Nasdaq Seeks Cover; E-Proxies Worry Campos; More

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asdaq has filed a petition with the SEC to designate securities listed on the NASDAQ Capital Market as covered securities under the Securities Act of 1933, so that the securities would be eligible for a “blue sky” exemption.

Section 18 provides exclusive federal regulation of securities listed on one of the named markets: the New York Stock Exchange, the American Stock Exchange, or the Nasdaq National Market. Under changes made to the law by Congress in 1996, the SEC also has authority to extend similar treatment to securities listed on another market that has listing standards that are substantially similar to the listing standards of one of the named markets. Nasdaq now wants securities trading on its Capital Market—typically smaller companies than those on its National Market—to receive such “covered” status.

In its petition, Nasdaq noted that some issuers qualified to list on the Capital Market have chosen to list on other venues solely because of their ability offer a blue-sky exemption, while other companies have sought to list dually on one of the exempt markets for the same reason. Nasdaq said the “competitive disparity” will worsen with the NYSE-Archipelago merger, because securities listed on Tier I of the Archipelago Exchange are considered covered securities through its relationship with the Pacific Stock Exchange. With the NYSE-Archipelago merger now complete, Nasdaq said in its petition, “Nasdaq will be the only major listing venue that will not be able to offer a blue-sky exemption for smaller companies.”

Noting that it has made numerous enhancements to the Capital Market listing standards since 1996, Nasdaq said those standards are “are substantially similar to, and in many ways exceed” the listing standards applicable to the named markets. Nasdaq also noted that the SEC’s Advisory Committee on Smaller Public Companies voted to recommend rulemaking to exempt securities listed on the Capital Market, and that the Board of the North American Securities Administrators Association doesn’t oppose the petition.

The SEC has not specified when it will consider Nasdaq’s request.

Lawmakers: SEC Has The Power To Grant SOX 404 Exemption

In response to an issue raised by members of the SEC Smaller Company Advisory Committee, two prominent Republican lawmakers say the agency does indeed have the power to exempt certain companies from Section 404 of Sarbanes-Oxley.

In a March 3 letter to SEC Chairman Christopher Cox, House Financial Services Committee Chairman Michael Oxley (R-Ohio) and Capital Markets Subcommittee Chairman Richard Baker (R-La.) said they believe the Commission has the authority to act on a controversial recommendation expected to be made by the advisory committee, should the SEC choose to do so.

The committee is expected to recommend in its final report, due next month, that the SEC exempt the smallest of issuers from 404 altogether and that it exempt some larger companies from 404’s external audit requirement. While the majority of the committee members support the exemption, some who oppose it have questioned whether the SEC had the power to act on such a recommendation if it is included in the group’s final report.

Oxley and Baker said they support the view that the Commission possesses the authority to provide relief from provisions of the Sarbanes-Oxley Act both under Section 36(a) of the Exchange Act of 1934 and Section 3(a) of SOX.

“Congress clearly intended that the Commission would have the authority under Section 36 of the Exchange Act to tailor rules and regulations for companies as it deems appropriate,” Oxley and Baker wrote. While Section 404 isn’t a provision included in the Exchange Act, the legislators noted that SOX and Section 404 are “inexorably linked to the Exchange Act in a number of ways.”

The committee, in its draft report posted for public comment last week, cited two reasons why the Commission’s exemption authority applies to SOX. Section 13(b)(2)(B) of the Exchange Act require issuers to maintain the internal controls upon which management and auditors must report under Section 404. In addition, the committee said, the Exchange Act and the Sarbanes-Oxley Act must be construed together, as they relate to the same subject matter under the legal doctrine of construction in pari material. For those reasons, Oxley and Baker said, “it is clear that the Commission’s exemptive authority applies to SOX.”

The actual letter and related coverage can be found in the box above, right.

SEC's Campos Sounds Off On E-Proxies, Shareholder Access

As the SEC mulls the 100-plus comments it received on its so-called “E-Proxy” proposal (see related story on e-proxy comments here), at least one SEC commissioner says he still has concerns about the plan, which would make proxies available online through a notice-and-access model.

In remarks at a March 3 conference in Washington, commissioner Roel Campos said while the proposal includes the “laudable goals” of using technology to reduce the cost of the proxy process and possibly making it easier for shareholders to place their director nominees on the ballot, he still worries about unintended consequences.

Campos

Campos said he pays particular attention to two issues. One is whether allowing companies to separate the proxy card from the rest of the proxy materials might encourage shareholders to vote their proxies without reading the proxy materials; if that occurs, he said, the SEC risks undermining the spirit of the proxy rules. Some possible solutions include the permitting or requiring of electronic voting, although Campos said there may be some “technological difficulties to overcome.”

His other concern—raised by other commentators on the rule, including the AARP—is that by changing the default rule to one of “notice and access” rather than paper delivery, could disproportionately affect certain groups of investors, such as seniors.

One compromise option, Campos said, would be to permit the “opt out” of Internet delivery to stay in effect until the shareholder changes his or her mind, rather than automatically defaulting back to Internet delivery each year.

Also on shareholder access, Campos said he still supports the SEC’s 2003 proposals, which would, under certain limited circumstances, require companies to include in their proxy materials shareholder nominees for election as director.

“In my opinion, nothing has changed in the last two-and-a-half years to resolve the issue,” Campos said. Short of mounting a costly, full-blown proxy fight, he said, shareholders don’t have a “real option” of voting for a director other than those supported by management. That barrier to putting non-management candidates on the proxy, combined with the plurality voting system, makes it extremely difficult to remove or replace directors on management’s slate, Campos said.

Calling the 2003 proposals a “middle-of-the-road approach” to giving shareholders access to the ballot, Campos said, “I hope the Commission finds an opportunity to revisit this issue.”