Notice2023-21136
Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing of Proposed Rule Change To Amend Rule 4120 and Rule 4753
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
September 28, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 187 (Thursday, September 28, 2023)</title>
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[Federal Register Volume 88, Number 187 (Thursday, September 28, 2023)]
[Notices]
[Pages 66913-66916]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-21136]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98489; File No. SR-NASDAQ-2023-036]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing of Proposed Rule Change To Amend Rule 4120 and Rule
4753
September 22, 2023.
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 September 12, 2023, The Nasdaq Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``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\ 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 Rule 4120 (Limit Up-Limit Down and
Trading Halts) and Rule 4753 (Nasdaq Halt Cross) to set forth specific
requirements for halting and resuming
[[Page 66914]]
trading in a security that is subject to a reverse stock split.
The text of the proposed rule change is available on the Exchange's
website at <a href="https://listingcenter.nasdaq.com/rulebook/nasdaq/rules">https://listingcenter.nasdaq.com/rulebook/nasdaq/rules</a>, 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
In conjunction with the increase in overall reverse stock splits in
recent years, Nasdaq proposes to amend Rule 4120 and Rule 4753 to set
forth specific requirements for halting trading in a security that is
subject to a reverse stock split and resuming trading using the Nasdaq
Halt Cross. Current Rule 4120 does not specifically list rule reverse
stock splits in its numerated circumstances in which Nasdaq may halt
trading in a security. The proposed amendments will be specific to the
automatic initiation, pre-market trading and opening of a Nasdaq-listed
security undergoing a reverse stock split.
Background
Nasdaq has observed that the current market environment has led to
an increase in reverse stock split activity. In 2022, Nasdaq processed
196 reverse stock splits, compared to 35 in 2021 and 98 in 2020. Just
in the first quarter of 2023, Nasdaq processed 78 reverse stock splits,
and projects significantly more throughout 2023. Reverse stock splits
are often effected by smaller companies that do not have broad media or
research coverage. In most cases, the companies are listed on the
Capital Market tier and are conducting reverse stock splits to achieve
compliance with Nasdaq's $1 minimum bid price requirement.\3\
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\3\ Rule 5550(a)(2) specifies that a Company that has its
Primary Equity Security listed on the Capital Market must have a
minimum bid price of at least $1 per share. See also Rule 5450(a)(1)
(Global and Global Select Markets). Companies are afforded a grace
period pursuant to Rule 5810(c)(3)(A) to regain compliance.
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Nasdaq believes that the increase in companies effecting reverse
stock splits warrants amendments to the trading halt rules to allow for
Nasdaq to help reduce the potential for errors resulting in a material
effect on the market resulting from market participants' processing of
the reverse stock split, including incorrect adjustment or entry of
orders. Nasdaq currently processes reverse stock splits overnight, with
the security opening for trading at 4:00 a.m. EST in the pre-market
hours (i.e., the trading session between 4:00 a.m. to 9:30 a.m. EST) on
a split-adjusted basis. Recently, market participants have expressed
concerns with allowing trading on an adjusted basis at 4:00 a.m.,
noting that it is not optimal because system errors or problems with
orders may go unnoticed for a period of time when a security that has
undergone a reverse stock split opens for trading with the other
thousands of securities. These errors have the potential to adversely
affect investors, market participants and the issuer.\4\ For example,
in one recent instance problems in connection with the processing of a
reverse stock split resulted in a broker executing trades selling more
shares than customers held in their accounts, resulting in a temporary
short position.
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\4\ In a separate filing, Nasdaq also proposed changes to adopt
specific notification and disclosure requirements for reverse stock
splits. See Securities Exchange Act Release No. 98014 (July 28,
2023), 88 FR 51376 (August 3, 2023) (SR-Nasdaq-2023-21).
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As such, Nasdaq believes it is appropriate to impose a regulatory
halt, which would prohibit pre-market trading immediately after a
reverse stock split and open trading in such securities using the
Nasdaq Halt Cross \5\ process set forth in Rule 4753. The proposed new
rule will allow for Nasdaq and market participants to better detect any
errors or problems with orders for the security resulting from the
reverse stock split before trading in the security begins and thereby
avoid any material effect on the market.
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\5\ The ``Nasdaq Halt Cross'' is the process for determining the
price at which Eligible Interest shall be executed at the open of
trading for a halted security and for executing that Eligible
Interest. See Rule 4753(a)(4). ``Eligible Interest'' shall mean any
quotation or any order that has been entered into the system and
designated with a time-in-force that would allow the order to be in
force at the time of the Halt Cross. See Nasdaq Rule 4753(a)(5).
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Description of the Proposed Amendment
Nasdaq is proposing to: (1) amend Rule 4120(a) to provide the
Exchange with explicit authority to declare a trading halt before the
end of Post-Market Hours \6\ on the day immediately before the market
effective date of a reverse stock split; and (2) amend Rule 4120(c) to
include this halt in the existing procedures for initiating and
terminating a trading halt. More specifically, proposed Rule
4120(a)(14) provides that Nasdaq shall halt trading of a security for
which Nasdaq is the primary listing market before the end of the Post-
Market Hours on the day immediately before the market effective date of
a reverse stock split. A trading halt due to a reverse stock split will
be mandatory pursuant to proposed Rule 4120(a)(14). Nasdaq also
proposes to modify Rule 4120(c)(7)(A) to include the new halt authority
proposed in Rule 4120(a)(14) in the reopening process currently
applicable to halts under Rules 4120(a)(1), (4), (5), (6), (9), (10)
and (11). In general, Nasdaq expects to initiate the halt at 7:50 p.m.,
prior to the close of post-market trading at 8:00 p.m. on the day
immediately before the split is effective,\7\ and resume trading at
9:00 a.m. on the day the split is effective.\8\ Nasdaq believes that
this halt and delayed opening will give sufficient time for investors
to review their orders and the quotes for the security and allow market
participants to ensure that their systems have properly adjusted for
the reverse stock split.
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\6\ The term ``Post-Market Hours'' means the period of time
beginning immediately after the end of Market Hours and ending at
8:00 p.m. ET. See Nasdaq Rule Equity 1, Section 1(a)(9).
\7\ Initiating the halt at approximately 7:50 p.m. will provide
Nasdaq with a limited buffer to ensure that trading in a security
that is undergoing a reverse stock split will not continue after the
close of post-market trading.
\8\ Nasdaq may change the resumption time if, for example, there
was an Extraordinary Market Activity that could interfere with a
fair and orderly 9:00 a.m. resumption. ``Extraordinary Market
Activity'' is defined in the Fiftieth Amendment to the Joint Self-
Regulatory Organization Plan Governing the Collection, Consolidation
and Dissemination of Quotation and Transaction Information for
Nasdaq-Listed Securities Traded on Exchanges on an Unlisted Trading
Privileges Basis.
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Nasdaq is also proposing to update Rule 4753(b) to include proposed
Rule 4120(a)(14) in the list of numerated provisions that would be
subject to the Nasdaq Halt Cross. As such, any security that is subject
to a reverse stock split will be reopened using the Nasdaq Halt Cross
prior to trading during market hours.
2. Statutory Basis
The Exchange believes that its proposal is consistent with the
requirements of the Act and the rules and regulations thereunder that
are applicable to a national securities
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exchange, and, in particular, with the requirements of section 6(b) of
the Act.\9\ Specifically, the proposal is consistent with section
6(b)(5) of the Act \10\ because it would promote just and equitable
principles of trade, remove impediments to, and perfect the mechanism
of, a free and open market and a national market system, and, in
general, 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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As described above, the Exchange is seeking to amend rules related
to halting and resuming trading in U.S.-listed equity securities
subject to a reverse stock split. The Exchange believes that
establishing a reverse stock split trading halt rule will protect
investors by giving the Exchange automatic authority to act in
situations where it is necessary to maintain fair and orderly markets.
It will also ensure that the process for resuming trading following a
reverse stock split halt is consistent with other types of halts
initiated by Nasdaq. Currently, none of the provisions in Rule 4120
provide authority to pre-emptively halt during pre-market hours the
trading in a security undergoing a significant corporate action that
could lead to investor or market confusion. The Exchange believes that
the proposed amendments will provide greater transparency and clarity
with respect to the manner in which trading will be halted due to a
reverse stock split, and the process through which that halt will be
implemented and terminated. Particularly, Nasdaq will not have the
discretion of determining when to halt a security following a reverse
stock split. Rather, following the reverse stock split of the security
for which Nasdaq is the primary listing market, trading in the security
will automatically halt prior to the close of post-market trading at
8:00 p.m. The proposed changes seek to achieve consistency with respect
to the initiation and termination of a trading halt with respect to
securities that have undergone a reverse stock split, while maintaining
a fair and orderly market, protecting investors and protecting the
public interest.
Additionally, establishing a mandatory trading halt for securities
that have undergone a reverse stock split and resuming trading
thereafter promotes fair and orderly markets and the protection of
investors, because it encourages Nasdaq to consider the broader
interests of the national market system and addresses potential
concerns that system errors may affect immediate trading in those
securities. Based on the foregoing, the Exchange believes that the
proposed rules are consistent with section 6(b)(5) of the Act \11\
because they will promote just and equitable principles of trade and
will remove any impediments to a free and open market and a national
market system by allowing sufficient time for investors to review their
orders and the quotes for a security that has undergone a reverse stock
split, and allow market participants to ensure that their systems have
properly accounted for the reverse stock split. As discussed
previously, the Exchange believes that the proposed amendments
establishing the authority and process for reverse stock split trading
halts and the resumption of trading is consistent with the Act, which
itself imposes obligations on exchanges with respect to issuers that
are listed.
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\11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes the proposal is consistent with section
6(b)(8) of the Act in that it does not impose any burden on competition
that is not necessary or appropriate in furtherance of the purposes of
the Act as explained below.
The Exchange believes the proposal will not impose a burden on
intermarket competition that is not necessary or appropriate in
furtherance of the purposes of the Act because the proposed rule change
is designed to protect investors and facilitate a fair and orderly
market, which are both important purposes of the Act. To the extent
that there is any impact on intermarket competition, it is incidental
to these objectives.
The Exchange does not believe that the proposed rule change imposes
a burden on intra-market competition because the provisions apply to
all market participants and issuers equally. In addition, information
regarding the halting and resumption of trading will be disseminated
using several freely accessible sources to ensure broad availability of
information offered by the Exchange that are available to subscribers.
In addition, the proposals include provisions related to the
declaration and timing of trading halts and the resumption of trading
designed to avoid any advantage to those who can react more quickly
than other participants.
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 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
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#fb898e979ed6989496969e958f88bb889e98d59c948d"><span class="__cf_email__" data-cfemail="d1a3a4bdb4fcb2bebcbcb4bfa5a291a2b4b2ffb6bea7">[email protected]</span></a>. Please include
file number SR-NASDAQ-2023-036 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-NASDAQ-2023-036. 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 (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>). 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
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available for website viewing and printing in the Commission's Public
Reference Room, 100 F Street NE, Washington, DC 20549, on official
business days between the hours of 10 a.m. and 3 p.m. Copies of the
filing also will be available for inspection and copying at the
principal office of the Exchange. Do not include personal identifiable
information in submissions; you should submit only information that you
wish to make available publicly. We may redact in part or withhold
entirely from publication submitted material that is obscene or subject
to copyright protection. All submissions should refer to file number
SR-NASDAQ-2023-036 and should be submitted on or before October 19,
2023.
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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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-21136 Filed 9-27-23; 8:45 am]
BILLING CODE 8011-01-P
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