Nasdaq fees are ready for takeoffIn late August, Nasdaq announced changes to their annual listing fees.  Generally, the fees will increase effective January 1, 2015, but Nasdaq is also adopting an all-inclusive annual fee and eliminating its quarterly fees.  The new annual fee will now include fees related to listing additional shares, record-keeping changes, and substitution listing events.  The all-inclusive fee is optional for issuers until January 1, 2018 at which point it becomes mandatory.

Issuers have a choice to make.  Option #1 – An issuer can do nothing and continue to pay an annual fee as well as pay the quarterly fees to list additional shares.  Under this method, an issuer will experience increased 2015 fees ranging from 0% to 40% depending on how many shares an issuer has outstanding.  Generally, the largest increases are for issuers with less than 10 million shares outstanding (14% increase) and for issuers with more than 100 million shares outstanding (40% if there are between 100 and 125 million shares outstanding and 25% if there are more than 150 million shares outstanding).  Think of this option as the same as flying on an airplane.  You get a seat (usually), but if you want anything else you need to pay.

Option #2 – Elect to Continue Reading Nasdaq annual listing fees are going up, up (but not away)

Nasdaq reverses course on independence standardsApparently, corporate governance cannot be dictated by the stock exchanges.  As we had blogged about last year, Section 952 of Dodd-Frank required each national securities exchange to review its independence standards for directors who serve on an issuer’s compensation committee.  Each national securities exchange had to ensure that its independence definition considered relevant factors such as (i) the source of the director’s compensation, including any consulting, advisory, or other compensatory fees paid by the listed company and (ii) whether the director has an affiliate relationship with the company.

As it turns out, Nasdaq interpreted the Dodd-Frank requirement to be much stricter than the NYSE.  At the time I suggested that Nasdaq was trying to “out corporate governance” the NYSE by layering on an extra independence requirement of prohibiting any director serving on the compensation committee from accepting “directly or indirectly any consulting, advisory, or other compensatory fee” from the issuer.  I still think that is the case.  As we have blogged about before, the NYSE and Nasdaq are fierce competitors in their attempts to obtain an issuer’s listing.  In fact, Nasdaq stresses that its stringent corporate governance requirements are a reason why an issuer should list on Nasdaq rather that the NYSE.

Well, I thought that Nasdaq’s stringent interpretation of the rule made little sense and that the burden simply outweighed any limited improvement in corporate governance, especially for community banks where directors often maintain some limited business with the issuer.  Apparently, Nasdaq-listed issuers agreed with me and “based on feedback” and indications that the stringent interpretation of Section 952 of Dodd-Frank “could influence a company’s choice of listing venue” Nasdaq quickly reversed course.

Nasdaq has proposed to eliminate the prohibition of compensation committee members from receiving any compensation beyond board fees.  Instead, Nasdaq-listed issuers will merely need to consider whether the compensation impairs the director’s ability to make independent judgments about the issuer’s executive compensation.  Nasdaq’s revised independence requirement is substantially the same as the NYSE.  Nasdaq expects to adopt the rule amendment prior to the start of issuers’ 2014 annual meetings.

Publicly traded bankDid you know that banks can go public and trade on Nasdaq and not have to file reports on the SEC’s EDGAR filing system?  Well, they can, but it may not be such a good thing.  You get this result when a bank goes public without a holding company.  These banks are instead required to register with their primary federal regulator (i.e., the FDIC, the Federal Reserve or the Office of the Comptroller of the Currency) and these regulators do not use the SEC’s EDGAR filing system.  So no EDGAR filings are required for these banks.

The problem is that EDGAR helps public companies satisfy SEC and other requirements.  For example, the national exchanges have listing requirements that are in addition to the reporting requirements of the SEC and the bank regulators. To comply, listed banks and bank holding companies must, on or before the applicable due date, file copies of all reports and other documents filed with the SEC or their appropriate regulatory authority. For listed bank holding companies, compliance with these requirements is easy because they file on EDGAR, which provides public access and download capabilities at no cost. Due to electronic links with the EDGAR system, most national exchanges generally provide that their filing requirements are considered fulfilled if the bank holding company files a required report or document with the SEC on EDGAR.  This is the result for the vast majority of publicly traded banks in the U.S.  According to the Federal Reserve, currently, about 84% of commercial banks in the U.S. are part of a bank holding company, and in addition, only a limited few publicly traded banks don’t have holding companies.

But what about banks that do not have holding companies? These banks can still go public by registering with their primary federal bank regulator, but they don’t get the benefit of the EDGAR system.  Instead, the bank regulatory authorities have their own filing requirements and the banks must comply with these rules to maintain their good standing as a public company. Where does this leave these publicly traded banks when it comes to their Nasdaq or national exchange filing requirements?  The answer is that these banks must still comply with the reporting requirements of Nasdaq or the national exchanges by undertaking an alternative filing process. For example, the Nasdaq requires these banks to provide it with three paper copies of the applicable filing. So there are more filings involved and more room for error.

Another problem with not using the EDGAR system is that Continue Reading Publicly Traded Banks Illustrate the Side Benefits of EDGAR

Where to list NYSE or Nasdaq?These are interesting times for technology companies that are contemplating initial public offerings. For companies of sufficient size, the exchange for the listing of their securities generally comes down to the New York Stock Exchange and the Nasdaq Stock Market. The NYSE has historical prestige and a long track record, while the Nasdaq has cultivated a progressive, tech-friendly reputation. If you are a high visibility technology company, you will probably find these exchanges actively competing for your listing. Such benefits as free advertising have been used, and business deals involving a company’s services may influence a company’s decision as to which exchange to list its securities. For example, Oracle’s switch to the NYSE from Nasdaq was reportedly in part due to an agreement by the NYSE to continue to use Oracle software in its operations.

Nasdaq has long been the favorite exchange for the listing of technology company offerings. This was probably due to the initial progressive use of automation and electronics in this exchange’s early operations which resonated with technology company executives. Rather than traders waving pieces of paper (the historical process at the NYSE), Nasdaq pioneered the use of electronic quotation boards and other advanced methods in its operations. Nasdaq was willing to list the offerings of smaller companies and was also cheaper than the NYSE. All of these factors allowed Nasdaq to build a reputation as the technology companies’ preferred exchange. This reputation was fostered and supported by the listing of a large number of technology companies, including big hitters like Apple and Microsoft.

Nasdaq’s role as the preeminent exchange for technology companies has been diminished. One of the major blows for this exchange was Continue Reading Stock exchanges compete for technology company IPO listings – Twitter chooses NYSE, but who’s really winning?

Nasdaq pays record fine for Facebook IPOMay 29, 2013 was a bad day at the office for The Nasdaq Stock Market, LLC as it agreed to pay a $10 million fine to settle allegations arising from the troubled May 18, 2012 Facebook IPO. This payment was announced by the SEC in a press release which was highly critical of Nasdaq management and its role in this IPO. This was the largest fine ever assessed against an exchange. This fine was a clear message to the securities exchanges to focus on their systems and processes and ensure that they are ready to successfully run transactions like the Facebook IPO. 

The SEC also issued an Administrative Order that describes the Facebook IPO and Nasdaq’s mistakes and securities law violations in detail. The Order also describes several instances where Nasdaq violated its own policies during the IPO. It is clear from this Order that the SEC is angry about the problems with the Facebook IPO and that it holds Nasdaq management responsible. The SEC is very concerned with future offerings and the ability of exchanges to manage them as the size, velocity and complexity of the offerings continues to increase. The SEC confirms that it is the responsibility of an exchange’s management to anticipate the problems that occur in these offerings and to have systems in place that can handle them. It is no longer sufficient to blame these problems on “technical glitches”, especially when so much money and credibility are at stake. The Order also censured Nasdaq and its affiliate, Nasdaq Execution Services, LLC. Matt Phillips has a nice summary of these Facebook IPO problems and the SEC Order on his blog. 

The Nasdaq’s actions before and during the Facebook IPO have been roundly criticized by commentators and industry experts and now by the SEC. Nasdaq management conducted system tests prior to the Facebook IPO, but the extent of these tests was woefully inadequate. They conducted tests using 40,000 orders, but almost 500,000 orders were waiting when the Nasdaq opened trading in Facebook stock. This huge volume of advance orders and the continuing high volume of orders quickly overwhelmed the exchange’s systems. In response to these numbers and panicked calls and emails from brokers (who apparently had no idea of how many shares they had purchased or their actual exposure), Nasdaq management held a “Code Blue” emergency call and made a few software adjustments which they thought would fix the problems. These adjustments did not work, however, and brokers continued to panic. Nasdaq management finally discovered that about 30,000 Facebook orders that had been placed earlier in the day had never been executed. Many of these shares were then sold into the open market, which depressed the stock price until brokers stepped in to help support it. Facebook shares were priced at $38.00 at the start of the IPO but closed that day at $38.23. This was a major disappointment, and the stock price has significantly retreated from that level. Facebook’s most recent price was Continue Reading The SEC gets tough – Nasdaq to pay record $10 million fine to settle Facebook IPO allegations

New platform for private companiesNasdaq OMX Group, Inc. announced today that it will enter into a joint venture with SharesPost, Inc. to form a marketplace for the trading of shares of unlisted companies. This is an interesting and cutting edge move that solves some problems for both Nasdaq and SharesPost. This new marketplace should be very positive for rapidly growing and large private companies which want to allow some trading in their shares but which are not ready to become publicly traded companies. It will also give investors opportunities to buy the shares of large private companies before the shares of these companies become publicly traded. According to a Nasdaq press release issued today this new marketplace, which will be called The Nasdaq Private Market, will “provide improved access to liquidity for early investors, founders and employees while enabling the efficient buying and selling of private company shares”. 

Nasdaq will own the majority of and will control this joint venture, but the joint venture will use SharesPost’s existing trading platforms and infrastructure. The joint venture will be run by SharesPost founder Greg Brogger. Depending on the speed of regulatory approval, this new market for unlisted shares could be operational later this year. 

This move makes good sense for Nasdaq because it should help them to begin to rebuild their credibility with up and coming companies and the technology industry. These market segments have traditionally been Nasdaq’s strength, but Nasdaq has been losing company listings (even from technology companies) to the NYSE and other exchanges. Nasdaq’s problems in attracting new technology company listings may be due to the significant negative issues that occurred in the initial public offering of Facebook’s shares last year. Nasdaq took a huge hit to its credibility as it was roundly blamed and criticized for the technical glitches that occurred with the Facebook offering. Some estimates say that major market makers and broker dealers lost more than $500 million in the Facebook IPO because of Nasdaq’s technical glitches. Nasdaq will also soon feel the economic effects of this matter as it reportedly offered as much as $62 million to settle associated claims and it now faces a possible $5 million fine from the SEC. For a good discussion of the current status of Nasdaq’s Facebook offering woes, see Charlie Osborne’s post on ZDNet

This new relationship should also be very beneficial to SharesPost. SharesPost, which began operations in 2009, experienced substantial success in facilitating trading of shares of unlisted companies. The company provided the platform for trading in unlisted securities of high visibility technology companies such as LinkedIn and Facebook before these companies’ securities became publicly traded. SharesPost eventually encountered regulatory scrutiny, however, and the SEC brought an action against the company for failure Continue Reading Potential good news for growth companies: Nasdaq to set up new private market for unlisted stocks

 

Stock Exchange
Panorama of Wall Street Historic District by Michael Daddino

An SEC advisory committee is likely to recommend that that the SEC support the formation of a new securities exchange designed especially for small cap and micro cap public companies. While this new exchange is a long way from approval and operation, strong SEC support could substantially increase its chances of successful implementation. This securities exchange could reduce costs and create new liquidity and capital raising opportunities for these companies.

It is too early to predict whether this new securities exchange will become a reality or how effective it may be. I believe, however, that this exchange concept is another potentially positive event for small companies and that it could produce significant benefits. This securities exchange, along with certain components of the JOBS Act, could provide significant opportunities for small companies to generate liquidity in their securities and raise additional capital for growth.

The SEC advisory committee that is making this recommendation is the Advisory Committee on Small and Emerging Companies. This Committee is made up of 20 individuals with connections to the small public company space, including business executives, state regulators and, angel investors. Christine Jacobs, co-chair of the Committee, is the CEO of a Theragenics Corp., a small cap medical device manufacturer. The Committee was formed in 2011 to focus on the special needs and dynamics of small businesses and small public companies (see September 13, 2011 formation announcement here). These Committee members are aware of the particular issues that these companies face in the capital raising, corporate governance and securities regulation arenas, and they make the SEC aware of issues and problems in the small company space. You can review information on current Committee members here.

The SEC is not bound by the recommendations of the Committee, but I believe that these recommendations will be taken seriously by the SEC and that some positive action could result. The SEC’s strong support here would substantially increase the chance of this new securities exchange being formed. I was not able to find any indication from the SEC on its possible reaction to the Committee’s recommendation.

The Committee has been reviewing this proposed new securities exchange and its possible positive effects on Continue Reading SEC advisory committee to recommend formation of small company securities exchange

compensation committeesIssuers listed on the NYSE or Nasdaq should pay close attention to the rules proposed by the exchanges last week because the proposed rules will impact compensation committees; however, the impact may be a “tale of two exchanges” because the impact is more significant to Nasdaq-listed companies.  As you may recall, Congress included several provisions in the Dodd-Frank Act to combat perceived public concerns over excessive executive compensation.  One provision, say-on-pay, has been implemented, but other more controversial provisions such as executive compensation clawbacks and executive compensation pay ratios have not been implemented.  Last week, the exchanges proposed rules to implement the independence requirements for compensation committees required under Dodd-Frank. 

As we have mentioned before, Section 952 of the Dodd-Frank Act does not infringe on traditional state corporation law by requiring an issuer to have a compensation committee or to have a compensation committee actually approve executive compensation.  Instead, it directs the exchanges to design and implement their interpretations of corporate governance best practices based on the parameters of Section 952.  The NYSE and Nasdaq proposed rules are different, and I highlight some of the most important aspects of each of the set of rules below.  In general, NYSE-listed companies are impacted significantly less than Nasdaq-listed companies.  

Director Independence  

The SEC rules implementing Section 952 require that the exchanges’ definition of independence consider relevant factors such as (i) the source of the director’s compensation, including any consulting, advisory, or other compensatory fees paid by the listed company and (ii) whether the director has an affiliate relationship with the company.  The two exchanges interpreted the SEC’s rules vastly different.  

The NYSE merely maintains its current definition of “independence” and requires the issuer to consider the two additional factors set out by the SEC.  In practice, it would be highly unlikely that the two additional factors set out by the SEC would impact a board’s assessment of a particular director’s independence.  

Nasdaq’s current definition of “independent director” remains in effect; however, Nasdaq has elected to overlay a separate independence Continue Reading Proposed compensation committee independence rules will impact some issuers more than others

Coke vs. Pepsi.  Apple vs. Microsoft.  Energizer vs. Duracell.  All are great brand rivalries.  Today we look at one of the biggest rivalries in the capital markets space: NYSE vs. Nasdaq.  And ever since the Nasdaq debacle with the Facebook IPO, the rivalry has only intensified. 

Companies going public face lots of decisions including where to list their shares.  Ever since the dot-com craze of the late 1990s, the rivalry between the NYSE and Nasdaq has been fierce.  Each exchange attempts to woo each other’s clients to switch their listing.  In fact, some big names have changed exchanges over the past year.  Texas Instruments and Viacom switched from the NYSE to Nasdaq in 2011.  Earlier this year, TD Ameritrade left Nasdaq for the Big Board, but Nasdaq countered by poaching Kraft.  Nasdaq (with its history of winning the listings of technology companies) and the NYSE have been fighting hand-to-hand in the technology company space with Groupon and Zynga choosing Nasdaq and LinkedIn and Pandora going with the NYSE.  So is one exchange better than the other?  This post will examine some of the most important factors you should consider in making your decision.

Historic DifferencesThe NYSE started operating in 1792 while Nasdaq started up in 1971.  The 200 year head start by the NYSE led to a couple of differences initially, but these changes have largely disappeared over the past decade.  Nasdaq has no physical trading floor; it is 100% electronic.  Because the NYSE operated without the assistance of computers for the bulk of its existence, it has a physical trading floor; however, since 2007 virtually all NYSE stock can be traded electronically.  One of the other major differences went away in 2008 when the SEC began allowing Nasdaq-listed companies to have one-, two- or three-letter ticker symbols.  Historically, all Nasdaq-listed companies needed to have a four letter trading symbol.  (Zillow was the first Nasdaq-listed company to take a one-letter trading symbol, “Z.”)  The ticker change followed Nasdaq’s conversion from an interdealer quotation system to a licensed national exchange in 2006, which from an issuer’s perspective, had little to no effect other than to further legitimize the then 35-year old “upstart” Nasdaq.

Branding and MarketingThe biggest difference between the two exchanges is the public’s perception of the exchanges.  Nasdaq with its upstart image and all electronic trading platform has attracted more technology-based companies, many of which did not qualify to list on the NYSE when they originally went public.  The Big Board, on the o Continue Reading Where to list: NYSE or Nasdaq?

Compensation committees remain on the hot seat.  Stemming from the Dodd-Frank Act, the SEC has adopted rules directing each national securities exchange to require companies with listed equity securities to comply with new compensation committee and compensation advisor requirements. Among other things, these new rules require national securities exchanges to implement listing standards that require :

  • each member of a listed company’s compensation committee to be an “independent” director;
  • the issuer to consider relevant factors (to be determined by the national securities exchange) including, but not limited to, the source of compensation of a member of the compensation committee member and whether a compensation committee member is “affiliated” with the issuer, subsidiary of the issuer, or an affiliate of the subsidiary;
  • an issuer’s compensation committee to have the authority and responsibility to retain compensation advisers and consider the independence of compensation advisers; and
  • require issuers to include specified disclosure about the use of compensation consultants and any related conflicts of interest in the proxy materials for their annual shareholders’ meetings.

As we noted when these rules were originally proposed, the SEC has not infringed on the traditional rights of states to define corporate law because these new rules do not require an issuer to have a compensation committee.  Rather, the new rules require that the independence rules be applied to committees performing functions typically performed by a compensation committee regardless of the name of the committee (compensation committee, human resource committee, etc.).  Under the final rules, the SEC has broadened the independence requirement to apply also to the members of the listed issuer’s board of directors who, in the absence of a compensation committee, oversee executive compensation matters.

The final definition of “independence” for a compensation committee will largely depend on the final rules of each national Continue Reading Are your compensation committee members independent?