[Federal Register Volume 76, Number 24 (Friday, February 4, 2011)]
[Notices]
[Pages 6506-6508]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-2447]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63804; File No. SR-NASDAQ-2010-134]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order
Instituting Proceedings To Determine Whether To Disapprove Proposed
Rule Change To Adopt Additional Criteria for Listing Commodity
Stockpiling Companies That Have Indicated Their Business Plan Is To Buy
and Hold Commodities
January 31, 2011.
I. Introduction
On October 15, 2010, 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 adopt additional criteria for listing companies
that have indicated that their business plan is to buy and hold
commodities. The proposed rule change was published for comment in the
Federal Register on November 3, 2010.\3\ The Commission subsequently
extended the time period in which to either approve the proposed rule
change, or to institute proceedings to determine whether to disapprove
the proposed rule change, to February 1, 2011.\4\ The Commission
received one comment letter on the proposal.\5\ This order institutes
proceedings under Section 19(b)(2)(B) of the Act to determine whether
to disapprove 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. 63207 (October 28,
2010), 75 FR 67788.
\4\ See Securities Exchange Act Release No. 63508 (December 9,
2010), 75 FR 78300 (December 15, 2010).
\5\ See Letter from Edward H. Smith, Jr. to Florence E. Harmon,
Deputy Secretary, Commission, dated January 18, 2011.
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II. Description of the Proposal
The Exchange proposes to adopt additional listing standards for
companies that have indicated that their business plan is to purchase
and stockpile raw materials or other commodities (``commodity
stockpiling companies''). Under the proposal, such companies are
required to meet all other applicable Nasdaq initial listing
requirements, as well as the following additional listing standards.
First, within 18 months of the effectiveness of its initial public
offering registration statement, or such shorter period as the company
specifies in the registration statement, the company would be required
to invest at least 85% of the net proceeds of the initial public
offering in the raw material or commodity identified in the
registration statement, or return the unused amount pro rata to its
shareholders.\6\
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\6\ See proposed Nasdaq IM-5101-3(a).
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Second, the company would be required to publish, or facilitate
access to, at no cost and in an easily accessible manner, regular
pricing information regarding the raw material or other commodity from
a reliable, independent source, at least as frequently as current
industry practice but no less than twice per week.\7\
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\7\ See proposed Nasdaq IM-5101-3(b).
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Third, the company would be required to publish its net market
value on a daily basis, or where pricing information for the raw
material or other commodity is not available on a daily basis, no less
frequently than twice per week.\8\ If the spot price of the raw
material or commodity fluctuates by more than 5%, the company shall
publish the net market value within one business day of the
fluctuation.
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\8\ See proposed Nasdaq IM-5101-3(d). Net market value would be
determined by multiplying the volume of the raw material or
commodity held in inventory by the last spot price published or
otherwise relied upon by the company, plus cash and other assets,
less any liabilities.
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Fourth, the company would be required to publish the quantity of
the raw material or other commodity held in inventory, the average
price paid, and the company's net market value within two business days
of any change in inventory held.\9\ Where the company contracts to
purchase or sell a material quantity of the raw material or commodity,
such information would be required to be disclosed in a Form 8-K filing
within four business days.
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\9\ See proposed Nasdaq IM-5101-3(c).
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Fifth, the company would be required to employ the services of one
or more independent third party storage facilities to safeguard the
physical holdings of the raw material or commodity.\10\ Finally, the
company would be required to create a committee comprised solely of
independent directors who shall consider, at least quarterly, whether
the company's purchasing activities have had a measurable impact on the
market price of the raw material or other commodity and shall report
such determinations and make subsequent recommendations to the
company's board of directors.\11\
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\10\ See proposed Nasdaq IM-5101-3(e). Under the proposed rule
language, the facility ``should provide services consistent with
those provided by custodians and these must include: Storage and
safeguarding; insurance; transfer of the raw material or other
commodity in and out of the facility; visual inspections, spot
checks and assays; confirmation of deliveries to supplier packing
lists; and reporting of transfers and of inventory to the [commodity
stockpiling company] and its auditors.'' The company must oversee
the third party storage facility with its committee of independent
directors.
\11\ See proposed Nasdaq IM-5101-3(f). The independent directors
may rely upon and shall have the authority to engage and pay an
industry expert in conducting this review. If the company's board of
directors disagrees with or does not accept the recommendations of
the committee, the company will be required to file a Form 8-K with
the Commission outlining the relevant events, committee's
determinations and recommendations, and rationale for the board of
directors' determination.
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Nasdaq also is proposing to adopt additional audit committee
requirements applicable to commodity stockpiling companies. In addition
to the existing audit committee requirements in Nasdaq rules, audit
committees for commodity stockpiling companies would be required to
establish procedures for the identification and management of potential
conflicts of interest, and would be required to review and approve any
transactions where such potential conflicts have been identified.\12\
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\12\ See proposed Nasdaq Rule 5605(c)(3) and IM-5605. Under the
proposal, the procedures should include any material amendment to
the management agreement, including any change with respect to the
compensation of the manager.
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[[Page 6507]]
III. Comment Letter
The Commission received one comment letter on the proposal.\13\ The
commenter, a shareholder in SMG Indium Resources Ltd. (``SMG''),
supported the proposal and stated, among other things, that approval of
the proposal would ``support making the market for commodities, such as
Indium, more efficient and transparent by providing investors * * *
with an easier and more cost-effective alternative for investing in
such commodities.'' This commenter further noted that, unlike
commodity-based trust shares, which are designed along the lines of an
exchange-traded fund (``ETF'') structure and offer exposure to very
liquid and actively-traded commodities, commodity stockpiling companies
``provide investment exposure to select strategic and commercial
commodities which do not have substantial liquid and active trading
markets nor extensive and well developed derivative and/or spot markets
and pricing mechanisms.'' The commenter explained his view that the
proposed listing standards would assure appropriate investor protection
in connection with the listing of commodity stockpiling companies, and
cited particular aspects of the proposal, including the frequency and
source of pricing information, the requirement to calculate and
disseminate net market value, and the use of third-party storage
facilities.
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\13\ See, note 4, supra.
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IV. Proceedings To Determine Whether To Disapprove SR-NASDAQ-2010-134
and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act to determine whether the proposed rule change
should be disapproved. Institution of such proceedings appears
appropriate at this time in view of the legal and policy issues raised
by the proposal, discussed below. Institution of disapproval
proceedings does not indicate that the Commission has reached any
conclusions with respect to any of the issues involved. Rather, as
described in greater detail below, the Commission seeks and encourages
interested persons to comment on the proposed rule change.
Pursuant to Section 19(b)(2)(B), the Commission is providing notice
of the grounds for disapproval under consideration. In particular,
Section 6(b)(5) of the Act \14\ requires that the rules of an exchange
be designed, among other things, to prevent fraudulent and manipulative
acts and practices, 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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\14\ 15 U.S.C. 78f(b)(5).
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Nasdaq's proposal would authorize a national securities exchange,
for the first time, to list an operating company that simply plans to
buy and hold a commodity or other raw material. A liquid market may not
exist for the commodity or other raw material to be held by the
commodity stockpiling company. Despite the commenter's view that the
proposal would provide appropriate investor protections for the listing
of commodity stockpiling companies such as SMG, the Commission believes
that the proposal raises issues, among other things, as to (1) whether
the dissemination of up-to-date pricing information twice per week
about the sole asset of an operating company would be sufficient to
support the fair and efficient exchange trading of its equity
securities; (2) in the absence of a liquid and transparent market for
the commodity or other raw material held by the company, whether the
pricing information from the ``independent source'' would in fact have
sufficient reliability and integrity, or whether there are risks that
information could be manipulated; (3) whether there would be risks such
pricing information may be available to some market participants sooner
than others, thereby giving the former an unfair trading advantage; and
(4) whether Nasdaq's proposal adequately addresses any special risks to
investors that might be presented by the exchange trading of an
operating company in the business solely of stockpiling an illiquid
commodity. The Commission believes these concerns raise questions as to
whether Nasdaq's proposal is consistent with the requirements of
Section 6(b)(5) of the Act, including whether the nature of the
required pricing information, and the frequency and manner of its
dissemination, would prevent manipulation, promote just and equitable
principles of trade, perfect the mechanism of a free and open market
and the national market system, or protect investors and the public
interest.
V. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data and arguments with respect to the
concerns identified above, as well as any others they may have with the
proposal. In particular, the Commission invites the written views of
interested persons concerning whether the proposed rule change is
inconsistent with Section 6(b)(5) or any other provision of the Act, or
the rules and regulation thereunder. Although there do not appear to be
any issues relevant to approval or disapproval which would be
facilitated by an oral presentation of views, data, and arguments, the
Commission will consider, pursuant to Rule 19b-4, any request for an
opportunity to make an oral presentation.\15\
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\15\ Section 19(b)(2) of the Act, as amended by the Securities
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by a self-regulatory
organization. See Securities Act Amendments of 1975, Senate Comm. on
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st
Sess. 30 (1975).
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Interested persons are invited to submit written data, views and
arguments regarding whether the proposed rule change should be
disapproved by March 21, 2011. Any person who wishes to file a rebuttal
to any other person's submission must file that rebuttal by April 5,
2011. 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 e-mail to [email protected]. Please include
File Number SR-NASDAQ-2010-134 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2010-134. This
file number should be included on the subject line if e-mail 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 Web site (http://www.sec.gov/rules/sro.shtml). Copies of the
[[Page 6508]]
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 Web site 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 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; the Commission does not edit personal
identifying information from submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NASDAQ-2010-134 and should be submitted
on or before March 21, 2011. Rebuttal comments should be submitted by
April 5, 2011.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(57).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-2447 Filed 2-3-11; 8:45 am]
BILLING CODE 8011-01-P