SEC Expands Nasdaq's Discretionary Authority to Delist Stocks
Commentary by Steven Lofchie
occurs that makes continued listing on Nasdaq inadvisable or unwarranted in the opinion of Nasdaq, even though the securities meet all enumerated criteria for continued listing."
occurs that makes continued listing on Nasdaq inadvisable or unwarranted in the opinion of Nasdaq, even though the securities meet all enumerated criteria for continued listing."
The SEC approved a Nasdaq proposed rule to provide the exchange discretionary authority to delist a stock that exhibits signs of potential manipulation after the SEC imposes a temporary trading suspension.
According to the SEC Order Granting Accelerated Approval and published in the Federal Register, under new Nasdaq Rule IM-5101-4, the exchange may delist a security where (i) it exhibits trading indicative of potential manipulation, (ii) the SEC has imposed a suspension under Exchange Act Section 12(k) "(Registration Requirements") and (iii) the exchange determines delisting is necessary to protect investors. The SEC said the exchange would be permitted to exercise the discretionary authority "even when the security and the listed company otherwise satisfy all applicable Nasdaq listing standards at the time of determination."
The SEC authorized Nasdaq to act case by case, weighing factors such as a company's location and any foreign-jurisdiction legal barriers, public float and liquidity, third-party social media activity, and recent discounted share issuances. The SEC said the authority may be used even when the manipulation appears driven by third parties with no connection to the company.
A company facing delisting would receive a written Staff Delisting Determination and could appeal to a Nasdaq hearings panel - which would stay the delisting - and then to the exchange's listing council and the SEC.
Nasdaq said the rule targets a recurring pattern in which unknown promoters use social media to inflate the price and volume of thinly traded small-cap stocks, prompting SEC suspensions.
Commentary
The financial industry should consider how the event of delisting is treated in standard form financing documents; i.e., it makes no sense that a delisted security should be valued at the last traded price, particularly when that last traded price has resulted from market manipulation that itself caused the delisting.