[Federal Register Volume 76, Number 245 (Wednesday, December 21, 2011)]
[Notices]
[Pages 79262-79267]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-32577]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-65963; File No. SR-NASDAQ-2011-122]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order
Granting Approval of Proposed Rule Change To Describe Complimentary
Services That Are Offered to Certain New Listings on NASDAQ's Global
and Global Select Markets
December 15, 2011.
I. Introduction
On August 30, 2011, The NASDAQ Stock Market LLC (``NASDAQ'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to describe services offered by NASDAQ to certain
newly listing companies on NASDAQ's Global and Global Select Markets.
The proposed rule change was published in the Federal Register on
September 16, 2011.\3\ The Commission originally received five comment
letters from three commenters on the proposal.\4\ NASDAQ submitted a
letter in response to these comments.\5\ The Commission received three
additional comment letters on November 30, 2011, December 8, 2011, and
December 13, 2011.\6\ On October 28, 2011, the Commission extended the
time period in which to either approve the proposed rule change,
disapprove the proposed rule change, or institute proceedings to
determine whether to disapprove the proposed rule change, to December
15, 2011.\7\ This order grants approval of the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 65324 (September 12,
2011), 76 FR 57781 (``Notice'').
\4\ See Letters to Elizabeth M. Murphy, Secretary, Commission,
from Neil Hershberg, Senior Vice President, Business Wire Inc.,
received September 28, 2011 (``Business Wire Letter 1''); John
Viglotti, Vice President, PR Newswire Association LLC, received
October 7, 2011 (``PR Newswire Letter''); Jesse W. Markham, Jr.,
Roger Myers, and Michael R. MacPhail, Holme Roberts & Owen LLP
(``Holme Roberts'') (writing on behalf of Business Wire, Inc.),
dated October 7, 2011 (``Business Wire Letter 2''); Patrick Healy,
CEO, Issuer Advisory Group LLC, dated October 22, 2011 (``Issuer
Advisory Letter''); and Holme Roberts Letter, dated November 15,
2011 (``Business Wire Letter 3'').
\5\ See Letter to Elizabeth M. Murphy, Secretary, Commission,
from Joan Conley, Senior Vice President and Corporate Secretary,
NASDAQ OMX, dated November 15, 2011 (``NASDAQ Response Letter'').
\6\ See Letter to Elizabeth M. Murphy, Secretary, Commission,
from Janet McGinness, New York Stock Exchange LLC, dated November
30, 2011 (``NYSE Letter''); Holme Roberts Letter, dated December 8,
2011 (``Business Wire Letter 4''); and Email from Dominic Jones, IR
Web Reporting International Inc., dated December 13, 2011 (``IR
Letter'').
\7\ See Securities Exchange Act Release No. 65653 (October 28,
2011), 76 FR 68237 (November 3, 2011).
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II. Description of the Proposal
In its filing, NASDAQ is proposing to amend its rules to include
new Section IM-5900-7 to describe products that are offered to certain
newly listing companies. As discussed in more detail below, NASDAQ
proposes to offer complimentary products and services to companies
listing on NASDAQ's Global and Global Select Markets in connection with
an initial public offering, upon emerging from bankruptcy, or in
connection with a spin-off or carve-out from another company
(``Eligible New Listings'').\8\ Additionally, NASDAQ proposes to offer
such services to companies that switch their listing from the New York
Stock Exchange (``NYSE'') to NASDAQ's Global or Global Select Markets
(``Eligible Switches''). In its filing, NASDAQ also noted that all
NASDAQ-listed companies, including companies listed on the Capital
Market, receive access to NASDAQ's Market Intelligence Desk and NASDAQ
Online.
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\8\ NASDAQ represented that, under the proposal, a company
transferring from the OTCBB or Pink Sheets or from the Capital
Market would not be eligible to receive these services. See Notice
supra note 3.
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The Exchange is a subsidiary of The NASDAQ OMX Group, Inc.
(``NASDAQ OMX''). NASDAQ proposes to offer these products and services
through NASDAQ OMX Corporate Solutions, Inc. (``Corporate Solutions''),
also a subsidiary of NASDAQ OMX and an affiliate of the Exchange.\9\
According to NASDAQ, Corporate Solutions offers products and programs
to private and public companies, including companies listed on the
Exchange, designed to enhance transparency, mitigate risk, maximize
efficiency and facilitate better corporate governance. Pursuant to the
proposal, Eligible New Listings and Eligible Switches with a market
capitalization of up to $500 million would receive the following
services for two years from the date of listing, having a total retail
value of approximately $93,500 per year,\10\ and would receive a waiver
of one-time development fees of approximately $4,000 to establish the
services:
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\9\ In its filing, NASDAQ stated its belief that Corporate
Solutions is not a ``facility'' of the Exchange as defined in 15
U.S.C. 78c(a)(2), and noted that its proposed rule change is being
filed with the Commission under Section 19(b)(2) of the Act because
it relates to services offered in connection with a listing on the
Exchange. See Notice supra note 3. The Commission notes that the
definition of a ``facility'' of an exchange is broad under the Act,
and ``includes its premises, tangible or intangible property whether
on the premises or not, any right to the use of such premises or
property or any service thereof for the purpose of effecting or
reporting a transaction on an exchange . . . and any right of the
exchange to the use of any property or service.'' The Commission
further notes that any determination as to whether a service or
other product is a facility of an exchange requires an analysis of
the particular facts and circumstances.
\10\ Retail values are based on Corporate Solutions' current
price list. If a company does not fully use the services offered in
a year, unused services do not carry forward into future years and
cannot be used to offset the costs of other services or listing
fees.
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Governance Services
[cir] Board Tools: Use of Directors Desk for up to 10 users, with
an approximate retail value of $20,000 per year.
[[Page 79263]]
[cir] Whistleblower Hotline: Use of a financial reporting hotline
that provides employees and others with fully-automated means of
reporting incidents and concerns, with an approximate retail value of
$3,500 per year.
Communications Services
[cir] Investor Relations Web site: Use of a Web site with all the
necessary content and features to communicate with investors, including
a corporate governance library containing documents such as the Board
committees' charters and the company's code of ethics, with a retail
value of approximately $16,000 per year.
[cir] Press Releases: Companies will be provided $15,000 worth of
distribution services for earnings or other press releases, including
photographs, and filing of EDGAR and XBRL reports. The actual number of
press releases will vary based on their length and the regional
distribution network chosen by the company.
Intelligence Services
[cir] Market Analytic Tools: Use of a market analytic tool, which
integrates corporate shareholder communications, capital market
information, investor contact management, and board-level reporting
into a unified workflow environment for up to four users, including
information about research and earnings estimates on the company and
help identifying potential purchasers of the company's stock using
quantitative targeting and qualitative insights, with an approximate
retail value of $39,000 per year.
Under the proposal, Eligible New Listings and Eligible Switches
with a market capitalization of $500 million or more would receive the
services described above, including the waiver of one-time development
fees, and the additional services described below, worth a total retail
value of approximately $169,000 per year.\11\ Eligible New Listings
with a market capitalization of $500 million or more would receive all
services for two years from the date of listing, and Eligible Switches
with a market capitalization of $500 million or more would receive all
services for four years from the date of listing:
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\11\ Id.
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Governance Services
[cir] Board Tools: An additional five licenses for Directors Desk,
with a retail value of approximately $10,000 per year.
Communications Services
[cir] Press Releases: An additional $5,000 worth of distribution
services.
Intelligence Services
[cir] Market Surveillance Tools: A stock surveillance package, that
includes monitoring the daily movement and settlement activity of the
company's stock, providing alerts on increases in trading volume and
block trading activity, and offering color to any unusual change in
stock price, with an approximate retail value of $60,000 per year. To
fully utilize this service, NASDAQ states that companies will have to
subscribe to, and separately pay for, certain third party information,
which is not included.\12\
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\12\ For example, companies would have to purchase position
reports from the Depositary Trust Corporation.
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The Exchange represents that it is proposing to offer four years of
services to Eligible Switches with a market capitalization of $500
million or more, as opposed to two years of services as is the case for
other Eligible Switches and Eligible New Listings, because the Exchange
believes that the issuers receive comparable services from the NYSE,
which the issuer would forego by switching their listing to NASDAQ, and
that those issuers will likely bring greater future value to NASDAQ
than will other issuers by switching to its market.\13\
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\13\ See e-mail from Arnold Golub, NASDAQ, to Sharon Lawson,
Division of Trading and Markets, Commission, dated December 8, 2011
(``NASDAQ E-Mail'').
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III. Summary of Comments and NASDAQ Response to Comments
Four commenters raised objections to the proposal,\14\ while one
commenter supported the proposal.\15\
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\14\ See supra notes 4 and 6.
\15\ See IR Letter.
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The commenter supporting the proposal believed that ``NASDAQ's
presence in the market has been good for competition. * * *'' \16\ This
commenter noted that ``NYSE's favored service providers dominate the IR
services industry'' and that of the ``companies in the Nasdaq-100
index, only 10 used NASDAQ's PR wire service. * * * The remaining
companies overwhelmingly used Business Wire or PR Newswire. . . .''
\17\
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\16\ Id.
\17\ Id.
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Two commenters generally expressed concern that NASDAQ's proposal
would harm competing suppliers of information dissemination and
investor relations (``IR'') services, adversely affect competition, and
result in economic coercion of and unfair discrimination among
issuers.\18\ These two commenters dispute NASDAQ's comparison of its
proposal to the recently approved rule change by the NYSE regarding
complimentary services provided to issuers.\19\ These commenters argue
that the proposals are fundamentally different in that NYSE offers IR
services though a variety of independent service providers, while
NASDAQ's proposal only offers one affiliated service provider.\20\
These commenters argue that NASDAQ's proposal effectively penalizes any
company eligible for the free services that chooses to use a NASDAQ
competitor.
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\18\ See Business Wire Letter 1, Business Wire Letter 2, and PR
Newswire Letter.
\19\ See Business Wire Letter 1 and PR Newswire Letter.
\20\ See Business Wire Letter 4 (noting that this is the first
time the Commission will be ruling on the permissibility of an
exchange subsidizing IR services provided by its own providers).
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These two commenters urge the Commission to reject the proposal
because it would create an inequitable allocation of listing fees. One
commenter states that the proposal would create a significant disparity
between what otherwise indistinguishable companies pay and receive for
their listing fees.\21\ This commenter alleges that the proposal would
result in an inequitable allocation with respect to fees paid by
issuers that are currently listed and that are not being offered the
free services under the proposal, versus newly listed companies that
are being offered the free services.\22\ The commenter disputes
NASDAQ's justification of providing complimentary services to newly
listing companies to help them adjust to the new responsibilities of
being a publicly trading company, and conversely believes that NASDAQ
is attempting to lock in newly listed companies into using Corporate
Solutions once the free services expire.\23\ Additionally, the
commenter argues that offering complimentary services to issuers that
switch their listings from the NYSE to NASDAQ discriminates among
issuers and inequitably allocates listing fees among more mature
companies.\24\ The commenter also argues that a company that lists on
NASDAQ and uses the complimentary IR services provided by Corporate
Solutions effectively pays a lower listing fee than a similarly
situated company that opts for IR services provided by another
vendor.\25\ Accordingly, the commenter believes that by bundling the
listing fee with the IR services, NASDAQ is distorting the new listing
fees paid by a company that opts to use a competing IR vendor,
[[Page 79264]]
resulting in an inequitable allocation of fees among issuers.\26\
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\21\ See Business Wire Letter 1.
\22\ See Business Wire Letter 2.
\23\ Id.
\24\ Id.
\25\ Id.
\26\ Id.
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These two commenters also urge the Commission to reject the
proposal because it will impose an unnecessary burden on competition in
the IR services market.\27\ These commenters argue that the proposal to
bundle the complimentary services with listings is a form of unlawful
tying.\28\ One of these commenters argues that the proposal creates an
uneven playing field in the market, distorts competition, and results
in NASDAQ coercing issuers to use the services simply because they are
free, even if they may not be the company's choice or meet its buying
criteria.\29\ One commenter notes that rival service providers could
not possibly compete because they cannot offer IR services for free
without the possibility of subsidizing the fees with listing fees.\30\
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\27\ See Business Wire Letter 2 and PR Newswire Letter.
\28\ See Business Wire Letter 1 and PR Newswire Letter.
\29\ See PR Newswire Letter.
\30\ See Business Wire Letter 1.
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One of these commenters argues that the proposal will burden
competition in apparent violation of the antitrust laws.\31\
Specifically, the commenter alleges that NASDAQ's bundling of IR
services with its listing service is an illegal ``tying'' in violation
of Section 1 of the Sherman Act. According to the commenter, a tying
arrangement violates Section 1 of the Sherman Act ``if the seller has
appreciable economic power in the tying product market and if the
arrangement affects a substantial volume of commerce in the tied
market.'' \32\ The commenter believes that NASDAQ's free or discounted
services meets the legal standard of a tying arrangement because
NASDAQ, by offering complimentary Corporate Solution services to
listing customers through its subsidiary, is tying the two services
together, so that Eligible New Listings or Eligible Switches will treat
NASDAQ's listing service and its free services as a single unit and
direct their business to Corporate Solutions since they are already
incurring that cost.\33\
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\31\ See Business Wire Letter 2 and Business Wire Letter 4.
According to Business Wire, NASDAQ is seeking approval of its
ongoing practice of tying free services to listed companies. See
Business Wire Letter 3 and Business Wire Letter 4.
\32\ See Business Wire Letter 2.
\33\ Id.
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The commenter also believes that NASDAQ has sufficient market power
to coerce at least a substantial number of newly listing companies to
use the tied product because ``NASDAQ, in its regulatory role, will, on
the one hand, be informing new public companies of their public
disclosure obligations while, on the other, be offering to provide them
those very disclosure services for free.'' \34\ The commenter further
argues that competition for IR services will not remain robust if
NASDAQ is allowed to use its market power with respect to NASDAQ
listings to eliminate meaningful competition.\35\ Further, the
commenter believes that the amount of commerce affected in the IR
services market is far above the ``not insubstantial'' requirement of
the Sherman Act, noting that the threshold requirement is so modest it
is always conceded.\36\
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\34\ Id.
\35\ See Business Wire Letter 4.
\36\ See Business Wire Letter 2.
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Separately, the commenter alleges that, by offering the Corporate
Solutions services for two to four years, NASDAQ has demonstrated an
attempt to monopolize in violation of Section 2 of the Sherman Act.\37\
According to the commenter, offering the services for free--clearly
below marginal cost--is predatory/anti-competitive conduct.\38\
Additionally, the commenter believes that NASDAQ's intent to monopolize
can be inferred by the fact that NASDAQ OMX, as owner of both a
national securities exchange and a subsidiary that provides information
dissemination services (``IDS'') and IR services, has an advantage and
that by offering free IR services to listed companies through its
subsidiary, NASDAQ OMX is acting to drive out competing IDS and IR
vendors for new listings and ultimately for all NASDAQ-listed
companies.\39\ Finally, the commenter claims that once competitors are
shut out of the IDS and IR market, Corporate Solutions would have an
unfettered ability to raise prices and/or compromise service levels to
the detriment of listed companies and the investing public--achieving
monopoly power.\40\
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\37\ Id.
\38\ Id.
\39\ Id.
\40\ Id.
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The commenter also is concerned that the proposal could reduce
pricing transparency, stating that historically, listed companies have
paid separate, transparent fees for listing services and ancillary IR
services, but that NASDAQ's proposal, by combining both services,
``blurs the line between the core mandatory and auxiliary services''
and makes it unclear, for example, the extent to which listing fee
increases are cross-subsidizing IR services.\41\
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\41\ Id.
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Two commenters state that NASDAQ's offering of IR services creates
a conflict of interest with respect to its role as a self-regulatory
organization (``SRO'').\42\ One commenter believes that NASDAQ's
authority in determining the adequacy of public disclosures by listed
companies makes it inappropriate for NASDAQ's sister company to be the
``preferred provider'' for such disclosure services.\43\ In addition,
this commenter believes that because NASDAQ is in a position to
determine how much disclosure is required, it could manipulate the
quantity of disclosures, such as reducing the amount of disclosures
required to save costs during the period when such services are being
offered for free and increasing the amount of disclosure required once
such services are being paid for.\44\ In addition, this commenter
argues that because NASDAQ has taken on this ancillary business of
providing IR services, it may have an incentive to fund this services
business to the detriment of its regulatory obligations.\45\ The
commenter argues that these conflicts are particularly high given that
NASDAQ's IR services providers do not have an independent sales force
and that NASDAQ's sales representatives market these IR services in
addition to selling listings.\46\ Accordingly, the commenter believes
that not only should NASDAQ's proposal be rejected, but that the
Commission should review NASDAQ's role in providing IR services and
consider requiring NASDAQ OMX to divest its Corporate Solutions
business or require Corporate Solutions to sell its IR service
providers to an independent third party, or, alternatively, order
NASDAQ to operate its Corporate Solutions business on a strict arms-
length basis.\47\
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\42\ See Business Wire Letter 2 and PR Newswire Letter
(expressing concern that this could effectively coerce an issuer
into using the SRO's services).
\43\ See Business Wire Letter 2.
\44\ Id.
\45\ Id.
\46\ Id.
\47\ Id.
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Another commenter recommends that the Commission disapprove the
proposed rule change and request that the listing exchanges consider
the idea of offering free listings or, alternatively, that the
Commission appoint an independent task force comprised of issuers to
recommend a model that would permit the exchanges to provide unlimited
value-added services.\48\ This commenter believes that NASDAQ's
proposal inhibits competition for listings, would result in the
equivalent of a maximum service cap and would be
[[Page 79265]]
used by exchange as a justification for limiting their service
offerings.\49\
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\48\ See Issuer Advisory Letter.
\49\ Id.
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One commenter objects to the provision by NASDAQ of free IR
services to Eligible Switches with a market capitalization of $500
million for four years, while New Listings with the same market
capitalization would only receive such services for two years under the
proposal.\50\ This commenter argues that treating Eligible Switches
differently from Eligible New Listings and existing NASDAQ listed
issuers unfairly discriminates between issuers in violation of Section
6 of the Act.\51\ This commenter states that issuers transferring their
listing from NYSE to NASDAQ are not a separate class of issuer, and
giving Eligible Switches preferential treatment results in unfair
discrimination.\52\ The commenter further argues that the proposed fee
structure is not an equitable allocation of reasonable fees among
issuers, and therefore violates Section 6(b)(4) of the Act, because for
four years an Eligible Switch would be paying substantially lower fees
than any company of the same capitalization already listed on NASDAQ
or, for the final two years, any Eligible New Listing.\53\ The
commenter does not believe that it is equitable to treat issuers
differently simply because one transferred from another exchange.\54\
This commenter requests that if the proposed rule is approved by the
Commission, that the Commission clarify that the rule encompasses the
complete set of products and services that NASDAQ is allowed to provide
Eligible New Listings and Eligible Switches, and that after the two or
four year periods covered by the rule have expired, companies may only
be provided with services that are applicable to all other listed
companies as set forth in NASDAQ's rules.\55\ In addition, to the
extent that NASDAQ is currently in discussions with companies to list
on NASDAQ, the commenter requests that the Commission direct NASDAQ to
treat such issuers in accordance with the proposed rule, and prohibit
NASDAQ from offering additional or different products or services, even
if an issuer lists prior to the proposed rule being approved.\56\
Finally, the commenter requests the Commission to clarify that
companies listed on NASDAQ within the two or four years (as applicable)
prior to the rule's passage will be subject to the new rule, and to
require NASDAQ to amend any agreements relating to services that such
issuers may currently have in order to conform services to the proposed
rule.\57\
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\50\ See NYSE Letter.
\51\ Id. See also Business Wire Letter 4.
\52\ See NYSE Letter.
\53\ Id.
\54\ Id.
\55\ Id.
\56\ Id.
\57\ Id.
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In the NASDAQ Response Letter, the Exchange responded to many of
the issues raised by the commenters.\58\ In response to commenter
concerns that the proposal limits issuer choice regarding service
providers and is unlawfully tying IR services to a company's listing,
NASDAQ reiterates that no issuer is required to use the offered
services, and to the extent that a company chooses to use the services,
such services are provided only for a limited time.\59\ Further, the
Exchange argues that the NASDAQ proposal is similar to the Commission-
approved NYSE proposal,\60\ because the NYSE proposed rule change does
not allow issuers unlimited choice as to which service providers they
can choose, as NYSE issuers must use those providers selected by the
exchange, with no transparency as to the selection process or the
financial arrangement between the NYSE and the service provider.\61\
NASDAQ also states that by relying on services provided by an
affiliated entity, rather than third parties, NASDAQ gains greater
control to assure it can provide the products most valued by companies
in a high quality manner.\62\
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\58\ See supra note 5 and accompanying text noting that NASDAQ's
Response Letter responds to only those comments cited in note 4,
supra.
\59\ See NASDAQ Response Letter.
\60\ See Securities Exchange Act Release No. 65127 (August 12,
2011), 76 FR 51449 (August 18, 2011) (SR-NYSE-2011-22) (``NYSE
Order'').
\61\ See NASDAQ Response Letter.
\62\ Id.
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In response to claims that the proposal creates an inequitable
allocation of listing fees, the Exchange states that its proposal is
consistent with Section 6(b)(4) of the Act, because offering different
services based on a company's market capitalization is appropriate
given that larger companies generally will need more and different
governance, communication and intelligence services. NASDAQ
additionally believes that the distinction based on market
capitalization is clear and transparent. NASDAQ also states that
offering the complimentary services to newly listing companies and not
to companies already listed on NASDAQ is appropriate given that the
services offered will help ease the transition of becoming a public
company and will help these companies fulfill their new
responsibilities as public companies.\63\ NASDAQ counters the concern
that the proposal results in unfair discrimination in violation of
Section 6(b)(5) of the Act, stating that it offers its program only to
companies switching from the NYSE, and not from other exchanges or
unlisted markets or to companies already listed on NASDAQ, because the
companies listed on the NYSE receive comparable services from the NYSE
(and not from other exchanges), which they would forego by switching
their listing to NASDAQ,\64\ and because NASDAQ believes attracting
NYSE listed companies will bring greater future value to NASDAQ.
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\63\ Id.
\64\ Id.
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NASDAQ also disputes allegations that it illegally ties its
Corporate Solutions services to a company's listing on NASDAQ,
asserting that companies wishing to list on NASDAQ are not forced to
use services provided by NASDAQ, since neither the receipt of such
services nor a NASDAQ listing are conditioned on the other.\65\ NASDAQ
attached a prior response letter from its outside counsel on an earlier
filing that addresses the antitrust claims and notes that antitrust
laws ``were enacted for the protection of competition not
competitors.'' \66\
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\65\ Id.
\66\ Id.
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Finally, NASDAQ represents that it achieves separation between its
business and regulatory conflicts by appropriately distinguishing the
regulatory functions from the influence of business considerations.\67\
According to the Exchange, it houses its regulatory functions,
including the Listing and Market Watch Departments, in a regulatory
group that is organizationally and institutionally separate from its
business lines.\68\ NASDAQ also notes that this structure, its
effectiveness in managing conflicts, and the effectiveness of the
regulatory program in practice, are subject to periodic Commission
examination, and any NASDAQ rule change to increase or decrease the
amount of information that a company must publicly disclose would
require Commission approval.\69\
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\67\ Id.
\68\ Id.
\69\ Id.
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IV. Discussion and Commission's Findings
The Commission has carefully reviewed the proposed rule change and
finds that it is consistent with the
[[Page 79266]]
requirements of Section 6 of the Act.\70\ Specifically, as discussed in
more detail below, the Commission finds that the proposal is consistent
with Sections 6(b)(4),\71\ 6(b)(5),\72\ and 6(b)(8) \73\ in that the
proposal is designed, among other things, to provide for the equitable
allocation of reasonable dues, fees, and other charges among Exchange
members and issuers and other persons using its facilities and to
promote just and equitable principles of trade, and is not designed to
permit unfair discrimination between issuers, and that the rules of the
Exchange do not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act.
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\70\ 15 U.S.C. 78f. In approving this proposed rule change, the
Commission has considered the proposed rule's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
\71\ 15 U.S.C. 78f(b)(4).
\72\ 15 U.S.C. 78f(b)(5).
\73\ 15 U.S.C. 78f(b)(8).
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The Commission notes that while all issuers will receive some
services from NASDAQ, such as NASDAQ Online and the Market Intelligence
Desk, some issuers will receive additional products and services based
on their status as either an Eligible New Listing or Eligible Switch
and their market capitalization.\74\ NASDAQ has represented that
offering additional services only to companies listing on the Global
and Global Select Markets and offering different services based on a
company's market capitalization reflects the higher demand for these
services by larger companies.\75\ Moreover, according to NASDAQ,
offering such services to newly listed companies should ease the
transition of becoming a public company. As to only offering services
to transfers from the NYSE to NASDAQ rather than all transfers, NASDAQ
notes that this should make up for services that issuers would
otherwise forego by switching their listing from NYSE to NASDAQ, and
that issuers listed on NYSE are better known and therefore have more
value to NASDAQ when they switch to its market.\76\
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\74\ See Notice supra note 3
\75\ See Notice supra note 3 and NASDAQ Response Letter supra
note 5.
\76\ See NASDAQ Response Letter supra note 5 and NASDAQ Email.
Specifically, NASDAQ states that ``when companies switch to NASDAQ,
it helps in our efforts to attract other new listings *&*&* and to
retain companies' listings. This benefit is more pronounced when the
company switches from the NYSE because NYSE-listed companies tend to
be larger and better known than companies listed on NYSE Amex, NYSE
Arca or regional exchanges. Having these companies as clients is
also valuable to NASDAQ OMX Corporate Solutions (NOCS), which
benefits from having well-known companies use its products.'' NASDAQ
Email; see also NYSE Order supra note 60.
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As noted above, NASDAQ's proposal will provide complimentary
products and services to Eligible New Listings and Eligible Switches
based on market capitalization. The Commission has previously approved
an NYSE proposal providing different tiers of complimentary services to
certain NYSE issuers based on shares of common stock issued and
outstanding or total global market value based on a public offering
price and has found this consistent with Sections 6(b)(4) and Sections
6(b)(5) of the Act.\77\ For similar reasons, we also find that it is
reasonable for NASDAQ to provide different services to tiers based on
market capitalization since larger capitalized companies generally will
need and use more services. Further, the Commission believes that by
describing in NASDAQ's rules the products and services available to
Eligible New Listings and Eligible Switches and the values of the
products and services, the Exchange is adding greater transparency to
its rules and the fees applicable to issuers.
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\77\ See NYSE Order supra note 60.
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The Commission recognizes, however, that there are two main
differences between the NYSE and NASDAQ proposals. First, the NYSE
believes that NASDAQ's treatment of Eligible Switches is not comparable
to NYSE Rule 907 since NYSE does not provide different services to an
issuer because it is transferring from another exchange; rather, such
issuers would be entitled to the same services as issuers currently
listed on the NYSE. As noted above, NASDAQ states that it makes this
distinction to compensate issuers for services they would forego from
switching their listing to NASDAQ from the NYSE, as well as to provide
its listing market broader benefits from attracting the larger, better
known companies that are listed on NYSE.\78\ Specifically, NASDAQ
asserts that larger Eligible Switches receive four years of
complimentary services because ``having larger companies switch to
NASDAQ is more valuable in attracting other potential listings and
NOCS' customers than having smaller companies, which are generally not
as well known, switch. Finally, these larger companies generally will
pay higher listings fees and purchase more NOCS services * * * thereby
making their listing more valuable to NASDAQ and NOCS.'' \79\
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\78\ See supra note 76.
\79\ See NASDAQ Email.
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The Commission notes that Section 6(b)(5) of the Act does not
require that all issuers be treated the same; rather, the Act requires
that the rules of an exchange not unfairly discriminate between
issuers. The Commission believes that NASDAQ has provided a sufficient
basis for its different treatment of Eligible Switches and that this
portion of NASDAQ's proposal meets the requirements of the Act in that
it reflects competition between exchanges, with NASDAQ offering
discounts for transfers of listings from a competing exchange. In
making this determination, we note that the provision of services under
the proposal is for a limited duration and that NASDAQ has provided a
reasonable basis for deciding to treat NYSE transfers different from
other types of transfers. Among other things, NASDAQ has stated that
offering services to issuers that must forego similar services provided
by the NYSE if they switch their listing to NASDAQ, and that add
greater future value to NASDAQ through their listing than do other
issuers justify such differential treatment.
Second, the NASDAQ proposal also differs from the NYSE proposal in
that NASDAQ will provide services through an affiliated service
provider. The Commission notes, however, that under NYSE's approved
proposal, issuers are offered services only from certain third party
vendors selected by the NYSE. We note that NASDAQ's use of its
affiliate to provide services to date does not appear to have adversely
affected the nature of competition among suppliers in the market for
these services.\80\
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\80\ One commenter noted that NASDAQ has been engaged, on an
ongoing basis, in the practice of offering free services to issuers
in connection with a listing on NASDAQ. See Business Wire Letter 3
and infra note 87 and accompanying text. The Commission notes that
any such offer of free or discounted services in connection with an
initial or continued exchange listing requires the filing by the
exchange of an appropriate proposed rule change with the Commission,
and approval or effectiveness thereof, before such offer of services
can be made, and that a failure to do so would constitute a
violation of Section 19(b) of the Act and Rule 19b-4 thereunder.
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The NASDAQ Response Letter responded to issues relating to
competition in markets served by Corporate Services. Specifically,
NASDAQ reiterated that issuers are not required to use the offered
services as a condition of listing. Furthermore, to the extent an
issuer chooses to use the services, such services are provided only for
a very limited time--between two to four years. Further, it has been
NASDAQ's experience that some companies choose not to use its services,
even though they are offered free.\81\
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\81\ See NASDAQ Response Letter supra note 5.
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[[Page 79267]]
The Commission recognizes, however, that the proposed rule change
may affect the purchase decisions of some listed issuers. The effect of
offering Corporate Solutions' services on a complimentary basis is to
provide issuers with the services of Corporate Solutions at a price
that is lower in relative terms than what other vendors charge. As the
Commission has previously discussed, a reduction in a vendor's relative
price will generally cause some issuers to substitute their business
toward that vendor.\82\ Accordingly, the Commission believes that
NASDAQ's offering of Corporate Solutions' products and services on a
complimentary basis will, by lowering its relative price, likely cause
some listed issuers to substitute their business away from other
vendors and toward Corporate Solutions. The Commission believes,
however, that the impact of this substitution would be limited for the
reasons discussed below.
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\82\ See NYSE Order supra note 60.
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As asserted in the Notice, the number of companies eligible for the
free services will be small in comparison to the total number of
companies that comprise the target market for such services, so that we
anticipate there is not likely to be competitively meaningful
foreclosure of similar services offered by third parties.\83\ NASDAQ
represents that only 34 companies in 2009, 77 companies in 2010, and 62
companies through June 30, 2011 would have qualified for free services
as Eligible New Listings by virtue of listing in connection with an IPO
or a spin-off or a carve out from another company had the proposed rule
been in effect.\84\ Additionally, NASDAQ states that only 10 companies
in 2009, three companies in 2010 and no companies through June 30, 2011
would have qualified for free services as Eligible Switches had the
proposal been in place. According to NASDAQ, this represents no more
than approximately 3 percent of listed companies.\85\
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\83\ See Notice supra note 3.
\84\ Id. The Commission notes that Business Wire believes these
figures are low because IPOs were depressed by the worldwide
financial crises.
\85\ We note that these numbers may be different had the
proposal been in place at that time.
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Further, NASDAQ notes that there are multiple third party services
vendors and that those vendors appear to operate in highly competitive
markets. In addition, one commenter believed that approving NASDAQ's
proposal was necessary to preserve competition.\86\ Further, another
commenter--a competing services firm--stated that despite ``NASDAQ's
current practice of offering `free' or significantly discounted
services[,]'' its business continues to grow and to compete for
business from NASDAQ issuers based on the quality of its services.\87\
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\86\ See IR Letter.
\87\ See PR Newswire Letter; see also supra note 80.
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The Commission also believes that NASDAQ is responding to
competitive pressures in the market for listings in making this
proposal.\88\ Specifically, NASDAQ is offering complimentary products
and services to attract new listings. The Commission understands that
NASDAQ faces competition in the market for listing services, and that
it competes in part by providing complimentary services to its listed
companies through its affiliate versus third party vendors like NYSE.
The ability to select from a choice of vendors and the use of a
specific affiliate vendor are among the different ways that NASDAQ and
NYSE may compete for listings and provide services for listed
companies. In fact, NASDAQ notes that, by relying on services provided
by an affiliate company rather than third parties, NASDAQ gains greater
control to assure it can provide the services most valued by companies
in a high quality manner.\89\ Accordingly, the Commission believes that
NASDAQ's proposal reflects the current competitive environment for
exchange listings among national securities exchanges, and is
appropriate and consistent with Section 6(b)(8) in furtherance of the
purposes of the Act.\90\
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\88\ See NYSE Letter (stating ``NASDAQ's proposed rule is not
based on concepts of fairness, but on what it needs to induce
issuers to transfer to NASDAQ from NYSE'').
\89\ See NASDAQ Response Letter supra note 5.
\90\ 15 U.S.C. 78f(b)(8).
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With respect to concerns raised by commenters that NASDAQ's
offering of IR services creates a conflict of interest with respect to
its role as an SRO, NASDAQ has represented that it has effectively
separated its regulatory functions from its business functions. The
Commission notes that its oversight of NASDAQ as a registered national
securities exchange is designed, among other things, to assure NASDAQ
performs its regulatory functions in a manner consistent with the Act.
Finally, the Commission notes that any change to NASDAQ's rules to
increase or decrease the amount of information that a company must
publicly disclose, or the manner of doing so, would require Commission
approval.
The Commission has carefully considered the comment letters.
Although some of the alternative proposals by the Investor Advisory
Group might also satisfy the standards under Sections 6(b) and 19(b) of
the Act \91\ depending on the facts and circumstances, those proposals
are not before us, and the Commission believes that NASDAQ's proposal
is consistent with these standards and, therefore, should be
approved.\92\
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\91\ 15 U.S.C. 78f(b) and 15 U.S.C. 78s(b).
\92\ The Commission notes that Business Wire and PR Newswire
raised concerns that NASDAQ would subsequently file a proposed rule
change attempting to lock all NASDAQ listed issuers into using
Corporate Solutions' services. The Commission notes that prior to
any such change being implemented, it would have to be filed with,
and approved, by the Commission pursuant to Section 19(b) of the
Act.
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\93\ that the proposed rule change (SR-NASDAQ-2011-122) be, and it
hereby is, approved.
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\93\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\94\
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\94\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-32577 Filed 12-20-11; 8:45 am]
BILLING CODE 8011-01-P