transfer can be erratic and investors may
be harmed if their securities trade during this period. The Exchange
believes that the proposed limited authority to declare a regulatory
halt in the hours prior to the OTC transfer pricing on the Exchange
would mitigate any potential price disparities and contribute to a fair
and orderly market once the security opens on the Exchange. The
Exchange believes that such authority would be consistent with the
protection of investors and the public interest.
In addition, Nasdaq proposes to allow for the initial pricing of
such securities through the IPO Cross where a broker-dealer is willing
to serve in the role of financial advisor to the issuer and perform the
functions under Rule 4120(c)(8) that are ordinarily performed by an
underwriter with respect to an initial public offering. To that end,
Nasdaq proposed to add Rules 4753(a)(3)(A)(iv)(e) and 4753(b)(2)(D)(v)
to state that in the case of the initial pricing of a security that
traded in the over-the-counter market pursuant to FINRA Form 211
immediately prior to the initial pricing, the fourth tie-breaker in
calculating each of the Current Reference Price disseminated in the
Nasdaq Order Imbalance Indicator and the price at which the Nasdaq Halt
Cross will occur, respectively, shall be the most recent transaction
price in that market. Nasdaq believes that such price is predictive of
the price in the market for the common stock that will develop upon
listing of the securities on Nasdaq and that it is therefore
appropriate to use the price from such trading to determine the Current
Reference Price and the price at which the Nasdaq Halt Cross will
occur. Nasdaq also believes that the IPO Cross will be a better
mechanism to open trading in these cases, given that these companies
may attract significant interest upon listing on the Exchange from
investors who previously could not invest in a security that was traded
in the OTC market. In that way, the initial interest in the security
upon its listing on the Exchange is similar to the interest in an
initial public offering.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\9\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\10\ in particular, in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general to protect investors and the public
interest.
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\9\ 15 U.S.C. 78f(b).
\10\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed amendment to Rules 4120 and
4753 to provide authority to declare a regulatory halt in a security
that is an OTC transfer would remove impediments to and perfect the
mechanism of a free and open market and a national market system by
providing the Exchange with authority to halt trading across all
markets for a security that has traded in the OTC
[[Page 38323]]
market and not previously listed on the Exchange, but for which a
regulatory halt would promote fair and orderly markets. The Exchange
believes that permitting the Exchange to declare a regulatory halt in
such securities before trading on the Exchange begins would avoid
potential price disparities or anomalies that may occur during any UTP
trading before the first transaction on the primary listing
exchange.\11\ More specifically, the Exchange believes that quoting and
trading in the pre-market of an OTC transfer can be erratic and
investors may be harmed if their securities trade during this period.
The Exchange therefore believes that having the authority to declare a
regulatory halt for a security that is the subject of an OTC transfer
is consistent with the protection of investors and the public interest
and would promote fair and orderly markets by helping to protect
against volatility in pricing before the initial transaction on the
primary listing exchange.
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\11\ Approving similar changes to Rule 123D of the New York
Stock Exchange (NYSE), the Commission stated that it ``believes that
extending the authority of the [NYSE] to declare a regulatory
trading halt prior to the initial pricing on the [NYSE] of
securities that were previously traded in the OTC market is
consistent with the Act because it is reasonably designed to address
any potential price disparities or anomalies that may occur during
UTP trading before the first transaction on the [NYSE].'' See
Securities Exchange Act Release No. 86351 (July 11, 2019), 84 FR
34219 (July 17, 2019) (Approving SR-NYSE-2019-32).
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The proposed rule change to clarify the fourth tie-breaker used in
calculating the Current Reference Price disseminated in the Nasdaq
Order Imbalance Indicator and the price at which the Nasdaq Halt Cross
will occur, protects investors and the public interest by describing
such fourth tie-breaker for a security that is not the subject of an
IPO, but that has traded in the OTC market pursuant to FINRA Form 211
immediately prior to the initiation of trading on Nasdaq. The proposed
rule change establishes that in such a case the Current Reference Price
and price at which the Nasdaq Halt Cross will occur will be the most
recent transaction price in the OTC market. Nasdaq believes the most
recent price from such trading is predictive of the price that will
develop upon listing of the securities on Nasdaq.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. The Exchange believes that the
benefit to investors to halt trading in a security that transfers from
an OTC market to a primary listing exchange outweighs any burden on
competition that may result from a regulatory halt in such security
before the initial listing on the primary listing exchange. The
proposed rule change is consistent with existing authority for the
Exchange to declare a regulatory halt in trading of a security before
the initial pricing on the Exchange and would extend that authority to
a transfer from the OTC market.
In addition, the proposed change is designed to more fully describe
the application of the IPO Halt Cross to a security that has traded in
the OTC market pursuant to FINRA Form 211 immediately prior to the
initiation of trading on Nasdaq in the determination of the forth tie-
breaker in calculating the Current Reference Price for the security and
the price at which the Nasdaq Halt Cross will occur. The proposed rule
change will have no impact on competition as it is merely designed to
improve the opening process for investors in securities of certain
companies that have already chosen to list on the Exchange and to
insure that the Current Reference Price and the price at which the
Nasdaq Halt Cross will occur is appropriately calculated.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. 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 the 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-NASDAQ-2019-060 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2019-060. 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 the 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 Number SR-NASDAQ-2019-060, and should be submitted
on or before August 27, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-16722 Filed 8-5-19; 8:45 am]
BILLING CODE 8011-01-P