[Federal Register Volume 83, Number 130 (Friday, July 6, 2018)]
[Notices]
[Pages 31614-31628]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-14461]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-83558; File No. SR-IEX-2018-06]
Self-Regulatory Organizations; Investors Exchange LLC; Notice of
Filing of Amendment No. 1 and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment No. 1, To Establish a
New Optional Listing Category on the Exchange, ``LTSE Listings on IEX''
June 29, 2018.
I. Introduction
On March 15, 2018, Investors Exchange LLC (the ``Exchange'' or
``IEX'') filed with the Securities and Exchange Commission (``SEC'' or
``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 establish a new optional listing category on
the Exchange, referred to as the ``LTSE Listings on IEX'' or ``LTSE
Listings.'' The proposed rule change was published for comment in the
Federal Register on April 2, 2018.\3\ The Commission received 23
comment letters on the proposed rule change.\4\ On
[[Page 31615]]
April 26, 2018, the Commission received a response letter from the
Exchange.\5\ On June 27, 2018, the Exchange submitted Amendment No. 1
to the proposed rule change.\6\ The Commission is publishing this
notice to solicit comments on Amendment No. 1 from interested persons,
and is approving the proposed rule change, as modified by Amendment No.
1, on an accelerated basis.
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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. 82948 (March 27,
2018), 83 FR 14074 (``Notice'').
\4\ See letters to Brent J. Fields, Secretary, Commission, from
Tony Davis, CEO, Inherent Group, dated April 19, 2018 (``Inherent
Group Letter''); Morgan Housel, Partner, The Collaborative Fund,
dated April 20, 2018 (``Collaborative Fund Letter''); Chris Brummer,
Professor of Law, Faculty Director, Institute of International
Economic Law, Georgetown University Law Center, dated April 22, 2018
(``Brummer Letter''); Dick Costolo, dated April 23, 2018 (``Costolo
Letter''); James Anderson, Partner and Head of Global Equities,
Baillie Gifford & Co, dated April 23, 2018 (``Baillie Gifford
Letter''); Marcie Frost, Chief Executive Officer, California Public
Employees' Retirement System Investment Office, dated April 23, 2018
(``CalPERS Letter''); Evan Williams, Co-Founder and James Joaquin,
Co-Founder & Managing Director, Obvious Ventures, dated April 23,
2018 (``Obvious Ventures Letter''); Douglas K. Chia, Executive
Director, Governance Center, The Conference Board, Inc., dated April
23, 2018 (``Conference Board Letter''); Steve Case, Chairman and
CEO, Revolution, dated April 23, 2018 (``Revolution Letter''); Marc
Andreessen, Cofounder and General Partner, Andreessen Horowitz,
dated April 23, 2018 (``Andreessen Horowitz Letter''); John Buhl,
dated April 23, 2018 (``Buhl Letter''); Sam Altman, President, Y
Combinator, dated April 23, 2018 (``Y Combinator Letter''); Andrew
Mason, CEO, Descript, dated April 23, 2018 (``Descript Letter'');
Judith Samuelson, Vice President, Founder & Director, The Business &
Society Program, and Alastair Fitzpayne, Executive Director, The
Future of Work Initiative, The Aspen Institute, dated April 23, 2018
(``Aspen Institute Letter''); Brian Singerman, Partner, Founders
Fund, dated April 23, 2018 (``Founders Fund Letter''); David Brown
and David Cohen, Founders and Co-CEOs, Techstars, dated April 23,
2018 (``Techstars Letter''); Tony Hsieh, Founder, Downtown Project,
dated April 23, 2018 (``Downtown Project Letter''); Aaron
Bertinetti, SVP, Research & Engagement, Glass, Lewis & Co., LLC,
dated April 23, 2018 (``Glass, Lewis Letter''); Jeff Weiner, CEO,
LinkedIn, dated April 23, 2018 (``LinkedIn Letter''); Chris
Concannon, President and COO, Cboe Global Markets, Inc. (``Cboe
Letter'); Reid Hoffman, Partner, Greylock Partners, dated April 23,
2018 (``Greylock Partners Letter''); Aneesh Chopra, President,
CareJourney, dated April 23, 2018 (``CareJourney Letter''); and
Alexis Ohanian, General Partner/Cofounder, and Garry Tan, Managing
Partner/Cofounder, Initialized Capital, dated April 23, 2018
(``Initialized Capital Letter''). All comments received by the
Commission on the proposed rule change are available at: https://www.sec.gov/comments/sr-iex-2018-06/iex201806.htm.
\5\ See letter to Brent J. Fields, Secretary, Commission, from
Claudia Crowley, Chief Regulatory Officer, Investors Exchange LLC,
dated April 26, 2018 (``IEX Response Letter''). The Exchange's
response letter is available at: https://www.sec.gov/comments/sr-iex-2018-06/iex201806-3520149-162294.pdf.
\6\ In Amendment No. 1, the Exchange proposes to amend: (1)
Proposed Rule 14A.001(a) to clarify that an LTSE Listings Issuer
must qualify for listing under Chapter 14 of the IEX Rules and the
LTSE Listings Rules, except as otherwise provided in the LTSE
Listings Rules; (2) proposed Rule 14A.200(c)(2) to specify that when
a company lists on LTSE Listings, in addition to the requirement
that the company must not have any security listed for trading on
the Exchange or any other national securities exchange, the company
also must be listing in connection with its initial public offering;
(3) proposed Rule 14A.210 to indicate that when the LTSE Listings
Issuer is dually-listed on the Exchange and on another national
securities exchange that is the Primary Listing Market and that
requires a minimum number of market makers, IEX Rules 14.310 and
14.320 requiring a minimum number of market makers for IEX listed
companies would not apply; and (4) proposed Rule 14A.413 by adding
paragraph (c) to require an LTSE Listings Issuer to post prominently
on its website a plain English explanatory statement regarding
shareholders' rights under the long-term voting provisions included
in its governance documents, including how the shareholder's voting
power may increase over time and the administrative steps the
shareholder must take to allow the shares' voting power to increase
over time. To promote the transparency of its proposed amendment,
when IEX filed Amendment No. 1 with the Commission, it also
submitted Amendment No. 1 as a comment letter to the file, which the
Commission posted on its website and placed in the public comment
file for SR-IEX-2018-06 (available at https://www.sec.gov/comments/sr-iex-2018-06/iex201806.htm).
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II. Background of the Proposed Rule Change
The Exchange proposes to adopt rules to create a new optional
listing category on the Exchange for common equity securities, referred
to as the ``LTSE Listings on IEX'' or ``LTSE Listings.'' According to
the Exchange, the new optional listing category would provide a
differentiated choice for issuers and investors that prefer listing
standards that are expressly designed to promote long-term value
creation.\7\ Specifically, the Exchange believes that LTSE Listings
would promote the interests of companies that seek to focus on long-
term value creation, as well as to respond to the transparency and
governance concerns of long-term focused investors.\8\
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\7\ See Notice, supra note 3, at 14074.
\8\ See id. at 14077.
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The Exchange believes that the proposed LTSE Listings Rules could
encourage greater participation in the public markets by companies and
potentially increase the number of companies willing to undertake an
initial public offering (``IPO'').\9\ According to the Exchange, the
total number of listed companies in the United States and the number of
IPOs have declined in the past few decades, and the Exchange states
that many academics, market participants, and other commenters believe
that these declines are the result of short-term pressures placed on
public companies.\10\
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\9\ See id. at 14076-77.
\10\ See id. at 14075-76.
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III. Description of the Proposed Rule Change, as Modified by Amendment
No. 1
The proposed rules for LTSE Listings would be located in new
Chapter 14A of the Exchange's rules (``LTSE Listings Rules'' or
``Rules''). Companies choosing to list on the Exchange (``LTSE Listings
Issuers'') could elect to be subject to the LTSE Listings Rules, and
such companies also would be subject to the listing and applicable
requirements set forth in current Chapter 14 of the IEX Rulebook (``IEX
Rules'') for IEX listed companies, except as those rules may be
modified by the LTSE Listings Rules.\11\
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\11\ See Notice, supra note 3, at 14074-75; see also proposed
Rules 14A.001(a) and 14A.200, and Amendment No. 1, supra note 6.
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The LTSE Listings Rules would include the following features: (i)
Rules relating to the board of directors and committee requirements;
(ii) rules requiring supplemental long-term disclosures; (iii) rules
requiring long-term alignment of executive compensation; (iv) rules
requiring a long-term shareholder voting structure; and (v) certain
other rules that the Exchange believes would encourage LTSE Listings
Issuers to focus on long-term value creation.\12\ In addition, the
Exchange is proposing rules that would clarify the application of
certain existing Exchange rules to LTSE Listings Issuers.\13\ The
Exchange would limit the availability of LTSE Listings to companies
seeking to list on LTSE Listings concurrently with their IPO (whether
listing on LTSE Listings only or dually listing on LTSE Listings and
another national securities exchange) \14\ and would not permit issuers
already listed on another national securities exchange to transfer to
LTSE Listings.\15\ LTSE Listings Issuers may list only common equity
securities on LTSE Listings.\16\
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\12\ See Notice, supra note 3, at 14077.
\13\ Id.
\14\ See Amendment No. 1, supra note 6.
\15\ See Notice, supra note 3, at 14075; see also proposed Rule
14A.200(c)(2). In connection with an initial public offering on the
Exchange, the proposed LTSE Listings Rules would permit the dual-
listing of companies seeking to list concurrently on LTSE Listings
and another national securities exchange. See infra Section III.F.2.
and proposed Rule 14A.210.
\16\ See proposed Rule 14A.001(b).
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A. The Exchange's Arrangement With LTSE Holdings, Inc.
The Exchange notes that the LTSE Listings Rules initially were
developed by LTSE Holdings, Inc. (together, with its affiliates,
``LTSE''), and that the Exchange has entered into an arrangement with
LTSE to authorize the Exchange to make the LTSE Listings Rules
available to interested companies as a listing category of the
Exchange.\17\ The Exchange states that, although the LTSE Listings
Rules were developed by LTSE, the Exchange would retain full self-
regulatory responsibility for determining initial and continuing
compliance with the Exchange's listing standards, including for those
companies that elect to be subject to the LTSE Listings Rules.\18\
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\17\ See Notice, supra note 3, at 14074. The Exchange states
that it understands that LTSE anticipates separately registering a
subsidiary as a national securities exchange in the future. See id.
\18\ See id. at 14077.
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The Exchange further states that it would retain, as its agents, a
small number of staff that also are employed by LTSE (``LTSE Listings
Agents'') solely to provide IEX with expertise in interpreting the LTSE
Listings Rules and assistance in conducting the LTSE Listings business,
and that the Exchange would not receive regulatory services from LTSE
itself.\19\ Specifically, the
[[Page 31616]]
Exchange notes that the LTSE Listings Agents would provide certain
advisory, marketing, public communications, and sales services to IEX
in connection with LTSE Listings.\20\ The Exchange, however, represents
that the LTSE Listings Agents would be subject to the Exchange's
oversight and regulatory authority as the responsible self-regulatory
organization.\21\ The Exchange states that it has an arrangement with
the LTSE Listings Agents that includes restrictions designed to protect
the Exchange's responsibilities as a self-regulatory organization and
the confidentiality of its books and records.\22\ Separately, the
Exchange states that it would permit LTSE to use and redistribute
written marketing, public communications, and sales materials
concerning the LTSE Listings business, subject to the Exchange's
consent.\23\
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\19\ See id. The Exchange represents that the LTSE Listing
Agents' involvement would not extend to other matters within the
Exchange's jurisdiction and that IEX would retain full self-
regulatory responsibility for determining initial and continuing
compliance with the Exchange's listing standards, including for
those companies that elect to be subject to the LTSE Listings Rules.
See id.
\20\ See id. at 14077 n.34. The Exchange states that, for
example, LTSE Listings Agents would evaluate issuers seeking to list
on the Exchange under the LTSE Listings Rules and would assist in
monitoring LTSE Listings Issuers for compliance with the LTSE
Listings Rules. See id.
\21\ See id. at 14077. The Exchange notes that, at all times,
LTSE Listings Agents would be subject to the satisfaction and the
oversight of the Exchange's Chief Regulatory Officer, with all
actions proposed by LTSE Listings Agents subject to the Exchange's
regulatory authority. See id. at 14077 n.34. The Exchange represents
that, notwithstanding the services provided by the LTSE Listings
Agents to the Exchange, all actions taken by the Exchange ultimately
would be based on the Exchange's determination that the action is
appropriate and consistent with the Act, the Commission's rules
thereunder, and the Exchange's rules. See id.
\22\ See id. at 14077 n.34. According to the Exchange, each LTSE
Listings Agent would be considered to be an agent of the Exchange in
connection with the performance of services under the Exchange's
arrangement with LTSE, pursuant to Article XI, Section 4 of the
Exchange's Amended and Restated Operating Agreement. Among other
things, the Exchange represents that, pursuant to the Exchange's
arrangement with LTSE, the Exchange would not share confidential
regulatory information with LTSE (other than with LTSE regulatory
personnel that are LTSE Listings Agents and that do not have direct
involvement in LTSE's commercial operations). In addition, the
Exchange represents that LTSE has agreed that each LTSE Listings
Agent would be required to consent in writing to the application to
such agent of the following provisions, which are consistent with
Article VII of the Bylaws of IEX Group, Inc.: non-interference with,
and due regard for, the Exchange's self-regulatory function;
confidentiality of the Exchange's books and records pertaining to
its self-regulatory function; maintenance of books and records
related to services under the Exchange's arrangement with LTSE and
services provided to the Exchange by LTSE Listings Agents at a
location within the United States; compliance with the federal
securities laws and the rules and regulations promulgated thereunder
and cooperation with the SEC in respect of the SEC's oversight
responsibilities regarding the Exchange and the self-regulatory
functions and responsibilities of the Exchange; and consent to
jurisdiction of the United States federal courts, the SEC, and the
Exchange for purposes of any suit, action, or proceeding arising out
of or relating to services provided to the Exchange and the
Exchange's arrangement with LTSE. See id.
\23\ See id.
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B. Board of Directors and Committee Requirements
As more fully described below, the LTSE Listings Rules would create
new requirements for the boards of directors and board committees of
LTSE Listings Issuers, which are intended to align the boards with the
objectives of the LTSE Listings Rules. The LTSE Listings Rules would
require each LTSE Listings Issuer to establish board committees
dedicated to overseeing the issuer's strategies for creating and
sustaining long-term growth and for selecting or recommending qualified
director nominees. The LTSE Listings Rules also would impose additional
obligations on audit committees and compensation committees with the
aim of increasing oversight and transparency.\24\
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\24\ See id.
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1. Long-Term Strategy and Product Committee
Proposed Rule 14A.405(c)(1) would require that each LTSE Listings
Issuer's board of directors maintain a committee specifically dedicated
to overseeing the LTSE Listings Issuer's strategic plans for long-term
growth, the Long Term Strategy and Product Committee (``LTSP
Committee''). The LTSP Committee must include a minimum of three
members of the board, a majority of whom must be independent
directors.\25\ The LTSP Committee cannot assume any roles or
responsibilities that are required to be undertaken by the LTSE
Listings Issuer's board committees comprised solely of independent
directors.\26\
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\25\ See proposed Rule 14A.405(c)(4).
\26\ See proposed Rule 14A.405(c)(1).
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Pursuant to proposed Rule 14A.405(c)(3)(A), each LTSE Listings
Issuer must certify that it has adopted a formal written LTSP Committee
charter and that the LTSP Committee would review and reassess the
adequacy of the formal written charter on an annual basis. The charter
must specify, among other things, the scope of the LTSP Committee's
responsibilities, and how it would carry out those responsibilities,
including structure, processes, and membership requirements, and that
the LTSP Committee must report regularly to the board of directors.\27\
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\27\ See proposed Rule 14A.405(c)(3)(B)(i)-(v). Proposed Rule
14A.405(c)(3)(C) would require that the LTSP Committee's charter be
made available on or through the LTSE Listings Issuer's website.
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2. Nominating/Corporate Governance Committee
Pursuant to proposed Rule 14A.405(d)(1), the director nominees of
an LTSE Listings Issuer must be either selected, or recommended for the
board's selection, by a nominating/corporate governance committee that
is comprised solely of independent directors. Director nominees of an
LTSE Listings Issuer may not be selected, or recommended for the
board's selection, by the independent directors constituting a majority
of the board's independent directors, as provided in IEX Rule
14.405(e)(1)(A), subject to an exception for exceptional and limited
circumstances.\28\ Independent Director oversight of director
nominations would not apply in cases where the right to nominate a
director legally belongs to a third party.\29\
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\28\ If the nominating/corporate governance committee is
comprised of at least three members, one director, who is not an
``Independent Director'' as defined in IEX Rule 14.405(a)(2) and is
not currently an Executive Officer or employee or a Family Member of
an Executive Officer, may be appointed to the nominating/corporate
governance committee if the board, under exceptional and limited
circumstances, determines that such individual's membership on the
committee is required by the best interests of the LTSE Listings
Issuer and its shareholders. See proposed Rule 14A.405(d)(2). An
LTSE Listings Issuer that relies on this exception must disclose the
nature of the relationship and the reasons for the determination, as
well as provide any disclosure required by Instruction 1 to Item
407(a) of Regulation S-K regarding its reliance on this exception.
See id. In addition, a member appointed under this exception may not
serve longer than two years. See id.
\29\ See proposed Rule 14A.405(d)(3).
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Proposed Rule 14A.405(d)(6)(A) would require that each LTSE
Listings Issuer adopt a formal written nominating/corporate governance
committee charter and to review and reassess the adequacy of the formal
written charter on an annual basis. Among other things, the charter
would need to specify the scope of the nominating/corporate governance
committee's responsibilities, and how the committee would carry out
those responsibilities, including structure, processes, and membership
requirements. The charter also would be required to specify that the
nominating/corporate governance committee must report regularly to the
board of directors.\30\
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\30\ This charter must be made available on or through the LTSE
Listings Issuer's website. See proposed Rule 14A.405(d)(6)(B).
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3. Audit Committee and Compensation Committees
Proposed Rule 14A.405 imposes requirements on the audit committee
and compensation committee in addition to the requirements imposed
[[Page 31617]]
by current IEX Rules 14.405(c) and 14.405(d), respectively. Under
proposed Rules 14A.405(a)(1) and 14A.405(b)(2)(A)(i), an LTSE Listings
Issuer's audit committee and compensation committee charters must
specify that the committees must report regularly to the board of
directors. In addition, the compensation committee charter must specify
that the compensation committee must adopt executive compensation
guidelines in accordance with proposed Rule 14A.405(b)(3) (Executive
Compensation Guidelines).\31\ An LTSE Listings Issuer would be required
to make both the audit committee charter and compensation committee
charter available on or through its website.\32\
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\31\ See proposed Rule 14A.405(b)(2)(A)(ii). Proposed Rule
14A.405(b)(4) clarifies that ``Smaller Reporting Companies,'' as
defined in Rule 12b-2 under the Act, 17 CFR 240.12b-2, are not
exempt from these additional compensation committee requirements.
\32\ See proposed Rules 14A.405(a)(2) and 14A.405(b)(2)(B).
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4. Committee Delegations and Third-Party Nominations
The proposed rules would allow the responsibilities of certain
committees to be delegated to other committees. Specifically, the
proposed rules would permit the board of directors to allocate the
responsibilities of the LTSP Committee, the nominating/corporate
governance committee, and compensation committee to committees of their
own denomination, provided that, in each case the committee with the
allocated committee responsibilities must satisfy the same
compositional requirements of the original committee and must be
subject to a formal written charter that satisfies the same committee
charter requirements of the original committee.\33\ Furthermore, if any
function of the LTSP Committee, the nominating/corporate governance
committee, or compensation committee has been delegated to another
committee, the charter of the committee receiving such delegation must
also be made available on or through the LTSE Listings Issuer's
website.\34\
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\33\ See proposed Rules 14A.405(c)(2), 14A.405(d)(5), and
14A.405(b)(2)(B).
\34\ See proposed Rules 14A.405(c)(3)(C), 14A.405(d)(6)(B), and
14A.405(b)(2)(B).
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Under the proposal, the charters of each committee of LTSE Listings
Issuers also would be permitted to address the authority of the
committee to delegate its responsibilities to subcommittees of the
committee, provided that any such subcommittee must meet the applicable
committee composition requirements with respect to independence.\35\
However, this LTSE Listings Rule would not apply in cases where the
right to nominate a director legally belongs to a third party, because
the right to nominate directors in such a case does not reside with the
LTSE Listings Issuer.\36\
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\35\ See Supplementary Material .01 to proposed Rule 14A.405,
which would apply to LTSE Listings Issuers in lieu of existing
Supplementary Material .08 to IEX Rule 14.405 (Independent Director
Oversight of Director Nominations).
\36\ See proposed Rule 14A.405, Supplementary Material .01.
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5. Corporate Governance Guidelines
Proposed Rule 14A.409 would require each LTSE Listings Issuer to
adopt and disclose certain corporate governance guidelines that address
director qualification standards, director responsibilities, director
access to management, director compensation, director orientation and
continuing education, management succession, and annual performance
evaluations of the board.\37\ Among other things, these corporate
governance guidelines must specify that no less than 40% of director
compensation must be paid in stock-based compensation tied to long-term
periods.\38\ In addition, LTSE Listings Issuers must adopt director
stock ownership guidelines, which must include minimum ownership
requirements that can be met over the length of board service.\39\
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\37\ An LTSE Listings Issuer would be required to make its
corporate governance guidelines available on or through its website.
See proposed Rule 14A.409(b).
\38\ See proposed Rule 14A.409(a)(4). An LTSE Listings Issuer
would be required to disclose in its corporate governance guidelines
what it considers to be ``long-term'' for this purpose. See id.
\39\ See id.
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C. Long-Term Strategy and Other Disclosure Requirements
The Exchange notes that, in addition to and separate from all
disclosures required under applicable securities laws, the Commission's
rules, and the Exchange's other rules, proposed Rule 14A.207 would
require LTSE Listings Issuers to provide certain supplemental
disclosures (``LTSP Disclosures'').\40\ The LTSP Disclosures would be
made publicly available pursuant to a supplement to the LTSE Listings
Issuer's Annual Report (``Annual Report Supplement'') that must be
distributed to shareholders along with, and in the same manner as, the
LTSE Listings Issuer's Annual Report.\41\ In addition, LTSE Listings
Issuers must make the Annual Report Supplement available on or through
the LTSE Listings Issuer's website.\42\ The LTSP Disclosures also must
be reviewed and approved by the LTSP Committee on at least an annual
basis.\43\
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\40\ See Notice, supra note 3, at 14080. Proposed Rule
14A.207(a) specifies that nothing in the rule shall affect the
obligation of an LTSE Listings Issuer to comply with applicable
securities laws. In addition, proposed Rule 14A.207(b) states that
all disclosures must comply with applicable securities laws,
including rules and regulations pertaining to the use and
reconciliation of non-GAAP financial measures and any securities law
obligations regarding updating or correcting prior public statements
or disclosures.
\41\ See proposed Rule 14A.207(b). Proposed Rule 14A.002(a)(1)
states that ``Annual Report'' means ``consistent with IEX Rule
14.207(d), the annual report made available to Shareholders
containing audited financial statements of the LTSE Listings Issuer
and its subsidiaries (which, for example, may be on Form 10-K, 20-F,
40-F or N-CSR) within a reasonable period of time following the
filing of the annual report with the Commission.''
\42\ See id. In addition, ``[e]ach LTSE Listings Issuer must
include a statement in its Annual Report that the LTSP Disclosures
are available in the Annual Report Supplement and provide the
website address,'' as well as ``notify IEX Regulation once its
Annual Report Supplement has been made publicly available on its
website.'' Id.
\43\ Id. The LTSP Committee must determine whether to recommend
to the board of directors that the LTSP Disclosures be included in
the Annual Report Supplement, and any board and committee approvals
should be reflected in board resolutions as appropriate. See id.
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1. Long-Term Growth Strategy
Proposed Rule 14A.207(c)(1) would require each LTSE Listings Issuer
to disclose its ``Long-Term Growth Strategy.'' Long-Term Growth
Strategy is defined as ``the strategy, as determined by management and
the board of directors and approved by the LTSP Committee, that is
focused on achieving long-term growth.'' \44\ The Exchange states that
this proposed requirement is designed to increase transparency for
shareholders on the strategic goals of the company's managers and
provide for greater alignment and accountability between a company's
long-term vision and investor expectations. An LTSE Listings Issuer
must include how it defines ``long-term'' for purposes of its Long-Term
Growth Strategy, including a discussion of how it made this
determination.\45\
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\44\ See proposed Rule 14A.002(a)(11).
\45\ See proposed Rule 14A.207(c)(1)(A).
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Proposed Rule 14A.207(c) outlines other required aspects of the
Long-Term Growth Strategy disclosure. This disclosure must include a
discussion of the LTSE Listings Issuer's ``Leading Indicators,'' \46\
as well as key milestones
[[Page 31618]]
that the LTSE Listings Issuer aims to achieve with respect to the
Leading Indicators.\47\ The LTSE Listings Issuer also must report on
the progress that the LTSE Listings Issuer has made in achieving these
key milestones.\48\ In addition, the Long-Term Growth Strategy must
include details relating to different businesses of the LTSE Listings
Issuer if the information is material to the overall strategy.\49\
Lastly, LTSE Listings Issuers must include a discussion of any changes
to the LTSE Listings Issuer's Long-Term Growth Strategy, Leading
Indicators, and/or key milestones since the publication of the LTSE
Listings Issuer's previous Long-Term Growth Strategy.\50\
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\46\ Proposed Rule 14A.002(a)(10) defines ``Leading Indicators''
as ``quantitative metrics (financial or non-financial) that an LTSE
Listings Issuer's management uses to help forecast revenue, profit
or other common after-the-event measures of long-term success. These
current and predictive metrics [would be] used by management to
focus on day-to-day results as they work towards achieving the LTSE
Listings Issuer's Long-Term Growth Strategy, and provide useful
information for timely decision-making in the shorter term.''
\47\ See proposed Rule 14A.207(c)(1)(B).
\48\ See id.
\49\ See proposed Rule 14A.207(c)(2).
\50\ See proposed Rule 14A.207(c)(1)(C).
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Proposed Rule 14A.207(c)(3) would provide an exception from the
requirement to disclose aspects of an LTSE Listings Issuer's Long-Term
Growth Strategy. Specifically, if the LTSE Listings Issuer's LTSP
Committee makes a determination that disclosure of any aspect of the
LTSE Listings Issuer's Long-Term Growth Strategy would be ``reasonably
likely to result in material harm'' to the LTSE Listing Issuer's
competitive position, the LTSE Listings Issuer could exclude such
information from its LTSP Disclosures. A process for making this
determination would be required to be disclosed in the issuer's LTSP
Committee Charter pursuant to proposed Rule 14A.405(c)(3)(B)(iv) and
any such determination must be documented by the LTSP Committee and be
made in accordance with its fiduciary duties.\51\ In addition, the LTSE
Listings Issuer must disclose in its LTSP Disclosures that it is
withholding certain aspects of its Long-Term Growth Strategy as a
result of competitive concerns.\52\ Upon the time that any withheld
information is no longer competitively sensitive, the LTSE Listings
Issuer would be required to disclose that information in its LTSP
Disclosures, even though this information may no longer be relevant to
its current Long-Term Growth Strategy.\53\
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\51\ See Notice, supra note 3, at 14081.
\52\ See proposed Rule 14A.207(c)(3).
\53\ Id.
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2. Other Supplemental Disclosure Requirements
In addition to the Long-Term Growth Strategy disclosure, proposed
Rule 14A.207 would require issuers to make disclosures relating to
buybacks, human capital investment, and research and development, as
described below:
Buybacks: Each LTSE Issuer must disclose its EPS Net of Buybacks,
defined as the quotient calculated by dividing (i) net income (as
reported in the LTSE Listings Issuer's financial statements in its most
recent Annual Report) by (ii) the sum of outstanding shares and shares
that were subject to a Buyback during the prior fiscal year.\54\
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\54\ See proposed Rules 14A.002(a)(6) and 14A.207(d). Pursuant
to proposed Rule 14A.002(a)(3), ``Buybacks'' means issuer
repurchases that are required to be disclosed pursuant to Item 703
of Regulation S-K.
---------------------------------------------------------------------------
Human Capital Investment: Each LTSE Listings Issuer must disclose
the extent to which the LTSE Listings Issuer's selling, general, and
administrative expenses (as reported in the LTSE Listings Issuer's most
recent Annual Report) consisted of ``Human Capital Investment.'' \55\
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\55\ See proposed Rules 14A.002(a)(7) and 14A.207(e). Proposed
Rule 14A.207(e) defines ``Human Capital Investment'' as the
aggregate amount an LTSE Listings Issuer spends on formal training
of workers in new skills to improve job performance, including,
among other things, amounts spent on fees or expenses related to
personnel hired or retained to train employees, training materials,
tuition assistance, and continuing education or similar programs.
Each LTSE Listings Issuer must also disclose the amount spent on
Human Capital Investment per full-time equivalent employee. Id.
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Research and Development: Each LTSE Listings Issuer must disclose
the amount of research and development spending that is short-term
focused and the amount of such spending that is long-term focused.\56\
---------------------------------------------------------------------------
\56\ See proposed Rule 14A.207(f). Each LTSE Listings Issuer
must also disclose how it defines ``short-term'' and ``long-term''
for these purposes and how it determined such definitions. Id.
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3. Timing for Supplemental Disclosures
Proposed Rule 14A.207(g) describes when these supplemental
disclosures must be made. An LTSE Listings Issuer must disclose its
Long-Term Growth Strategy on its website no later than at the time of
its initial listing, and it must remain on the LTSE Listings Issuer's
website until the LTSE Listings Issuer is required to make the
disclosure annually in its Annual Report Supplement.\57\ After initial
listing, an LTSE Listings Issuer must make the disclosures relating to
buybacks, human capital investment, and research and development
publicly available on its website by the earlier of when the LTSE
Listings Issuer files its Form 10-K or distributes its Annual Report
Supplement.\58\ Thereafter, the LTSE Listings Issuer must make this
disclosure annually in its Annual Report Supplement, as set forth in
proposed Rule 14A.207(b).\59\
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\57\ See proposed Rule 14A.207(g)(1). The initial disclosure
must be made in compliance with the rules and regulations relating
to the dissemination of free writing prospectuses, if applicable.
Id.
\58\ See proposed Rule 14A.207(g)(2).
\59\ See id.
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D. Executive Compensation Requirements
Proposed Rule 14A.405(b)(3) requires an LTSE Listings Issuer's
compensation committee to adopt a set of executive compensation
guidelines applicable to Executive Officers,\60\ which the Exchange
states are designed to link executive compensation to the long-term
value of the LTSE Listings Issuer. These guidelines must include
general principles for determining the form and amount of Executive
Officer compensation, and for reviewing those principles, as
appropriate. Specifically, the compensation committee must ensure that
the time periods and performance metrics used to determine Incentive-
Based Compensation \61\ for Executive Officers are consistent with the
LTSE Listings Issuer's Long-Term Growth Strategy, and may consult with
the LTSP Committee in assessing whether such time periods and
performance metrics are consistent with the LTSE Listings Issuer's
Long-Term Growth Strategy.\62\
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\60\ IEX Rule 14.405(a)(1) defines ``Executive Officer'' as
persons meeting the definition of ``officer'' in Rule 16a-1(f) under
the Act, 17 CFR 240.16a-1(f).
\61\ Proposed Rule 14A.002(a)(8) defines ``Incentive-Based
Compensation'' as any variable compensation, fees, or benefits that
serve as an incentive or reward for performance.
\62\ See proposed Rule 14A.405(b)(3)(A)(i). In addition, the
LTSE Listings Issuer must disclose in its proxy statement, or Annual
Report Supplement if no proxy statement is filed, whether or not the
compensation committee has determined that such time periods and
performance metrics are consistent with the LTSE Listings Issuer's
Long-Term Growth Strategy. See id.
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Proposed Rule 14A.405(b)(3)(B) imposes additional requirements
related to the compensation of Executive Officers. An LTSE Listings
Issuer may not provide Executive Officers with any Incentive-Based
Compensation that is tied to a financial or performance metric that is
measured over a time period of less than one year or grant any time-
based equity compensation that has any portion that vests in less than
a year from the grant date (or from the hire date, in the case of new
hire grants).\63\ In addition, equity compensation awarded to Executive
Officers must be subject to a period of vesting over at least five
years.\64\
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\63\ See proposed Rule 14A.405(b)(3)(B)(i).
\64\ See proposed Rule 14A.405(b)(3)(B)(ii). The vesting
scheduling must reflect the long-term focus of the equity grant and
could allow for accelerated vesting only upon the death of the
Executive Officer or the occurrence of a disability that renders the
Executive Officer permanently unable to remain employed at the LTSE
Listings Issuer in any capacity. Id. The compensation committee must
determine appropriate Vesting Periods and amounts, as well as
holding periods, for equity compensation awarded to Executive
Officers that apply following an Executive Officer's retirement or
resignation. See proposed Rule 14A.405(b)(3)(B)(iv).
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[[Page 31619]]
The proposed LTSE Listings Rules provide for two exceptions to the
executive compensation requirements discussed above. First, the
compensation committee may provide alternative time periods for
incentive and equity compensation if there is a ``business necessity,''
and the LTSE Listings Issuer discloses and explains such business
necessity.\65\ Second, any executive compensation that is subject to an
existing written agreement entered into at least one year prior to the
initial listing of an LTSE Listings Issuer on the Exchange need not
comply with the requirements, but usage of this exemption must be
disclosed in the Annual Report Supplement.\66\
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\65\ See proposed Rule 14A.405(b)(3)(B)(iii). However, the
amount of equity awards granted in the aggregate that vests before
the first anniversary of the grant date, or that does not meet the
minimum five-year vesting schedule, cannot exceed 5% of the total
number of shares authorized for grant in any fiscal year. See id.
\66\ See proposed Rule 14A.405(b)(3)(C). Proposed Rule
14A.405(b)(4) clarifies that ``Smaller Reporting Companies,'' as
defined in Rule 12b-2 under the Act, 17 CFR 240.12b-2, are not
exempt from the executive compensation guidelines described in
proposed Rule 14A.405(b)(3).
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E. Long-Term Shareholder Voting Structure
According to the Exchange, it is consistent with the focus of the
LTSE Listings category to provide a differentiated choice for issuers
and investors that prefer listing standards that are explicitly
designed to promote long-term value creation.\67\ Thus, the Exchange
proposes Rule 14A.413(b) to require that LTSE Listings Issuers maintain
certain voting rights provisions in their corporate organizational
documents that would provide shareholders with the ability, according
to the shareholder's option, to accrue additional voting power over
time.\68\ LTSE Listings Issuers would be required to comply with the
obligations set forth in IEX Rule 14.413 and in proposed Rule14A.413,
both of which relate to voting rights. Under proposed Rule 14A.413,
LTSE Listings Issuers would be required to include certain voting
rights provisions in their corporate organizational documents that
provide shareholders the ability to accrue additional voting power over
time.\69\ Under proposed Rule 14A.413(b)(2), all securities listed on
LTSE Listings, including securities issued by Foreign Private
Issuers,\70\ must be eligible for a Direct Registration Program
(``DRP'') operated by a clearing agency registered under Section 17A of
the Act.\71\
---------------------------------------------------------------------------
\67\ See Notice, supra note 3, at 14083.
\68\ Id.
\69\ See proposed Rule 14A.413(b).
\70\ Pursuant to IEX Rule 14.002(a)(15), the term ``Foreign
Private Issuer'' as used in the Exchange's rules has the same
meaning as in Rule 3b-4 under the Act, 17 CFR 240.3b-4.
\71\ 15 U.S.C. 78q-1. See also proposed Rules 14A.200(c)(1) and
14A.208.
---------------------------------------------------------------------------
Voting power would accrue only to shareholders who are beneficial
owners; register such shares in their name as ``record holders'' on the
books of the LTSE Listings Issuer (including through the use of a DRP);
and continue to hold such shares as record holders over a period of
time.\72\ Shares held in ``street name,'' that is, shares registered on
the books of an issuer's transfer agent in the name of a nominee
selected by the Depository Trust Company, would not accrue additional
voting power over time.\73\
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\72\ See proposed Rule 14A.413(b)(2). For these purposes, record
owners of shares listed on LTSE Listings include those shareholders
holding a physical paper certificate of such shares and shareholders
holding shares through a DRP. See proposed Rule 14A.413(b)(3).
\73\ See Notice, supra note 3, at 14084.
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As of the date of the company's initial listing on LTSE Listings,
each holder of equity securities listed on LTSE Listings must be
entitled to an equal number of votes per share (the ``Initial Voting
Power'') on a per class basis.\74\ For each full calendar month
following the date of the LTSE Listings Issuer's listing on the
Exchange during which a shareholder maintains continuous record
ownership of shares, the voting power of such shares for so long as
they are held of record by such shareholder would be required to
increase by at least one twelfth (1/12th) over the shares' Initial
Voting Power on the last business day of the month, up to an amount
that is ten times their Initial Voting Power.\75\ If, at any time, a
shareholder transfers shares out of record ownership, then on the date
of such transfer, such shares would revert to entitling the shareholder
to the Initial Voting Power of such shares.\76\
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\74\ See proposed Rule 14A.413(b)(1).
\75\ See proposed Rule 14A.413(b)(3). Pursuant to proposed Rule
14A.413, Supplementary Material .01(b), an LTSE Listings Issuer
would be permitted to provide that the voting rights of shareholders
holding in record name increase at a rate greater than one twelfth
(1/12th) per month, provided that the voting power of such shares
may not increase to a level that exceeds ten times their Initial
Voting Power.
\76\ Proposed Rule 14A.413(b)(4). Proposed Rule 14A.413(b)(5)
requires that, prior to listing securities on LTSE Listings, a
prospective LTSE Listings Issuer must obtain from its transfer agent
a certification confirming that the transfer agent has software or
other systems or processes available to the LTSE Listings Issuer
that would enable the transfer agent and LTSE Listings Issuer to
determine, as of a particular record date, the LTSE Listings
Issuer's shareholder's voting rights calculated in accordance with
proposed Rule 14A.413(b) (Long-Term Voting).
---------------------------------------------------------------------------
In addition, although the requirements of proposed Rule 14A.413(b)
could be viewed as similar to time-phased voting plans, the Exchange
believes that proposed Rule 14A.413(b) is consistent with IEX Rule
14.413, which is the Exchange's Voting Rights Policy.\77\ IEX Rule
14.413 bars a company already listed on the Exchange from undertaking
any of the prohibited corporate actions specified therein, including
the adoption of time-phased voting plans.\78\ The Exchange notes that,
because LTSE Listings Issuers would be required as a pre-condition to
listing on LTSE Listings to have in place a voting rights structure as
of the date of its initial listing that complies with proposed Rule
14A.413(b), no new corporate action that disparately reduces voting
rights would be permitted to be taken subsequent to the LTSE Listings
Issuer's listing on the Exchange.\79\
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\77\ See IEX Rule 14.413.
\78\ See id. Proposed Rule 14A.413, Supplementary Material
.01(a) states that, so long as not inconsistent with IEX Rule
14.413, an LTSE Listings Issuer could (i) maintain multiple classes
of securities, including shares that have voting power per share in
excess of the Initial Voting Power of the securities listed on the
Exchange, and/or (ii) establish or maintain classes of shares not
listed on the Exchange that do not comply with proposed Rule
14A.413(b).
\79\ See Notice, supra note 3, at 14085-86.
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The proposed LTSE Listings Rules also contain various provisions
relating to the determination of record ownership for purposes of
accreting voting power:
Accreting Voting and the Exchange's Voting Rights Policy: The
proposed rules describe how to determine what is considered ``super-
voting'' stock for purposes of IEX Rule 14.413, which provides that
voting rights of existing shareholders of publicly traded common stock
registered under Section 12 of the Act cannot be disparately reduced or
restricted through any corporate action or issuance.\80\ Proposed Rule
14A.413, Supplementary Material .01(f) would prohibit an issuer from
disparately reducing or restricting the voting rights of existing
shareholders by issuing a
[[Page 31620]]
new class of super-voting stock.\81\ For purposes of LTSE Listings, a
class of securities shall be considered super-voting stock if (i) the
Initial Voting Power of such class of securities exceeds the Initial
Voting Power of any of the LTSE Listings Issuer's existing classes of
common stock listed on LTSE Listings or (ii) the rate at which the
voting power of such class may increase over time is greater than the
corresponding rate for any of the LTSE Listings Issuer's existing
classes of common stock listed on LTSE Listings.\82\
---------------------------------------------------------------------------
\80\ See IEX Rule 14.413. IEX Rule 14.413 notes that examples of
such corporate action or issuance include, but are not limited to,
the adoption of time-phased voting plans, the adopting of capped
voting rights, the issuance of super-voting stock, or the issuance
of stock with voting rights less than the per share voting rights of
the existing common stock through an exchange offer. Id.
\81\ See proposed Rule 14A.413, Supplementary Material .01(f).
\82\ See id.
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Potential Evasion of Loss of Long-Term Voting Power: An LTSE
Listings Issuer may provide in its governance documents that if its
board of directors adopts a resolution reasonably determining that,
notwithstanding technical compliance with the provisions of the LTSE
Listings Issuer's governance documents relating to the increasing
voting power of long-term shareholders and continuity of record
ownership, there has in fact been a change in beneficial ownership with
respect to shares held of record that would evade the purposes of this
LTSE Listings Rule 14A.413(b), such shares may be treated as being
entitled only to their Initial Voting Power.\83\
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\83\ See proposed Rule 14A.413, Supplementary Material .01(c).
Any LTSE Listings Issuer that provides in its governance documents
that the board of directors may make such a determination must also
adopt in its governance documents a process for any shareholders
directly affected by such determination to challenge such
determination. This process must provide the affected shareholders
with an opportunity to present additional information demonstrating
that a change of beneficial ownership has not occurred. See id.
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Technical Changes in Ownership: An LTSE Listings Issuer may adopt a
process by which a shareholder may demonstrate that, notwithstanding a
technical change in record ownership, a change in beneficial ownership
has not occurred.\84\
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\84\ See proposed Rule 14A.413, Supplementary Material .01(d).
The proposed rule further states that an example of this could be
where a shareholder changes its legal name, or where ownership of
shares by an individual is re-titled to reflect joint ownership with
a spouse. See id.
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Shareholders Holding Through Custodians: In the case of a
shareholder that holds its shares in an LTSE Listings Issuer through a
custodian consistent with applicable regulatory requirements, an LTSE
Listings Issuer may recognize such shareholder as a holder of record
solely for purposes of proposed Rule 14A.413(b), so long as the
custodian becomes the shareholder of record in a manner that indicates
the name of the ultimate beneficial owner.\85\
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\85\ See proposed Rule 14A.413, Supplementary Material .01(e).
The proposed rule further states that an example could be if
Investment Fund ABC maintains custody of its assets through Bank
XYZ, Investment Fund ABC may be recognized as the record holder of
the shares of an LTSE-Listed company solely for purposes of this
rule if Bank XYZ registers the shares on the books of the LTSE-
Listed Issuer as being owned by ``Bank XYZ, as custodian for
Investment Fund ABC.'' See id.
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F. Proposed Rules Concerning the Application of Certain Existing
Exchange Rules
Certain of the proposed LTSE Listings Rules clarify the application
of existing Exchange listings rules to LTSE Listings Issuers, as
described further below.
1. General Procedures for Initial and Continued Listing on LTSE
Listings
A company seeking the initial listing of one or more classes of
securities on LTSE Listings must comply with the requirements and
procedures set forth in the IEX Rule Series 14.200, as well as the
supplemental requirements set forth in proposed Rule 14A.200.\86\ The
Exchange must first determine that a company is eligible for listing
under the LTSE Listings Rules and meets the Exchange's other listing
criteria before it would provide a clearance letter, as defined in IEX
Rule 14.201.\87\ After receiving a clearance letter pursuant to IEX
Rule 14.201, a company choosing to list as an LTSE Listings Issuer must
file an original listing application.\88\ To apply for listing on LTSE
Listings, a company must execute a Listing Agreement and a Listing
Application on the forms designated by the Exchange for an LTSE
Listings Issuer, which would provide the information required by
Section 12(b) of the Act.\89\ At the time of listing, the company may
not already have any security listed for trading on the Exchange or any
other national securities exchange and the company must be listing on
LTSE Listings in connection with its initial public offering.\90\
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\86\ See proposed Rule 14A.200 and Amendment No. 1, supra note
6.
\87\ See proposed Rule 14A.200(a).
\88\ See proposed Rule 14A.200(b).
\89\ 15 U.S.C.781(b). See also proposed Rule 14A.200(b).
\90\ See proposed Rule 14A.200(c)(2) and Amendment No. 1, supra
note 6.
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2. Dually-Listed Securities
The Exchange proposes to permit LTSE Listings Issuers to list a
class of securities that, in connection with its IPO, has been approved
for listing on another national securities exchange.\91\ The Exchange
would make an independent determination of whether any such companies
satisfy all applicable listing requirements and shall require companies
to enter into a dual-listing agreement with the Exchange.\92\ In the
event that an issuer chooses to dually list on both LTSE Listings and
another national securities exchange in connection with its IPO, the
Exchange would expect such other national securities exchange to be the
LTSE Listings Issuer's ``Primary Listing Market.'' \93\ The Exchange
states that when an LTSE Listings Issuer is dually-listed on another
national securities exchange, the initial trading of such issuer's
securities on the Exchange would not occur until after the completion
of the opening auction for such securities on the first day of listing
on the ``Primary Listing Market.'' \94\ The Exchange further states
that it would monitor the dually-listed LTSE Listings Issuer for
compliance with all applicable IEX Rules on an ongoing basis, as it
would for any other LTSE Listings Issuer.\95\ Proposed Supplementary
Material .01 to Rule 14A.210 would clarify the application of certain
IEX Rules, such as rules governing trading halts, for dually-listed
LTSE Listings Issuers.
---------------------------------------------------------------------------
\91\ See proposed Rule 14A.210(a).
\92\ See proposed Rule 14A.210, Supplementary Material .01.
\93\ See Notice, supra note 3, at 14087.
\94\ See id. at 14087 n.74. ``Primary Listing Market'' is
defined in proposed Rule 14A.002(a)(14) as having the same meaning
as that term is defined in the Nasdaq Unlisted Trading Privileges
national market system plan and consistent with the use of the term
``listing market'' in the Consolidated Quotation Service and
Consolidated Tape Association national market system plans.
\95\ See id. at 14087 n.73. In addition, proposed Rule
14A.210(b) imposes notification requirements on a dually-listed LTSE
Listings Issuer if its securities have fallen below the continued
listing requirements of LTSE Listings or the other market. Proposed
Rule 14A.210(c) also provides that, for an LTSE Listings Issuer with
a dually-listed security, if IEX is not the Primary Listing Market
and the Primary Listing Market requires a minimum number of market
makers, the minimum market maker requirements of IEX Rules 14.310
and 14.320 that require a company listed on the Exchange to maintain
a particular minimum number of registered and active Market Makers
would not be applicable to the LTSE Listings Issuer's dually-listed
security. See Amendment No. 1, supra note 6.
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Proposed Rule 14A.435 would require LTSE Listings Issuers to
certify, at or before the time of listing, that all applicable listing
criteria have been satisfied, as set forth in IEX Rule 14.202(b).\96\
In addition, the Chief Executive Officer of each LTSE Listings
[[Page 31621]]
Issuer must annually certify to the Exchange that: (i) The LTSE
Listings Issuer is in compliance with the proposed Rule Series 14A.400,
qualifying the certification to the extent necessary, and (ii) the LTSE
Listings Issuer has designated an employee responsible for ensuring
that the voting power of the LTSE Listings Issuer's securities is
determined in accordance with proposed Rule 14A.413(b) (Long-Term
Voting).\97\
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\96\ Proposed Rule 14A.401(b) provides that LTSE Listings
Issuers may request from IEX a written interpretation of the LTSE
Listings Rules, and a response to such request generally would be
provided within one week following receipt by IEX Regulation of all
information necessary to respond to the request.
\97\ See proposed Rule 14A.435(b). In addition, an LTSE Listings
Issuer must provide the Exchange with prompt notification after an
Executive Officer of the LTSE Listings Issuer becomes aware of any
noncompliance by the LTSE Listings Issuer with the requirements of
the proposed Rule Series 14A.400. See proposed Rule 14A.410.
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LTSE Listings Issuers would not be required to pay the fees
described in IEX Rule Series 14.600.\98\ The Exchange represents that
it intends to file a separate proposed rule change that would address
listing fees applicable to LTSE Listings Issuers.\99\
---------------------------------------------------------------------------
\98\ See proposed Rule 14A.200(c)(3).
\99\ See Notice, supra note 3, at 14092.
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3. Shareholder Approval Calculation
Proposed Rule 14A.412 describes the circumstances in which an
Exchange-listed company is required to obtain shareholder approval
prior to the issuance of securities in connection with certain
transactions. Under IEX Rule 14.412, an Exchange-listed company is
required to obtain shareholder approval in connection with: (1) The
acquisition of the stock or assets of another company; (2) a change of
control; (3) equity-based compensation of officers, directors,
employees, or consultants; and (4) private placements.\100\ Among the
potential triggers that would require shareholder approval, shareholder
approval is required if the common stock being issued ``has or will
have upon issuance voting power equal to or in excess of 20% of the
voting power outstanding before the issuance.'' \101\ In light of the
potential increased future voting power of new shares to be issued, the
Exchange believes that it is appropriate in calculating the shareholder
approval threshold to require that LTSE Listings Issuers assign a
greater level of voting power to the newly issued shares than the
Initial Voting Power of those shares, on the presumption that the
ultimate voting power of those shares would increase over time.\102\
Proposed Rule 14A.412 would implement a special calculation to
determine whether or not the issuance of new shares by an LTSE Listings
Issuer would surpass the 20% threshold.
---------------------------------------------------------------------------
\100\ See id. at 14090.
\101\ See id.; see also IEX Rule 14.412(a)(1)(A).
\102\ See Notice, supra note 3, at 14090.
---------------------------------------------------------------------------
Under current IEX Rule 14.412, determining whether an issuance
equals or exceeds this shareholder approval threshold is generally
calculated by multiplying the number of shares to be issued by the
voting power of such shares and dividing this number by the voting
power of the shares outstanding before the issuance.\103\ However,
because the shares of LTSE Listings Issuers would have accruing voting
power, the Exchange is proposing Rule 14A.412 to provide a different
means of calculating the numerator and denominator that would be
applied to LTSE Listings Issuers.\104\
---------------------------------------------------------------------------
\103\ See id. This general formula is subject to certain
exceptions. See IEX Rule 14.412.
\104\ See Notice, supra note 3, at 14090-91.
---------------------------------------------------------------------------
Pursuant to proposed Rule 14A.412(a)(1), for LTSE Listings Issuers
that have been listed on LTSE Listings for at least five years, the
numerator of the shareholder approval calculation would be the number
of shares to be issued multiplied by the product of the Initial Voting
Power of such shares and the Long-Term Voting Factor.\105\ For LTSE
Listings Issuers that have been listed on LTSE Listings for fewer than
five years, the numerator would be the greater of (i) the number of
shares to be issued multiplied by the product of the Initial Voting
Power of such shares and the Long-Term Voting Factor and (ii) the
number of shares to be issued multiplied by twice the Initial Voting
Power of such shares.\106\
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\105\ See id. at 14091. Proposed Rule 14A.412(c)(1) defines
``Long-Term Voting Factor'' as the quotient calculated by dividing
(i) the voting power outstanding as of the Shareholder Approval
Calculation Date by (ii) the number of shares outstanding as of the
Shareholder Approval Calculation Date multiplied by the Initial
Voting Power of those outstanding shares.
\106\ See proposed Rule 14A.412(a)(2).
---------------------------------------------------------------------------
Instead of applying the existing rule for determining the
denominator of the calculation--the voting power of shares outstanding
at issuance as described in IEX Rule 14.412(e)(2)--proposed Rule
14A.412(b) states that the following provision shall apply, ``[v]oting
power outstanding refers to the aggregate number of votes which may be
cast by holders of those shares outstanding which entitle the holders
thereof to vote generally on all matters submitted to the company's
shareholders for a vote, as of the Shareholder Approval Calculation
Date.'' \107\ All other provisions of IEX Rule 14.412 would continue to
apply.\108\
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\107\ Proposed 14A.412(c)(2) defines ``Shareholder Approval
Calculation Date'' as the date on which an LTSE Listings Issuer
enters into a binding agreement to conduct a transaction that may
require shareholder approval under IEX Rule 14.412 (Shareholder
Approval).
\108\ See Notice, supra note 3, at 14092.
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The Exchange believes that the provisions of proposed Rule 14A.412
for calculating when shareholder approval would be required in
connection with certain transactions would be a reasonable and balanced
approach, while taking into account the potential increased future
voting power of new shares to be issued.\109\
---------------------------------------------------------------------------
\109\ See id.
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4. Change of Control Transactions and Reverse Mergers
The proposed LTSE Listings Rules set forth procedures for change of
control transactions, which would operate in conjunction with existing
IEX Rule 14.102(a). Proposed Rule 14A.102(a)(1) would require an LTSE
Listings Issuer to apply for initial listing in connection with a
transaction whereby the LTSE Listings Issuer combines with, or into, an
entity that is not listed on LTSE Listings, resulting in a change of
control of the LTSE Listings Issuer and potentially allowing the non-
LTSE Listings entity to obtain a listing on LTSE Listings.\110\
Proposed Rule 14A.102(a)(2) describes the impact of a change of control
transaction on the proposed long-term voting provisions of LTSE
Listings and voting power of such shares.\111\ Proposed Rule 14A.102(b)
states that an entity formed by a Reverse Merger \112\ would not be
eligible to
[[Page 31622]]
apply for initial listing on LTSE Listings.
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\110\ ``The Exchange shall consider the factors enumerated in
IEX Rule 14.102(a) for determining whether a change of control has
occurred.'' See proposed Rule 14A.102(a)(1). Any combined entity
applying for initial listing must agree to comply with all
applicable requirements of Chapter 14A, including requirements
relating to long-term voting set forth in proposed Rule 14A.413, to
apply to list as permitted by proposed Rule 14A.102. See id.
\111\ If an initial listing following a change of control meets
applicable listing requirements and the LTSE Listings Issuer is the
surviving entity following the business combination, any shares of
the LTSE Listings Issuer that have accrued additional voting power
pursuant to proposed Rule 14A.413(b) prior to the business
combination would retain such additional voting power following the
business combination. See proposed Rule 14A.102(a)(2). Conversely,
if the non-LTSE Listings Issuer is the surviving entity or a new
entity is formed following the business combination, all shares of
the class or classes of securities to be listed on LTSE Listings
would have voting power equal to their Initial Voting Power at the
time of such listing. See id.
\112\ A ``Reverse Merger'' is generally defined as ``any
transaction whereby an operating company becomes an Exchange Act
reporting company by combining, either directly or indirectly, with
a shell company which is an Exchange Act reporting company, whether
through a reverse merger, exchange offer, or otherwise.'' See IEX
Rule 14.002(a)(27).
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5. Exemptions From Certain Corporate Governance Requirements
Proposed Rule 14A.407 modifies the exemptions from certain
governance requirements for LTSE Listings Issuers.
Applicability of Exemptions to Corporate Governance Requirements:
Proposed Rule 14A.407(a) would provide that an LTSE Listings Issuer may
not rely on the exemptions set forth in IEX Rule 14.407(a) with respect
to the requirements of Chapter 14A.\113\ Proposed Rule 14A.407(a)
clarifies that a Foreign Private Issuer who meets the requirements of
Chapter 14A, including the requirement to distribute an Annual Report
Supplement, may list on LTSE Listings.
---------------------------------------------------------------------------
\113\ See Notice, supra note 3, at 14089. IEX Rule 14.407(a)
provides exemptions to certain of the Exchange's corporate
governance requirements for asset-backed issuers and other passive
issuers, cooperatives, Foreign Private Issuers, limited partnerships
and management investment companies.
---------------------------------------------------------------------------
Phase-in of Compliance With LTSP Committee Composition
Requirements: In addition to the phase-in schedules provided in
existing IEX Rule 14.407(b),\114\ an LTSE Listings Issuer that is
listing in connection with its IPO or that is emerging from bankruptcy
would be permitted to phase-in its compliance with the LTSP Committee
composition requirements.\115\
---------------------------------------------------------------------------
\114\ IEX Rule 14.407(b) allows a company listed on the Exchange
to phase-in its compliance with certain Exchange rules over a period
of time in certain situations, for example, for a company emerging
from bankruptcy. See id.
\115\ See proposed Rule 14A.407(b). Specifically, that LTSE
Listings Issuer would be permitted to phase in its compliance with
the committee composition requirements set forth in proposed Rule
14A.405(c)(4) as follows: (1) At least one member of the LTSP
Committee must be an Independent Director at the time of listing,
and (2) a majority of the members of the LTSP Committee must be
Independent Directors within 90 days of listing. See id.
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Controlled Companies: Proposed Rule 14A.407(c)(1) states that an
LTSE Listings Issuer that is a Controlled Company \116\ would be exempt
from the additional compensation committee requirements of proposed
Rule 14A.405(b) and the nominating/corporate governance committee
requirements of proposed Rule 14A.405(d).\117\
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\116\ The term ``Controlled Company'' is defined in IEX Rule
14.407(c)(1) as an Exchange-listed company of which more than 50% of
the voting power for the election of directors is held by an
individual, a group or another company.
\117\ However, Controlled Companies would not be exempt from the
executive compensation requirements of proposed Rule 14A.405(b)(3).
See proposed Rule 14A.407(c)(1). If a Controlled Company does not
have a compensation committee, the Independent Directors on the LTSP
Committee, or the Independent Directors of the board, would be
responsible for compliance with the executive compensation
requirements. See proposed Rule 14A.407(c)(2).
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G. Other Requirements for LTSE Listings Issuers
Earnings Guidance: Proposed Rule 14A.420 prohibits LTSE Listings
Issuers from providing Earnings Guidance more frequently than annually,
unless such disclosure would be required by IEX Rule 14.207(b)(1)
(Disclosure of Material Information), other applicable law or to make
the previously issued Earnings Guidance not misleading.\118\
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\118\ Pursuant to proposed Rule 14A.002(a)(5), ``Earnings
Guidance'' means any public disclosure made to Shareholders
containing a projection of the LTSE Listings Issuer's revenues,
income (including income loss), or earnings (including earnings
loss) per share. Any Earnings Guidance, including updates and
supplementary disclosure related to Earnings Guidance, must also
comply with the disclosure and notification requirements of IEX Rule
14.207(b)(1). See proposed Rule 14A.420(b).
---------------------------------------------------------------------------
Long-Term Stakeholder Policies: Proposed Rule 14A.425 requires LTSE
Listings Issuers to develop and publish: (i) A policy regarding the
LTSE Listings Issuer's impact on the environment and community; and
(ii) a policy explaining the LTSE Listings Issuer's approach to
diversity throughout the LTSE Listings Issuer.\119\ The LTSE Listings
Issuer must review the policies required by proposed Rule 14A.425 at
least annually and make such policies available on or through its
website.
---------------------------------------------------------------------------
\119\ See Notice, supra note 3, at 14086.
---------------------------------------------------------------------------
Website Requirements: Several of the proposed LTSE Listings rules
require LTSE Listings Issuers to make certain disclosures or documents
publicly available on the LTSE Listings Issuer's website, and proposed
Rule 14A.430 would explicitly require LTSE Listings Issuers to have and
maintain a public available website.\120\ In addition, proposed Rule
14A.413 would require each LTSE Listings Issuer to prepare and maintain
an explanatory statement that must be written in plain English and
posted prominently on the LTSE Listings Issuer's website and that must
explain how a shareholder's voting power in the LTSE Listings Issuer's
securities may increase over time, and explain the particular
conditions that must be satisfied and the administrative steps that the
shareholder must take to hold shares in a manner that would allow such
voting power to increase over time.\121\
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\120\ For documents available on or through an LTSE Listings
Issuer's website, such website must be accessible from the United
States, must clearly indicate in the English language the location
of such documents on the website and such documents must be
available in a printable version in the English language. See
proposed Rule 14A.430.
\121\ See Amendment No. 1, supra note 6.
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H. Failure To Meet LTSE Listings Standards
Pursuant to IEX Rule 14.500(a), a failure to meet the listing
standards set forth in the LTSE Listings Rules would be treated as a
failure to meet the listing standards set forth in Chapter 14 of the
IEX Rules, for purposes of the IEX Rule Series 14.500. As a result, the
procedures for the independent review, suspension, and delisting of
companies that fail to satisfy one or more standards for continued
listing would apply to any LTSE Listings Issuer that fails to comply
with listing standards in the LTSE Listings Rules as well as in Chapter
14 of the IEX Rules.
Proposed Rule 14A.500(b) would provide that a failure to satisfy
one or more of the LTSE Listings Rules would be treated as a deficiency
for which a company may submit a plan to regain compliance in
accordance with IEX Rule 14.501(d)(2). Absent an extension, such a plan
must be provided within 45 calendar days of IEX Staff's notification of
deficiency in accordance with IEX Rule 14.501(d)(2)(C) (Timeline for
Submission of Compliance Plans).
Proposed Rule 14A.500 would permit an issuer to remain listed on
the Exchange as a standard IEX listed company should the LTSE Listings
Issuer become subject to delisting for failure to satisfy one or more
LTSE Listings Rules, but remains in compliance with all other
applicable listing rules of the Exchange.
IV. Summary of Comments and IEX's Response Letter
As noted above, the Commission received twenty-three comment
letters regarding the proposed rule change \122\ and one response
letter from the Exchange.\123\ All commenters expressed their support
for the proposed rule change, although two commenters indicated that
they generally preferred single class voting structures.\124\ Several
commenters suggested that IEX's proposed rule change may encourage
additional companies to pursue an initial public offering with an
increased focus on long-term objectives.\125\ Many
[[Page 31623]]
commenters expressed a related view that the current market structure
disproportionately encourages short-term outlooks.\126\ One commenter
suggested that the proposal would encourage additional new listings by
increasing competition and providing an alternative model in the
exchange market for listings.\127\ Another commenter commended IEX more
broadly for its proposal's innovation in areas such as increasing
transparency in reporting and disclosure of long-term strategy,
aligning board incentives with the interests of long-term shareholders,
aligning executive compensation with long-term performance, and
recognizing environmental, social, and governance priorities.\128\ Yet
another commenter remarked that founders today feel the need to grow
large in the private markets in order to sustain and protect their
cultures, thinking, and values when they enter the public markets.\129\
---------------------------------------------------------------------------
\122\ See supra note 4.
\123\ See supra note 5.
\124\ See Inherent Group Letter and Glass, Lewis Letter.
\125\ See Collaborative Fund Letter at 1; Costolo Letter; Case
Letter; Conference Board Letter at 2; Andreessen Horowitz Letter;
Obvious Ventures Letter; Founders Fund Letter; Descript Letter;
LinkedIn Letter; Y Combinator Letter at 1-2; Techstars Letter at 1;
Downtown Project Letter; CareJourney Letter; Brummer Letter at 3.
See also Greylock Partners Letter (expressing support for ``a new
option that aims to build an ecosystem that enables opportunity and
connects long-term visionaries from all sides of the economy''). Two
commenters supporting the proposal discussed the benefits of a new
exchange designed to promote long-term objectives. See Collaborative
Fund Letter at 1; Baillie Gifford Letter at 1-2. The Commission
notes that IEX's proposed rule change would simply provide an
additional listings tier on IEX, and that IEX is not proposing an
application for registration as a separate national securities
exchange.
\126\ See, e.g., Inherent Group Letter at 1; Buhl Letter;
Conference Board Letter at 1-2; Andreessen Horowitz Letter; Obvious
Ventures Letter; Greylock Partners Letter; Aspen Institute Letter;
Descript Letter; LinkedIn Letter; Techstars Letter at 1; Downtown
Project Letter; CareJourney Letter; Revolution Letter.
\127\ See Cboe Letter at 1.
\128\ See Glass, Lewis Letter at 1-2.
\129\ See Initialized Capital Letter.
---------------------------------------------------------------------------
Five commenters specifically supported providing longer-tenured
investors in a company with greater input in corporate governance.\130\
In addition to the proposed long-term voting system, two of these
commenters also highlighted the benefits of the additional disclosure
requirements that are focused on long-term growth.\131\ Three
commenters stated that the proposed listing standards would increase
transparency to investors, such as with respect to long-term goals,
metrics, and performance, and would help align executive compensation
with these long-term measures.\132\ One of these commenters suggested
that IEX's proposal to require a board committee focused on long-term
growth strategies and the disclosure of such strategies could better
encourage long-term relationships between issuers and their
shareholders through the increased transparency that the proposal would
promote.\133\ This commenter also highlighted the proposal's required
disclosure of human capital expenses and short-term vs. long-term
research and development spending as features that could provide
valuable insight into how issuers are effectively investing in their
long-term growth and thereby mitigate concerns about short-term
fluctuations in earnings.\134\ This commenter further noted that the
proposed executive compensation requirements would better tie
management's incentives to the listed company's disclosed long-term
growth strategy.\135\
---------------------------------------------------------------------------
\130\ See Revolution Letter; Inherent Group Letter at 1;
CareJourney Letter; Brummer Letter at 4-5; CalPERS Letter at 2.
\131\ See CalPERS Letter at 2; Brummer Letter at 3-4.
\132\ See Inherent Group Letter at 1; Andreessen Horowitz
Letter; Brummer Letter at 3-4.
\133\ See Brummer Letter at 4.
\134\ See id.
\135\ See id.
---------------------------------------------------------------------------
One commenter, while generally supporting IEX's proposal, expressed
concern about the proposed increasing voting rights that are based on
the length of time that the shares are held.\136\ This commenter noted
that dual-class voting structures ``are generally not in the best
interests of common shareholders; this includes any equity structures
providing unequal voting rights, regardless of the number of share
classes issued.'' \137\ This commenter acknowledged, however, that the
long-term shareholder voting feature of the IEX proposal may be
preferable to some investors compared to other existing unequal voting
structures.\138\ Another commenter, while not expressing a concern
specific to IEX's proposal, noted that it ``generally prefer[s] single-
class share structures,'' but ``support[s] mechanisms that reward long-
term shareholders with a greater say in corporate governance issues
than short-term shareholders.'' \139\ This commenter cautioned that any
such mechanisms ``must maintain management accountability, preserve
adequate liquidity in the public markets, and balance the interests of
small and large--and short-term and long-term--shareholders.'' \140\
---------------------------------------------------------------------------
\136\ See Glass, Lewis Letter at 2.
\137\ See id.
\138\ See id.
\139\ See Inherent Group Letter at 1.
\140\ See id.
---------------------------------------------------------------------------
In its response to the commenters, IEX stated that its proposed
long-term voting provisions differ from existing dual-class and uneven
voting structures because its proposed voting structure treats all
common shareholders equally in their ability to gain additional voting
power based on the length of time that their shares are held.\141\
According to the Exchange, this proposed structure is designed to more
directly align voting rights with long-term engagement with the
issuer.\142\ The Exchange further noted that the proposed voting
structure should not be mandated for any issuer but is an important
alternative that would be available to issuers that elect to list on
the proposed new IEX listings tier.\143\
---------------------------------------------------------------------------
\141\ See IEX Response Letter at 1.
\142\ See id. at 1-2.
\143\ See id. at 2.
---------------------------------------------------------------------------
V. Discussion and Commission Findings
After careful review and consideration of the comments received,
the Commission finds that the proposed rule change, as modified by
Amendment No. 1, is consistent with the requirements of the Act and the
rules and regulations thereunder applicable to a national securities
exchange.\144\ In particular, the Commission finds that the proposed
rule change, as modified by Amendment No. 1, is consistent with Section
6(b)(5) of the Act.\145\ Section 6(b)(5) of the Act\146\ requires,
among other things, that the rules of a national securities exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, 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; and not be
designed to permit unfair discrimination between customers, issuers,
brokers or dealers.
---------------------------------------------------------------------------
\144\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\145\ 15 U.S.C. 78f(b)(1) and 15 U.S.C. 78f(b)(5).
\146\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
As noted above, the Commission received 23 comment letters on the
proposed rule change, as well as a response letter from the Exchange.
The commenters generally expressed support for the Exchange's proposal,
although two commenters indicated that they preferred single-class
voting structures, but acknowledged that they otherwise supported the
aim of the Exchange's proposal to favor long-term shareholder
value.\147\
---------------------------------------------------------------------------
\147\ See Section IV., supra.
---------------------------------------------------------------------------
The Exchange proposes to adopt listing rules for a new tier of
listings on its market, LTSE Listings. The Exchange states that it
believes that companies
[[Page 31624]]
should be able to maintain a public listing on an exchange that
provides a differentiated choice for issuers and investors that prefer
listing standards that the Exchange explicitly has designed with the
aim of promoting long-term value creation. Although companies today
could list on the Exchange and voluntarily choose to focus on long-term
value creation, the Exchange believes that providing a listing category
with listing rules that the Exchange has designed to address some of
the concerns regarding ``short-termism'' could encourage greater
participation in the public markets by long-term focused companies and
investors
In support of its proposal, the Exchange notes that many academics,
commentators, market participants, and others have expressed concerns
regarding ``short termism'' and the potential impact on issuers when
some investors' focus on short-term results. The Exchange points to
data indicating that the average number of IPOs per year from 2001
through 2016 was approximately one-third of the average number of IPOs
between 1998 and 2000, and that the number of listed companies fell by
nearly 50% from 1996 through 2016.
An analysis of IPO data,\148\ prepared by the Commission's Division
of Economic Research and Analysis, similarly points to a decline in the
number of IPOs and public companies compared to the nineties. For
example, the number of IPOs declined by approximately 77% from 1997 to
2017, while the average number of IPOs per year declined by
approximately 73% from 1990-1998 to 2001-2017.\149\ The number of
listed companies decreased by approximately 45% from 1997 to 2017 and
the average number of listed companies decreased by approximately 34%
from 1990-1998 to 2001-2017.\150\
---------------------------------------------------------------------------
\148\ See Ritter, J., Initial Public Offerings: Updated
Statistics, January 2018, https://site.warrington.ufl.edu/ritter/files/2018/01/IPOs2017Statistics_January17_2018.pdf (retrieved Jun.
20, 2018). The sample excludes IPOs with offers prices below $5,
ADRs, units, closed-end funds, REITs, natural resource limited
partnerships, small best efforts offers, banks and thrifts, and
stocks not listed on Amex, NYSE, and NASDAQ.
\149\ Id. Peak technology bubble years (1999 and 2000) are
excluded. If 2008 and 2009 are excluded, the decrease in the average
number of IPOs per year from 1990-1998 to 2001-2017 is estimated to
be approximately 70%.
The decline is smaller but still considerable when an earlier
time period is used for comparison. The average number of IPOs per
year decreased by approximately 47% from 1980-1989 to 2001-2017
(approximately 42%, excluding 2008-2009).
\150\ The estimate is based on Staff calculations based on World
Bank's World Development Indicators data on the number of domestic
listed companies in the US (retrieved April 23, 2018). The average
number of listed companies is estimated to have decreased by
approximately 23% from 1980-1989 to 2001-2017.
---------------------------------------------------------------------------
Academic studies have similarly demonstrated a decline in the
number of U.S. IPOs and listed companies in recent years and have cited
various potential reasons for this decline, including a high cost of
going public and being a reporting company,\151\ the advantages of
being acquired by a larger firm,\152\ and the expanding role of private
markets.\153\ Other studies generally note the cyclical nature of
offering activity.\154\
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\151\ See, e.g., Engel, E., Hayes, R., Wang, X., 2007, The
Sarbanes-Oxley Act and Firms' Going-Private Decisions, Journal of
Accounting and Economics 44(1-2), 116-145; Kamar, E., Karaca-Mandic,
P., Talley, E., 2009, Going-Private Decisions and the Sarbanes-Oxley
Act of 2002: A Cross-Country Analysis, Journal of Law, Economics, &
Organization 25(1), 107-133; Bova, F., Minutti-Meza, M., Richardson,
G., Vyas, D., 2014, The Impact of SOX on the Exit Strategies of
Private Firms, Contemporary Accounting Research 31(3), 818-850.
\152\ See, e.g., Gao, X., Ritter, J., Zhu, Z., 2013, Where have
all the IPOs gone? Journal of Financial and Quantitative Analysis
48(6), 1663-1692.
\153\ See, e.g., Ewens, M., Farre-Mensa, J., 2018, The
deregulation of the private equity markets and the decline in IPOs,
Working paper, https://ssrn.com/abstract_id=3017610 (retrieved Jun.
20, 2018); Doidge, C., Kahle, K., Karolyi, A., Stulz, R., 2018,
Eclipse of the Public Corporation or Eclipse of the Public Markets?
Journal of Applied Corporate Finance 30(1), 8-16.
\154\ See, e.g., Lowry, M., 2003, Why does IPO volume fluctuate
so much? Journal of Financial Economics 67(1), 3-40; Alti, A., 2005,
IPO Market Timing, Review of Financial Studies 18(3), 1105-1138;
Yung, C., Colak, G., Wang, W., 2008, Cycles in the IPO market,
Journal of Financial Economics 89(1), 192-208.
---------------------------------------------------------------------------
Other observers have offered various reasons for the IPO decline,
including high costs of an IPO and of being a public company\155\ and
the attractiveness of private placements and of being acquired.\156\
---------------------------------------------------------------------------
\155\ See, e.g., IPO taskforce, Rebuilding the IPO On-Ramp:
Putting Emerging Companies and the Job Market Back on the Road to
Growth, October 20, 2011, https://www.sec.gov/info/smallbus/acsec/rebuilding_the_ipo_on-ramp.pdf (retrieved Jun. 27, 2018); Committee
on Capital Markets Regulation, U.S. Public Markets are Stagnating,
April 2017, http://www.capmktsreg.org/wp-content/uploads/2017/06/US-Public-Equity-Markets-are-Stagnating.pdf (retrieved Jun. 27, 2018).
Besides ongoing costs of periodic reporting, observers have pointed
to other considerations, such as the costs of the IPO, disclosure
requirements, audits, litigation, investor relations, shareholder
activism, etc.
\156\ See, e.g., Eule, A., Are Unicorns Killing the 2016 IPO
Market? June 4, 2016, Barron's, http://www.barrons.com/articles/are-unicorns-killing-the-2016-ipo-market-1465018470 (retrieved Jun. 27,
2018); Zanki, T., 4 Reasons Cos. Are Staying Private Longer, March
14, 2017, Law360, New York, https://www.law360.com/articles/901768?scroll=1 (retrieved Jun. 27, 2018); Hutchinson, J., Why Are
More Companies Staying Private? February 15, 2017, https://www.sec.gov/info/smallbus/acsec/hutchinson-goodwin-presentation-acsec-021517.pdf (retrieved Jun. 27, 2018). See also Notice, supra
note 3, at 14075 n.10.
---------------------------------------------------------------------------
Issuers that list on the LTSE Listings tier would be subject to the
listing standards in proposed Chapter 14A of IEX's rules, as well as
Chapter 14 of IEX's rules relating to its standard listing tier.
Significant features of proposed Chapter 14A, which are discussed in
more detail below, pertain to: (1) The opportunity for shareholders to
receive accreting voting rights; (2) an alternative calculation for
determining shareholder approval requirements; (3) additional corporate
governance and other requirements for LTSE Listings Issuers; and (4)
provisions pertaining to dually-listed securities.
A. Mandatory Accreting Voting Rights
A key feature of the Exchange's proposal is the requirement that
companies electing to list their common equity securities on the
Exchange's LTSE Listings tier must comply with the voting rights
requirements set forth in proposed Rule 14A.413 with respect to those
listed securities. In the Exchange's view, the proposed voting rights
structure is designed to more directly align shareholders' voting
rights with long-term issuer engagement.\157\ Specifically, proposed
Rule 14A.413(b) would require an LTSE Listings Issuer to establish an
Initial Voting Power\158\ associated with its listed securities, and
that Initial Voting Power would be required to increase at a rate of at
least 1/12th per month for each eligible shareholder \159\ that owns
the issuer's shares continuously as of the date that the shareholder
appears as the record owner on the LTSE Listings Issuer's books or
through DRP. Under Rule 14A.413(b), the voting power of the shares
would be required to accrete up to an amount that is ten times their
Initial Voting Power. However, if at any time, the shareholder ceases
to hold the LTSE Listing Issuer's shares in record form or transfers
those shares out of record ownership (whether for purposes of sale or
otherwise), then on the date of such transfer the increased voting
power of the shares would revert to their Initial Voting Power. The
Exchange states that the voting rights provisions are designed to align
with the long-term focus of the LTSE Listings category by providing
long-term investors in an LTSE Listings Issuer with a greater role in
corporate
[[Page 31625]]
governance than short-term shareholders.\160\
---------------------------------------------------------------------------
\157\ See supra notes 67-68 and accompanying text.
\158\ See supra note 74 and accompanying text.
\159\ Only shareholders of an LTSE Listings Issuer who register
such shares in their name as record holders on the books of the LTSE
Listings Issuer, including through the use of a DRP, would be
eligible for these accreting voting rights. See supra note 72 and
accompanying text.
\160\ See Notice, supra note 3, at 14083. The Exchange believes
that long-term investors in a public company are more likely than
short-term shareholders to exercise their voting rights in a manner
that prioritizes long-term growth over short-term results. See id.
---------------------------------------------------------------------------
Although the commenters generally supported the Exchange's
proposal, two commenters expressed a concern about the proposed voting
rights structure.\161\ Specifically, one commenter noted a concern that
dual-class voting structures generally are not in the best interests of
shareholders, and that skewing the alignment of ownership and voting
rights presents agency risks.\162\ The other commenter stated that
mechanisms that reward long-term shareholders with a greater say in
corporate governance nonetheless should balance the interests of small
and large, and short-term and long-term, shareholders.\163\ The
Exchange responded by noting that its proposal differs from existing
dual-class and uneven voting structures because its proposed voting
structure would treat the LTSE Listings Issuer's common shareholders
equally in their ability to gain additional voting power based on their
ownership tenure.\164\ The Exchange further noted that its proposed
voting structure would provide an alternative available to issuers that
elect to list on the proposed LTSE Listings tier.\165\ In its proposal,
the Exchange also stated that because LTSE Listings Issuers would be
required, as a pre-condition to listing on LTSE Listings, to already
have in place a voting rights structure as of the date of its initial
listing that complies with LTSE Listings Rule 14A.413(b), no new
corporate action that disparately reduces voting rights would be taken
subsequent to listing on the Exchange.\166\
---------------------------------------------------------------------------
\161\ See Inherent Group Letter and Glass, Lewis Letter at 2.
\162\ See Glass, Lewis Letter at 2.
\163\ See Inherent Group Letter.
\164\ See IEX Response Letter at 1.
\165\ See id. at 2.
\166\ See supra note 79 and accompanying text.
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Section 6(b)(5) of the Exchange Act requires that an exchange's
rules be designed to promote just and equitable principles of trade and
not be designed to permit unfair discrimination between customers,
issuers, brokers, or dealers and, in general, to protect investors and
the public interest. The proposed voting rights structure rule would
require an LTSE Listings Issuer to differentiate in the allocation of
voting rights based on the manner in which its shareholders hold their
shares (whether in DRP or record name or whether in street name) and
for the length of time that they hold their shares. The proposed voting
rights rule is intended to allow shareholders of an LTSE Listings
Issuer to increase the voting power of their shares as long as they
continue to hold such shares as record holders on the books of the LTSE
Listings Issuer, including through DRP. The proposal does not make any
other distinction in voting rights among the LTSE Listings Issuer's
shareholders, and any shareholders that continuously hold their shares
in record form would be eligible to increase their voting power up to
the maximum allowable voting power consistent with proposed Rule
14A.413(b). LTSE Listings Issuers also would be required to comply with
IEX's existing voting rights policy, which provides that the voting
rights of existing shareholders of listed stock cannot be disparately
reduced or restricted through any corporate action or issuance,
including, but not limited to, the adoption of time-phased voting
plans, the adoption of capped voting rights plans, the issuance of
super-voting stock, or the issuance of stock with voting rights less
than the per share voting rights of the existing common stock through
an exchange offer.\167\ To address the restrictions in this voting
rights policy, the proposal prohibits an LTSE Listings Issuer from
issuing additional classes of common stock that exceeds the Initial
Voting Power of any of the LTSE Listings Issuer's existing classes of
common stock listed on LTSE Listings. In addition, the proposal
prohibits issuances where the rate at which the voting power of such
class may increase over time at a rate greater than the corresponding
rate for any of the LTSE Listings Issuer's existing classes of common
stock listed on LTSE Listings.\168\
---------------------------------------------------------------------------
\167\ See IEX Rule 14.413.
\168\ See supra note 81 and accompanying text; proposed Rule
14A.413, Supplementary Material .01(f).
---------------------------------------------------------------------------
The Commission also notes that, pursuant to proposed Rule
14A.200(c)(2), at the time that a company initially lists on the LTSE
Listings tier, that company may not have any securities listed for
trading on IEX or any other national securities exchange, and that a
company would be permitted to list on LTSE Listings only in connection
with its initial public offering.\169\ The proposal also would require
an LTSE Listings Issuer to prepare and maintain an explanatory
statement, written in plain-English, and posted prominently on its
website, which provides information regarding the rights of
shareholders under the issuer's long-term voting provisions, including,
at a minimum, explanations of how a shareholder's voting power may
increase over time, the particular conditions that must be satisfied in
order for such additional voting power to increase, and the
administrative steps that a shareholder must take to hold shares in a
manner that will allow their voting power to increase over time.\170\
In light of the foregoing, the Commission finds that the Exchange's
voting rights proposal is consistent with Section 6(b)(5) of the Act.
---------------------------------------------------------------------------
\169\ See Amendment No. 1, supra note 6.
\170\ See id.
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B. Alternative Calculation for Requiring Shareholder Approval
The Exchange proposes a modified shareholder approval calculation
formula for LTSE Listings Issuers to be used for determining when
shareholder approval is required for additional issuances of
securities. While the calculation for shareholder approval ordinarily
would be based on the legal maximum potential voting power of the
shares to be issued (which in the case of the proposed rules would
multiply the Initial Voting Power by ten), the Exchange asserts that
this approach would not be appropriate because it believes that it
would be extremely unlikely that all shares of a new issuance would be
held in record name by the same shareholder uninterrupted for a period
of 10 years.\171\ The Exchange also states that it would be even more
unlikely for all shares of a new issuance to accrue votes up to the
maximum amount while the shares outstanding remain static and do not
accrue any additional voting rights. The Exchange therefore argues that
requiring issuers to make these particular assumptions would result in
LTSE Listings Issuers having to obtain shareholder approval for
transactions that would not be materially dilutive to existing
shareholders. The Exchange further contends that imposing the burden of
obtaining shareholder approval (including the monetary costs, as well
as the time involved and uncertainty of outcome) would not be justified
for transactions that, in the Exchange's view, are unlikely to be
materially dilutive to the voting power of existing shareholders.\172\
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\171\ See Notice, supra note 3, at 14090. Under the proposal,
transferring shares out of record form or transferring ownership to
another person would revert the voting rights associated with the
shares to their Initial Voting Power.
\172\ See id. at 14090-91.
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The Exchange notes that, because shareholders may or may not elect
to hold their shares in record ownership,
[[Page 31626]]
and may hold them in such manner for varying lengths of time, it is not
possible to determine with precision how many shares issued in any
transaction would accumulate additional voting power or the extent of
voting power that those shares eventually would attain.\173\ The
Exchange proposes two alternative means for calculating the maximum
potential voting power of the new shares: (i) for issuers that have
been listed on LTSE Listings for at least five years, this value would
be the number of shares to be issued multiplied by both the Initial
Voting Power and Long-Term Voting Factor,\174\ and (ii) for issuers
that have been listed on LTSE Listings for fewer than five years, this
value would be the greater of (x) the number of shares to be issued
multiplied by both the Initial Voting Power and Long-Term Voting Factor
or (y) the number of shares to be issued multiplied by the Initial
Voting Power, multiplied by two.
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\173\ See id. at 14090.
\174\ See supra note 105 and accompanying text, for a
description of the Long-Term Voting Factor.
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The Exchange states that the Long-Term Voting Factor is intended to
estimate the extent of the increase in voting power that the new shares
to be issued are likely to obtain based on the percentage of increased
voting power that existing issued shares have already obtained. The
Exchange also believes that, for companies that have been listed for a
shorter period of time, a minimum multiple of two is appropriate
because the actual Long-Term Voting Factor that these companies would
have experienced is likely to be lower than that of longer-listed
companies and may not be representative of the longer-term growth in
voting power that the new shares may ultimately attain.\175\
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\175\ See Notice, supra note 3, at 14091.
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The Commission notes that the rationale for the Exchange's proposed
modification to the shareholder approval calculation is based on the
unique features of the proposed voting rights structure. The
traditional shareholder approval calculation assumes that the maximum
voting rights of any newly issued shares definitely would be reached.
However, because of the way the Exchange's proposal would work (i.e.,
with the voting rights reverting to their Initial Voting Power upon any
trade, and accreting voting rights available only for record holders),
it is difficult to predict what the maximum voting rights of the newly-
issued shares would be. While the proposed formula for modifying the
calculation of the maximum potential voting power of the newly-issued
shares may appear reasonable, it is difficult to assess whether it is
in fact appropriate because there is no available data on the behavior
of securities subject to the proposed voting structure. The Commission
notes that the Exchange has represented that, if approved, it would
periodically assess whether a five year cut-off for applying a minimum
Long-Term Voting Factor and the minimum Long-Term Voting Factor of two
continue to be appropriate, or whether either element should be
modified based on the Exchange's experience with LTSE Listings Issuers.
For example, the Exchange would consider when the rate of growth of the
voting power of an LTSE Listings Issuer's shares typically becomes
relatively stable and at what level.\176\ The Commission believes that
that these representations by the Exchange are important for ensuring
that the calculation for shareholder approval is appropriately
established for LTSE Listings Issuers and that the requirement for
shareholder approval for required transactions remains robust. In
addition, the Commission notes that LTSE Listings Issuers would have to
comply with all the other provisions of the shareholder approval rules
that require a shareholder vote. For example, an issuance that results
in a change of control would need to have shareholder approval
irrespective of whether the issuance exceeded the 20% provision as
calculated under the LTSE Listings rules.
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\176\ See id. at 14091 n.87.
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For the foregoing reasons, the Commission finds that the Exchange's
proposal with regard to the proposed shareholder approval calculation
is consistent with the Act, particularly Section 6(b)(5) thereunder.
The Commission notes, however, that in the case of an LTSE Listings
Issuer whose securities are dually-listed under proposed Rule 14A.210,
such issuers would be required to comply with the stricter listing
standard for calculating the requirement for shareholder approval,
which could be the rule of the other listing exchange.
C. Additional Corporate Governance and Other Requirements
The Exchange's proposal contains a number of additional corporate
governance requirements for LTSE Listings issuers, which would be in
addition to or in lieu of the corporate governance requirements
contained in Chapter 14 of IEX's rules. The proposed new requirements
for boards of directors and board committees are designed to align the
board with the objectives of the LTSE Listings rules.\177\ The proposal
would require the boards of an LTSE Listings issuer to establish an
LTSP Committee, which would be dedicated to overseeing the issuer's
strategies for creating and sustaining long-term growth, and a
nominating/corporate governance committee. The proposal also would
require committees, including the audit and compensation committees, to
report to the board and to make their charters available on the
issuer's website, and would retain the composition and transparency
requirements of those committees, if their functions were transferred
to another committee. LTSE Listings Issuers would be required to
provide more transparency about their operations, and in particular
their long-term goals, strategies, and performance, in the form of
additional disclosures, i.e., the LTSP Disclosures, in an Annual Report
Supplement. The proposal also would require LTSE Listings Issuers to
adopt corporate governance guidelines and executive compensation
guidelines, which would impose certain requirements and restrictions on
executive compensation that the Exchange believes are measures intended
to capture the long-term performance of the issuer.
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\177\ See id. at 14077.
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These additional corporate governance requirements were supported
by the commenters. Commenters particularly supported the proposed
increased transparency for investors and the proposed requirements that
the Exchange has designed with the intent of aligning executive
compensation with long-term measures of the issuer's performance. The
Commission finds that the proposed additional corporate governance
requirements are consistent with the Act, particularly Section 6(b)(5)
thereunder.
D. Dual Listings
The Exchange proposes to allow an LTSE Listings Issuer to list a
class of securities that, in connection with its IPO, has been approved
for listing on another national securities exchange. The Exchange would
make an independent determination of whether such issuer satisfies all
the applicable listing requirements of the Exchange and would require
such issuer to enter into a dual-listing agreement with the Exchange.
The Exchange would expect the other national securities exchange to be
the LTSE Listings Issuer's primary listing market. The proposed rules
would require prompt notification by the LTSE Listings Issuer if it
falls below
[[Page 31627]]
the listing standards of the other exchange (and vice versa), and also
would honor the trade halt authority of Primary Listing Market, as
designated under the CQ and CTA Plans or the UTP Plan.
The Commission finds that the proposal to allow dual-listings of
securities listed on LTSE Listings, which would allow such dual-
listings to occur in connection with the initial public offering of
those securities, is consistent with the Exchange Act. The Commission
notes that dually-listed securities of LTSE Listings issuers would need
to satisfy the listing standards of both exchanges in order to maintain
both listings, and could not rely on satisfying one exchange's listing
standards to maintain its listing on the other exchange. The Commission
also notes that in instances where one exchange has a higher or more
stringent requirement than the other exchange, the issuer would be
required to comply with the higher or more stringent requirement. For
example, as noted above, if an LTSE Listings Issuer's security is also
listed on another exchange and that other exchange has a more stringent
requirement for applying its shareholder approval calculation
requirement, the more stringent requirement of the other exchange would
be applied to the LTSE Listings issuer. Similarly, if the other
exchange has a lower requirement or no requirement with respect to a
corporate governance requirement imposed by the Exchange for an LTSE
Listings Issuer, such as the LTSP Disclosures requirement, the LTSE
Listings Issuer would have to comply with the higher standard imposed
by the Exchange.
In light of the foregoing, the Commission finds that the Exchange's
proposal to adopt rules relating to supplemental listing standards for
LTSE Listings Issuers is consistent with the Act, particularly Section
6(b)(5) thereunder. The Commission believes that the proposed rules are
appropriate in that they aim to provide issuers that believe the LTSE
Listings standards to be better aligned with their objectives, and
potentially with the governance preferences of their shareholders, with
the option to comply with certain additional listing requirements,
which in turn would provide shareholders with the opportunity to
increase their voting power in the issuer's listed securities.
VI. Solicitation of Comments on Amendment No. 1 to the Proposed Rule
Change
Interested persons are invited to submit written data, views, and
arguments concerning whether Amendment No. 1 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-IEX-2018-06 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-IEX-2018-06. 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-IEX-2018-06, and should be submitted on
or before July 27, 2018.
VII. Accelerated Approval of Proposed Rule Change, as Modified by
Amendment No. 1
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment No. 1, prior to the thirtieth day
after the date of publication of notice of the filing of Amendment No.
1 in the Federal Register. As discussed above, Amendment No. 1 revises
the proposal to: (1) Clarify in proposed Rule 14A.001(a) that an LTSE
Listings Issuer must qualify for listing under Chapter 14 of the IEX
Rules and the LTSE Listings Rules, except as otherwise provided in the
LTSE Listings Rules; (2) specify in proposed Rule 14A.200(c)(2) that
when a company lists on LTSE Listings, in addition to the requirement
that the company must not have any security listed for trading on the
Exchange or any other national securities exchange, the company also
must be listing in connection with its initial public offering; (3) add
paragraph (c) to proposed Rule 14A.210 to provide that if dually-listed
securities are listed on another national securities exchange that is
the primary listing market and requires a minimum number of market
makers, the minimum market maker requirements of IEX Rules 14.310 and
14.320 would not be applicable to such dually-listed securities; and
(4) add paragraph (c) to proposed Rule 14A.413 to require each LTSE
Listings Issuer to prepare and maintain an explanatory statement that
must be written in plain English, made publicly available, and posted
prominently on its website and that must describe how the voting power
of the issuer's securities may increase over time, and the conditions
and administrative steps necessary for such voting power to increase.
With respect to not applying the minimum market maker requirements
of IEX Rules 14.310 and 14.320 when another national securities
exchange is the Primary Listing Market for the LTSE Listing Issuer's
dually-listed securities, the Exchange notes that such requirements are
not necessary if the Primary Listing Market imposes minimum market
maker requirements. With respect to requiring each LTSE Listings Issuer
to make an explanatory statement publicly available and posted
prominently on the issue's website explaining the long-term voting
provisions, the Exchange believes that the new rule language would help
ensure that an LTSE Listings Issuer's shareholders would be able to
easily obtain necessary information about the LTSE Listings Issuer's
long-term voting structure and how such shareholders, if they so
choose, may accrue additional voting power over time. With respect to
the amendments to proposed Rules 14A.001(a) and 14A.200(c)(2), the
Exchange notes that these are simply conforming and clarifying changes
to the proposed rule text.
The Commission believes that Amendment No. 1 would help increase
transparency by providing clear and easily accessible information to
[[Page 31628]]
shareholders and potential shareholders regarding an LTSE Listings
Issuer's long-term voting structure and regarding how they can accrue
additional voting power over time. The Commission also believes that it
is appropriate for the Exchange to not apply the minimum market maker
requirements of IEX Rules 14.310 and 14.320 when another national
securities exchange is the Primary Listing Market for the LTSE Listings
Issuer's dually-listed securities. The Commission believes that
Amendment No. 1 does not raise any new or novel regulatory issues, and
provides additional transparency to investors, further facilitating the
Commission's ability to make the findings set forth above to approve
the Exchange's proposed rule change. For these reasons, the Commission
finds good cause, pursuant to Section 19(b)(2) of the Act,\178\ to
approve the proposed rule change, as modified by Amendment No. 1, on an
accelerated basis.
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\178\ 15 U.S.C. 78s(b)(2).
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VIII. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\179\ that the proposed rule change (SR-IEX-2018-06), as modified
by Amendment No. 1, be, and hereby is, approved on an accelerated
basis.
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\179\ Id.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\180\
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\180\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-14461 Filed 7-5-18; 8:45 am]
BILLING CODE 8011-01-P