United States: Impact of Recent NASDAQ Changes on Listed Companies

The Securities and Exchange Commission (the "SEC") recently approved rules related to a number of changes to the structure of the NASDAQ. The changes include registration of the NASDAQ as a "national securities exchange," changing the name of the "NASDAQ National Market" to the "NASDAQ Global Market," and adding a new top tier market classification called the "NASDAQ Global Select Market." The following discussion addresses some of the practical implications of the recent NASDAQ changes.

On January 13, 2006, the SEC approved NASDAQ’s application to register The NASDAQ Stock Market as a "national securities exchange" under Section 6 of the Securities Exchange Act of 1934 (the "1934 Act"). Previously, NASDAQ was considered an automated inter-dealer quotation system of a national securities association registered pursuant to Section 15A of the 1934 Act. While the exact date of transition remains uncertain at this time due to the number of conditions NASDAQ must satisfy before operating as a "national securities exchange," NASDAQ has stated that it expects to complete its transition to a "national securities exchange" in August 2006. One of the recent SEC rule approvals modified the conditions that NASDAQ must satisfy in order to facilitate the transition. NASDAQ will notify the public of its final transition date.

NASDAQ’s transition to a "national securities exchange" covers both the NASDAQ National Market (see discussion below regarding changes to the National Market) and the NASDAQ Capital Market, but it will not require significant changes for companies currently listed on either of those markets. Some of the notable considerations, however, are as follows:

After NASDAQ becomes operational as a "national securities exchange," unless NASDAQ receives the relief discussed below, Section 16 and Form 144 filings related to NASDAQ-listed securities would have to be manually filed with NASDAQ. Previously, these filings were not required to be sent to NASDAQ because it was not a "national securities exchange." However, NASDAQ expects to receive relief from the SEC that will allow the electronic filing of Section 16 reports and Forms 144 through the SEC’s EDGAR system to satisfy NASDAQ’s requirement that its listed companies file these reports with NASDAQ. If a selling stockholder’s broker files Forms 144 on paper, instead of electronically on EDGAR, the paper Forms 144 should be sent to the NASDAQ Listing Qualifications Department at the following address:

When NASDAQ begins operations as a "national securities exchange," all securities listed on The NASDAQ Stock Market must become registered under Section 12(b) of the Act, as contrasted with Section 12(g) under which they are currently registered. Ordinarily, changing registration from Section 12(g) to Section 12(b) would require that each company file a short-form registration statement on Form 8-A with the SEC. However, to facilitate the process for its listed companies, NASDAQ has stated that it will file an application on behalf of its listed companies to register their NASDAQ-listed securities under Section 12(b) on the day before NASDAQ commences operations as a "national securities exchange." Accordingly, no further action should be required by NASDAQ-listed companies in connection with this transition. Thereafter, any filings a company makes pursuant to the 1934 Act, such as Form 10-K, should indicate in the appropriate "check box" that its NASDAQ-listed securities are registered under Section 12(b) of the Act.

After NASDAQ begins operations as a "national securities exchange," there will be an additional layer added to the 1934 Act deregistration process. The deregistration process for NASDAQ-listed companies will be similar to the deregistration procedures currently required of companies listed on other national securities exchanges. For example, either the NASDAQ or the issuer must file a Form 25 with the SEC in order to commence the deregistration process. Note that because all NASDAQ-listed companies previously were registered under Section 12(g) before they were registered under Section 12(b), their Section 12(g) registration automatically would revive despite deregistration under Section 12(b). Accordingly, NASDAQ-listed companies must also terminate registration under Section 12(g), and potentially their 1934 Act reporting obligation under Section 15(d), by filing a Form 15.

Even though NASDAQ will become a national securities exchange, securities listed on The NASDAQ Capital Market will not be considered "covered securities," and thus are subject to state blue sky regulation. The NASDAQ Stock Market has filed a rulemaking petition with the SEC to designate securities listed on The NASDAQ Capital Market as covered securities, but it is unclear when the SEC will take action on that petition. Because the North American Securities Administrators Association (i.e., the association of state securities regulators) has stated that it does not oppose the NASDAQ’s rulemaking petition, it appears that the requested rulemaking will not face significant obstacles.

In California and several other states, securities listed on a national securities exchange or on the "NASDAQ National Market" are relieved from certain corporate filing requirements, including specified relief from compliance with appraisal rights procedures. In order to receive this relief, California and several other states require that the national securities exchange must be designated by the commissioner of corporations or secretary of state. The Business Law Section of the California State Bar is working with the appropriate California officials to make the transition to the new NASDAQ designations as seamless as possible.

Effective July 1, 2006, the NASDAQ National Market has bifurcated itself into two tiers of market designations - the "NASDAQ Global Market" and the "NASDAQ Global Select Market." The name change from the "National Market" to the "Global Market" is intended to reflect the global reach of the markets and the issuers listed in the new market classifications. The continued listing standards for both market classifications will remain the same as before. However, the initial financial listing standards for inclusion on the NASDAQ Global Select Market are the most stringent of any stock market in the world. The NASDAQ estimates that approximately one-third of its largest listed companies qualify for listing on the NASDAQ Global Select Market.

The NASDAQ automatically transferred approximately 1,200 listed companies to the NASDAQ Global Select Market.¹ Companies that were not eligible to be automatically transferred to the Global Select Market have two options available for a subsequent listing on the Global Select Market when they become eligible for listing. First, if a NASDAQ-listed company becomes eligible for listing on the Global Select Market, then it may file an application with the NASDAQ and be transferred as soon as the NASDAQ Listing Qualifications Department verifies its eligibility. Second, starting in October 2007 and each October thereafter, the NASDAQ Listing Qualifications Department will review each company listed on the Global Market to determine if it qualifies for an automatic transfer to the Global Select Market. In each case, a NASDAQ Global Market company will not have to pay additional entry or application fees to obtain a listing on the NASDAQ Global Select Market.

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