22 May Airo AV Announces Nasdaq proposes new rules to address emerging market listin…
Yesterday, the SEC formally announced its July 9 roundtable on emerging markets. In the announcement, the SEC observed that, “while the U.S. securities laws and regulations applicable to emerging market companies listed on U.S. exchanges are the same as (or comparable to) the laws and regulations applicable to U.S. public companies, the practical effects often are substantially different, based on the inability of U.S. regulators to inspect for compliance and enforce these rules and regulations.” In the meantime, Nasdaq appears to have taken the matter to the next level. Nasdaq’s three new proposals haven’t been posted by the SEC yet—so there may still be a lot of behind-the-scenes negotiation before they see the light of day on the SEC’s website—but they are clearly designed to address these concerns about emerging market issuers, especially lack of accounting controls and transparency. Not to be outdone, the Senate yesterday passed a bill that could bar from listing on U.S. exchanges companies audited by firms that the PCAOB is prohibited by foreign authorities from inspecting.
In April, SEC Chair Jay Clayton and other SEC and PCAOB officials issued a Statement discussing the risks and exposures of companies based, or with significant operations, in emerging markets, including China, for both U.S. domestic companies and foreign private issuers. Although the SEC is committed to high-quality disclosure standards, the statement read, its ability to enforce these standards in emerging markets is limited and is “significantly dependent on the actions of local authorities” and the constraints of “national policy considerations.” As a result, in many emerging markets, “there is substantially greater risk that disclosures will be incomplete or misleading and, in the event of investor harm, substantially less access to recourse, in comparison to U.S. domestic companies.” In addition, the environment in which the company operates could affect “whether the company has sufficient controls, processes and personnel to address its accounting or financial reporting issues.” The message was that, notwithstanding similarity in form and appearance between disclosures from U.S. domestic companies and disclosures from or related to emerging markets, disclosures from emerging markets may well differ in scope and quality and companies need to provide appropriate risk disclosure in that regard. (See this PubCo post.)
There are three new Nasdaq proposals that would apply to companies with businesses principally administered in “Restrictive Markets”:
- a proposal to adopt a new requirement related to the qualifications of management;
- a proposal to apply additional initial listing criteria related to offering size and liquidity; and
- a proposal to apply additional and more stringent criteria to an applicant for listing or a listed company based on the qualifications of the company’s auditor.
The proposed definition of “Restrictive Market” would apply to all three proposals. Under proposed Rule 5005(a)(37), a “Restrictive Market” would be defined as “a jurisdiction that Nasdaq determines to have secrecy laws, blocking statutes, national security laws or other laws or regulations restricting access to information by regulators of U.S.-listed companies in such jurisdiction.” To determine whether a company’s business is principally administered in a Restrictive Market and thus subject to the requirement, Nasdaq may consider “the geographic locations of the company’s: (a) principal business segments, operations or assets; (b) board and shareholders’ meetings; (c) headquarters or principal executive offices; (d) senior management and employees; and (e) books and records.” In examining where the company conducts its principal business activities, Nasdaq will consider these factors “holistically,” meaning that the location of a company’s headquarters is not necessarily determinative. The rule, which looked to SEC guidance regarding foreign private issuer status, is designed to cover both FPIs based in Restrictive Markets and companies based in the U.S. or another jurisdiction that principally administer their businesses in Restrictive Markets.
Because management is responsible for ensuring compliance with the corporate governance listing requirements on an ongoing basis, Nasdaq believes it is necessary that management be familiar with these responsibilities. However, “Nasdaq has observed instances where it appears that management lacked familiarity with the requirements to be a Nasdaq-listed public company in the U.S. or was otherwise unprepared for the rigors of operating as a public company.” Nasdaq contends that the risks arising in these circumstances are intensified when a company’s business is principally administered in a Restrictive Market.
To address this issue, Nasdaq is proposing a new listing standard in Rule 5210(c) that would require listing applicants with businesses that are principally administered in Restrictive Market countries to have, and certify to Nasdaq that they will continue to have, a
“member of senior management or a director with relevant past employment experience at a U.S.-listed public company or other experience, training or background which results in the individual’s general familiarity with the regulatory and reporting requirements applicable to a U.S.-listed public company under Nasdaq rules and federal securities laws. Alternatively, in the absence of such an individual, the company could retain on an ongoing basis an advisor or advisors, acceptable to Nasdaq, that will provide such guidance to the company.”
The individual would be expected to serve as a resource on governance, internal controls and securities issues. Nasdaq notes that other global markets have similar requirements. Proposed Rule 5250(g) would impose an ongoing obligation for companies in Restricted Markets.
Companies that fall out of compliance would need to disclose that information and would have a 180-day compliance period to regain compliance. The proposed rule changes would be applicable to Restrictive Markets companies that apply to list on Nasdaq after the date of effectiveness, but not to companies that were already listed.
Proposal for Additional Listing Criteria
Here again, Nasdaq raises concerns about the lack of transparency, the accuracy of disclosures, accountability and access to information for companies with businesses that are administered principally in Restrictive Markets. In particular, Nasdaq is apprehensive about a lack of liquidity and proper price discovery in the secondary markets, especially when companies conduct IPOs or business combinations with a “small offering size or a low public float percentage because such companies may not attract market attention and develop sufficient public…