News

New Nasdaq rule permitting public reprimand letters

News Brief
January 11, 2006

By: Cydney Posner

The SEC has recently posted a proposed Nasdaq rule change that would allow Nasdaq to issue public reprimand letters to listed companies for certain rule violations when a determination is made that the violation does not merit delisting. The rule became effective upon publication of the notice, although comments were solicited.

If the Nasdaq Listing Qualifications Department has made a determination that a listing requirement has not been satisfied, the staff provides written notice to the issuer of the deficiency. Depending upon the nature of the deficiency, under prior rules, the notice would take the form of either a Staff Determination, which initiated proceedings to deny or limit listing, or a deficiency letter that provided the issuer with 15 days to submit a plan to regain compliance with the listing standard. Upon the expiration of the 15-day period provided in the deficiency notice, the staff is required either to initiate delisting proceedings or to grant an issuer up to 105 days to regain compliance with the listing standard. If an issuer receives a Staff Determination, it may then request a hearing before a Listing Qualifications Panel and appeal the decision to the Nasdaq Listing and Hearing Review Council. The final decision of the Listing Council is subject to review by the NASD Board of Directors and the SEC. However, Nasdaq has identified circumstances where delisting would be disproportionate to the underlying deficiency and could harm investors by premature delisting of companies whose deficiency involves only a relatively minor infraction.

The new rule allows the staff to issue, as a Staff Determination, a public reprimand letter in circumstances where the Listing Department has determined that the issuer has violated a Nasdaq corporate governance or notification listing standard (other than one required by Rule 10A-3), but that delisting is not an appropriate sanction. In determining whether to issue a public reprimand letter, the Listing Department will consider the following factors:

  • whether the violation was inadvertent;
  • whether the violation materially adversely affected shareholders’ interests;
  • whether the violation has been cured;
  • whether the issuer reasonably relied on an independent advisor and
  • whether the issuer has demonstrated a pattern of violations.
Nasdaq provides the following examples of circumstances where it could determine to issue a public reprimand letter:

  • the staff determines that a company engaged in a pattern of failing to provide advance notice of press releases to the Nasdaq StockWatch department;
  • the staff becomes aware that a company with a December 31 fiscal year end has not held an annual meeting for the prior year as of early January, but the company has filed a proxy to hold the meeting in the next few weeks; or
  • the staff determines that an independent director resigned from the company and was replaced with another independent director, but the company did not provide prior notice to Nasdaq.
Because a public reprimand letter would be considered a Staff Determination, it would be subject to appeal in the same manner as a notice to deny or limit listing. The changes also clarify that if an appeal of a public reprimand letter is pending, an issuer would not be disqualified from receiving an exception with respect to any additional deficiencies.

A company that receives a public reprimand letter must make a public announcement through the news media disclosing the receipt of the decision, indicating the rules upon which the decision was based. Prior to the release of the public announcement, the company must provide the disclosure to Nasdaq's MarketWatch Department, the Listing Department and the Hearings Department. The public announcement must be made as promptly as possible, but not more than four business days following receipt of the decision.

Panel decisions, Listing Council decisions or decisions of the NASD Board may also serve as a public reprimand letter, if the applicable body makes the same type of determination under the same criteria as outlined above regarding Staff Determinations. As with a public reprimand letter issued by the staff, an issuer that receives a public reprimand letter issued by one of these adjudicatory bodies would also be required to make a public announcement through the news media disclosing receipt of the letter.

Note that Nasdaq continues to believe that delisting is the appropriate sanction for companies that fall below the quantitative listing requirements, violate Nasdaq listing standards or raise public interest concerns.

This content is provided for general informational purposes only, and your access or use of the content does not create an attorney-client relationship between you or your organization and Cooley LLP, Cooley (UK) LLP, or any other affiliated practice or entity (collectively referred to as “Cooley”). By accessing this content, you agree that the information provided does not constitute legal or other professional advice. This content is not a substitute for obtaining legal advice from a qualified attorney licensed in your jurisdiction and you should not act or refrain from acting based on this content. This content may be changed without notice. It is not guaranteed to be complete, correct or up to date, and it may not reflect the most current legal developments. Prior results do not guarantee a similar outcome. Do not send any confidential information to Cooley, as we do not have any duty to keep any information you provide to us confidential. This content may be considered Attorney Advertising and is subject to our legal notices.