[Federal Register Volume 87, Number 36 (Wednesday, February 23, 2022)]
[Notices]
[Pages 10265-10268]
[FR Doc No: 2022-03760]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94265; File No. SR-NASDAQ-2022-015]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing of Proposed Rule Change To Exempt Non-Convertible
Bonds Listed Under Rule 5702 From Certain Corporate Governance
Requirements

February 16, 2022.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on February 4, 2022, The Nasdaq Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I and II
below, which Items have been prepared by the Exchange. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The Exchange proposes to exempt non-convertible bonds listed under
Rule 5702 from certain corporate governance requirements. The text of
the proposed rule change is available on the Exchange's website at
https://listingcenter.nasdaq.com/rulebook/nasdaq/rules, at the
principal office of the Exchange, and at the Commission's Public
Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
    In November 2018, the Commission approved amendments to the
Exchange's rules that permit the Exchange to list and trade non-
convertible corporate debt securities (referred to herein as ``bonds''
or ``non-convertible bonds'') on the Nasdaq Bond Exchange.\3\ Under the
Exchange's listing rules then adopted, a non-convertible bond was
eligible for initial listing on the Exchange only if it had a principal
amount outstanding or market value of at least $5 million and its
issuer had at least one class of an equity security listed on Nasdaq,
the New York Stock Exchange (``NYSE''), or NYSE American.\4\ In
February 2020, Nasdaq amended Listing Rule 5702 to allow the listing of
non-convertible bonds issued by certain companies not listed on Nasdaq,
NYSE American or NYSE (the ``2020 Filing'').\5\
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    \3\ See Securities Exchange Act Release No. 84575 (November 13,
2018), 83 FR 58309 (November 19, 2018) (approving SR-NASDAQ-2018-
070, as modified by Amendment Nos. 1-3) (``Approval Order'').
    \4\ Rule 5702(a).
    \5\ Specifically, the 2020 Filing expanded the categories of
non-convertible bonds eligible to be listed under Rule 5702 to
include non-convertible bonds of affiliates of a listed company
where: A listed company directly or indirectly owns a majority
interest in, or is under common control with, the issuer of the non-
convertible bond; or a listed company has guaranteed the non-
convertible bond. In addition, for un-affiliated companies, the 2020
Filing allowed listing of non-convertible bonds where a nationally
recognized securities rating organization (an ``NRSRO'') has
assigned a current rating to the non-convertible bond that is no
lower than an S&P Corporation ``B'' rating or equivalent rating by
another NRSRO; or if no NRSRO has assigned a rating to the issue, an
NRSRO has currently assigned (i) an investment grade rating to an
immediately senior issue of the same company, or (ii) a rating that
is no lower than an S&P Corporation ``B'' rating, or an equivalent
rating by another NRSRO, to a pari passu or junior issue of the same
company.
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    In 2018, Nasdaq stated its plan to seek exemptions to certain
requirements of the Nasdaq Rule 5600 Series, including requirements
relating to Review of Related Party Transactions (Rule 5630),
Shareholder Approval (Rule 5635), and Voting Rights (Rule 5640),\6\ but
later indicated that it would not pursue those exemptions because, at
the time, the equity of the issuers listing non-convertible bonds under
Rule 5702 was required to be listed on Nasdaq, NYSE American or NYSE
and therefore were subject to those Rules or substantially similar
rules of NYSE American or the NYSE.\7\
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    \6\ See Securities Exchange Act Release No. 84001 (August 30,
2018), 83 83 FR 45289 (September 6, 2018).
    \7\ See Securities and Exchange Act Release No. 86072 (June 10,
2019), 84 FR 27816 (June 14, 2020).
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    Given the change made in the 2020 Filing to allow the listing of
non-convertible bonds by issuers that are not otherwise listed on a
national securities exchange, Nasdaq now proposes to exempt non-
convertible bonds from the requirements relating to Review of Related
Party Transactions (Rule 5630), Shareholder Approval (Rule 5635), and
Voting Rights (Rule 5640).\8\
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    \8\ To increase the clarity of the rule, Nasdaq proposes to
include in the proposed Listing Rule 5702(d) other exemptions
applicable to an issuer of a non-convertible bond, as provided by
Listing Rule 5615(a)(6)(A), which states, in the relevant parts,
that issuers ``whose only securities listed on Nasdaq are . . . debt
securities . . . are exempt from the requirements relating to
Independent Directors (as set forth in Rule 5605(b)), Compensation
Committees (as set forth in Rule 5605(d)), Director Nominations (as
set forth in Rule 5605(e)), Codes of Conduct (as set forth in Rule
5610), and Meetings of Shareholders (as set forth in Rule 5620(a)).
In addition, these issuers are exempt from the requirements relating
to Audit Committees (as set forth in Rule 5605(c)), except for the
applicable requirements of SEC Rule 10A-3. Notwithstanding, if the
issuer also lists its common stock or voting preferred stock, or
their equivalent on Nasdaq it will be subject to all the
requirements of the Nasdaq 5600 Rule Series.'' Nasdaq also proposes
to include in the proposed Listing Rule 5702(d) exemptions from the
requirements relating to Diverse Board Representation (as set forth
in Rule 5605(f)) and Board Diversity Disclosure (as set forth in
Rule 5606) applicable to an issuer of a non-convertible bond, as
provided by Listing Rules 5605(f)(4) and 5606(c), respectively.

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    Nasdaq believes that it is appropriate to exempt non-convertible
bonds satisfying the requirements of Listing Rule 5702, which are the
same as the requirements for listing debt on NYSE American,\9\ from the
requirements relating to Review of Related Party Transactions (Rule
5630), Shareholder Approval (Rule 5635), and Voting Rights (Rule 5640).
Nasdaq believes that listing requirements for non-convertible bonds are
designed so that only companies capable of meeting their financial
obligations are eligible to have their non-convertible bonds listed on
Nasdaq. To issue a bond, the issuer hires a third-party trustee,
typically a bank or trust company, to represent buyers of the bond. The
agreement entered into by the issuer and the trustee is referred to as
the trust indenture, which is a binding contract that is created to
protect the interests of bondholders. Accordingly, holders of non-
convertible bonds do not expect to have governance rights the way that
equity investors may. The issuance of equity and assignment of voting
rights does not affect these creditors because their interests are
protected contractually, as indicated above. Accordingly, bondholders
are focused on the ability of the issuer to meet their financial
obligations and the listing rules already have standards in that
regard. For this reason, non-convertible bonds are already exempt from
many of the governance requirements.\10\
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    \9\ See Section 104 of the NYSE American Company Guide. In
addition, NYSE has similar listing conditions, although the NYSE
rule does not permit listing of debt securities where the issuer has
equity securities listed on Nasdaq or NYSE American, is directly or
indirectly owned by, or is under common control with, an issuer
listed on Nasdaq or NYSE American, or where an issuer listed on
Nasdaq or NYSE American has guaranteed the debt security. See
Section 102.03 of the NYSE Listed Company Manual.
    \10\ See Listing Rule 5615(a)(6)(A) and footnote 8 above.
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    Nasdaq believes that it does not need to impose the requirements of
the Rules in connection with listing of non-convertible bonds on
issuers that have a class of equity listed on Nasdaq, NYSE or NYSE
American because these issuers either have equity securities listed on
Nasdaq, which makes them subject to the requirements of the Rules, or
NYSE or NYSE American, which makes them subject to substantially
similar requirements of such exchanges. In cases where listed issuers
raise debt through entities they directly or indirectly own a majority
interest in, or entities with which they are under common control,
Nasdaq believes it is appropriate to exempt these issuers from the
requirements of the Rules and rely on the company's listing on Nasdaq,
NYSE American or NYSE as evidence that the issuer of the non-
convertible bond is capable of meeting its financial obligations
because the issuer is a subsidiary or affiliate of the listed company.
    Similarly, in other cases, where the issuer of the non-convertible
bond is not a subsidiary or affiliate of a listed company, a listed
company may nonetheless guarantee the debt and in these cases the
guarantee by the listed company serves to ensure that if the company
cannot, then its guarantor is capable of meeting the financial
obligations of the non-convertible bond, particularly, because that
debt is a senior security to the listed equity.
    Nasdaq also believes that there are other indications that the
issuer of a non-convertible bond is capable of meeting its financial
obligations, besides the ties to a listed company described above.
Specifically, in the case of these un-affiliated issuers, Nasdaq
believes that it is appropriate to exempt from the requirements of the
Rules issuers of listed bonds with a current rating from an NRSRO that
is no lower than an S&P Corporation ``B'' rating or equivalent rating
by another NRSRO because this is another third-party evaluation of the
issuers ability to make interest payments and repay the loan upon
maturity. Similarly, if a more junior issue of the same company, or an
issue of the same company at the same priority in liquidation (a ``pari
passu issue'') has a rating no lower than an S&P Corporation ``B''
rating or an equivalent rating by another NRSRO, than it is appropriate
to presume that the company will also be capable of meeting its
obligations on the non-convertible bonds to be exempt from the
requirements of the Rules because those bonds would be repaid in the
same priority (if a pari passu issue) or sooner (if the other issue is
more junior) as the ``B'' rated issue. Finally, if no NRSRO has
assigned a rating to the issue to be listed, Nasdaq believes it is
appropriate to consider the rating assigned to the next most senior
issue of the same company. If that rating is an investment grade
rating, which is higher than the ``B'' rating standard just described,
then that also provides assurance that the company will be capable of
meeting its financial obligations on the non-convertible bond.\11\ In
assigning ratings, an NRSRO considers the ability of the issuer to make
timely payments of interest and ultimate payment of principal to the
related securities.\12\
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    \11\ See S&P Global ``Understanding Ratings'' available at
https://www.spglobal.com/ratings/en/about/understanding-ratings,
which identifies ratings of ``BBB'' or higher as investment grade,
at least two levels higher than ``B'' ratings.
    \12\ See, e.g., Exhibit 2, Principles of Credit Ratings, to S&P
Global Form NRSRO, available at https://www.standardandpoors.com/en_US/delegate/getPDF?articleId=2193671&type=COMMENTS&subType=REGULATORY.
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    Nasdaq notes that it performs real-time surveillance of the bonds
for the purpose of maintaining a fair and orderly market at all
times.\13\ An issuer listing non-convertible bonds will continue to be
subject to the existing continued listing requirement of Listing Rule
5702(b)(2) that it must be able to meet its obligations on the listed
non-convertible bonds. These issuers are also subject to the
requirement in Listing Rule 5702(c) to make prompt public disclosure of
material information that would reasonably be expected to affect the
value of its listed bonds or influence investors' decisions regarding
such bonds, which will allow Nasdaq to timely review for events that
may cause the issuer to be unable to meet its obligations on the listed
non-convertible bonds. Thus, for example, an issuer would have to
disclose if a non-convertible bond that was previously guaranteed is no
longer guaranteed, or if the issuer or guarantor declares bankruptcy.
An issuer would also have to disclose if its common stock is delisted,
and Nasdaq would consider whether it is appropriate to continue the
listing of the non-convertible bond of an issuer that was majority-
owned, under common control, or guaranteed by a listed company, which
has since been delisted. Nasdaq also would consider any changes in the
rating assigned to the bond or other issues of the same company that
were used to qualify the listed bond.
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    \13\ See Approval Order at 58313.
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    Finally, Nasdaq notes that in approving the bond listing standards
of other exchanges,\14\ the Commission considered the delisting
criteria for the bonds and noted that it would have serious concerns
about any proposal

that does not provide for the delisting of convertible bonds where a
company acts to disadvantage its shareholders. That concern was
addressed by including in a requirement that the NYSE American would
delist convertible bonds when the issuer's equity security is delisted
due to a violation of the that exchange's corporate governance listing
standards. However, in circumstances where the exchange lacked an
equity listing relationship with the debt issuer the Commission
concluded that:
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    \14\ See Section 104 of the NYSE American Company Guide;
Securities Exchange Act Release No. 36594 (December 14, 1995), 60 FR
66330 (December 21, 1995) (approving SR-Amex-95-29). See also
Securities Exchange Act Release No. 37878 (October 28, 1996), 61 FR
56726 (November 4, 1996) (Notice of filing and immediate
effectiveness of proposed rule change by the Chicago Board Options
Exchange, Inc., relating to listing and delisting standards for debt
securities).

the revised standards should enable [NYSE American] to identify
listed companies that may have insufficient resources to meet their
financial obligations or whose debt securities may lack adequate
trading depth and liquidity. This, in turn, will allow [NYSE
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American] to take appropriate action to protect bondholders.

    In terms of the delisting criteria, the Commission discussed the
lack a minimum market value for debt securities, elimination of the
distribution requirement for ``unaffiliated'' \15\ issuers and set
forth its expectation for the exchange to consider carefully the
propriety of continued exchange trading of the securities of bankrupt
or distressed companies, and indicated that it expected debt securities
with minimal value to be delisted. However, the Commission did not
discuss or set forth any expectations that an unaffiliated bond issuer
should be subject to any corporate governance requirements applicable
to an issuer of an equity security. Nasdaq believes this approach is
consistent with the creditors' reliance on contractual protections of
their interests rather than on governance rights, as described above.
Accordingly, Nasdaq believes that it is appropriate to exempt non-
convertible bonds satisfying the requirements of Listing Rule 5702 from
the requirements of the Rules and that this approach is consistent with
the delisting requirements of other exchanges.\16\
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    \15\ The Commission defined an unaffiliated issuer as an issuer
that has no equity securities listed on the [NYSE American] or NYSE;
is not, directly or indirectly, majority-owned by, nor under common
control with, an issuer of [NYSE American] or NYSE-listed equity
securities; and is not issuing a debt security guaranteed by an
issuer of equity securities listed on the [NYSE American] or NYSE.
    \16\ See footnote 14 above.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\17\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\18\ in particular, in that it is designed 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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    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(5).
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    Listing Rule 5702 allows the listing of non-convertible bonds
issued by companies capable of meeting their financial obligations on
those bonds. Nasdaq believes that the proposed rule change is designed
to protect investors and the public interest because issuers that have
equity securities listed on Nasdaq, are already subject to the
requirements of the Rules, or such issuers are subject to the rules of
NYSE or NYSE American, that impose substantially similar requirements.
    Nasdaq also believes that exempting unaffiliated bond issuers is
designed to remove impediments to and perfect the mechanism of a free
and open market because issuers of such bonds are capable of meeting
their financial obligations on those bonds and because Nasdaq lacks an
equity listing relationship with the debt issuer or such relationship
is attenuated. The existing alternative conditions for issuers that do
not have equity securities listed on Nasdaq, NYSE American or NYSE are
designed to protect investors and the public interest by ensuring that
the bond is issued or guaranteed by an entity listed on Nasdaq, NYSE
American or NYSE; is issued by an entity under direct, indirect or
common control with an issuer listed on Nasdaq, NYSE American or NYSE;
that the issue to be listed (or an issue that is at the same priority
or junior to the issue to be listed) is assigned a minimum ``B'' rating
or its equivalent by an NRSRO; or that the next most senior issue to
the issue to be listed is assigned an investment grade rating. These
conditions are appropriate indicia that the issuer, or a guarantor, can
meet its obligations on the debt. Moreover, this approach is consistent
with approach of NYSE American and other exchanges for listing
debt.\19\ As discussed above, Nasdaq believes that the Commission has
previously considered this approach and approved listing standards that
assure that an issuer is capable of meeting its financial obligations.
Finally, Nasdaq notes that it surveils for changes to the conditions of
listed bonds that may implicate the ability of the issuer to meet its
obligations on the listed non-convertible bonds.
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    \19\ See Section 104 of the NYSE American Company Guide, Nasdaq
Listing Rule 5515(b)(4) and Section 102.03 of the NYSE Listed
Company Manual.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. Rather, the proposed rule
change will enhance competition among exchanges by conforming Nasdaq's
listing standards for non-convertible bonds to those of other
exchanges, as described in details above. In addition, the proposed
rule change may enhance competition among issuers by allowing more
issuers to list their non-convertible bonds on Nasdaq, provided they
meet the requirements of the rule.

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

    Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include
File Number SR-NASDAQ-2022-015 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2022-015. This
file number should be included on the

subject line if email is used. To help the Commission process and
review your comments more efficiently, please use only one method. The
Commission will post all comments on the Commission's internet website
(http://www.sec.gov/rules/sro.shtml). Copies of the submission, all
subsequent amendments, all written statements with respect to the
proposed rule change that are filed with the Commission, and all
written communications relating to the proposed rule change between the
Commission and any person, other than those that may be withheld from
the public in accordance with the provisions of 5 U.S.C. 552, will be
available for website viewing and printing in the Commission's Public
Reference Room, 100 F Street NE, Washington, DC 20549, on official
business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of
the filing also will be available for inspection and copying at the
principal office of the Exchange. All comments received will be posted
without change. Persons submitting comments are cautioned that we do
not redact or edit personal identifying information from comment
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-
NASDAQ-2022-015, and should be submitted on or before March 16, 2022.
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    \20\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-03760 Filed 2-22-22; 8:45 am]
BILLING CODE 8011-01-P