SEC Gives Nasdaq OK To Issue Public Reprimand Letters

The Securities and Exchange Commission has approved a Nasdaq rule filing that lets Nasdaq issue a public reprimand letter for certain rule violations when the more serious punishment of delisting isn’t appropriate.

The rule, effective immediately, allows Nasdaq to issue public reprimand letters for violations of corporate-governance or notification-listing standards other than those required by Rule 10A-3 of the Securities Exchange Act of 1934.

“In monitoring compliance with Nasdaq’s corporate governance rules, Nasdaq staff identified circumstances where a rule violation had occurred, but a delisting action was not the appropriate sanction,” a Nasdaq spokesman said. “The public reprimand letter gives Nasdaq the ability to impose a lesser sanction on listed companies in these limited circumstances, where violations involve a relatively minor infraction of certain Nasdaq corporate governance standards or notice requirements.”

A company that receives a reprimand letter is required to disclose receipt of the letter publicly, including the basis for the staff’s determination, within four business days. Public reprimand letters are subject to appeal in the same manner as a notice to deny or limit listing.

EXCERPT

The excerpt below is from Section 4803 (Staff Review of Deficiency) of "Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Allow Nasdaq to Issue Public Reprimand Letters," published Dec. 6, 2005:

Staff Review of Deficiency

(a) Whenever staff of the Listing Department determines that an issuer does not meet a

listing standard set forth in the Rule 4000 Series, staff shall immediately notify the issuer. The

issuer shall make a public announcement through the news media disclosing the receipt of this

notice, including the Rule(s) upon which it was based. Prior to the release of the public

announcement, the issuer shall provide such disclosure to Nasdaq's MarketWatch Department,

the Listing Department, and the Hearings Department. The public announcement shall be made

as promptly as possible, but not more than four business days following receipt of the notice

from the Listing Department.

1. In the case of

all quantitative deficiencies from standards that do not provide a compliance period;

deficiencies from the standards of Rules 4350(c) or (d) or 4360(c) or (d) where the

cure period of the Rule is not applicable; or

deficiencies from the standards of Rules 4350(f), (h), (i), (k), or (n), 4360(f) or (i), or

4351;

staff's notice shall provide the issuer with fifteen calendar days to submit a plan to regain

compliance with the listing standard; provided, however, that the issuer shall not be provided

with an opportunity to submit such a plan if review under the Rule 4800 Series of a prior Staff

Determination (other than a Staff Determination that serves as a public reprimand letter as

described in Section 4801(k)(2)) with respect to the issuer is already pending. Subject to the

restrictions of paragraph (b), staff may extend this deadline upon good cause shown. Upon

receipt of the issuer's plan, staff in the Listing Department may request such additional information from the issuer as is necessary to make a determination regarding the likelihood that

the plan will allow the issuer to meet the listing standard at issue...

Source

Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Allow Nasdaq to Issue Public Reprimand Letters

In determining whether to issue a public reprimand letter, Nasdaq said it will consider whether the violation was inadvertent; whether the violation materially adversely affected shareholders’ interests; whether the violation has been cured; whether the offending company reasonably relied on an independent adviser and whether the company demonstrated a pattern of violations.

The rule filing gave several examples of infractions that might result in a reprimand letter: a company that engaged in a pattern of failing to provide advance notice of press releases to the Nasdaq StockWatch department; a company with a Dec. 31 fiscal year-end that hasn’t held an annual meeting for the prior year as of early January, but has filed a proxy to hold the meeting in the next few weeks; or an independent director who resigned from a company and was replaced with another independent director, but the company didn’t provide prior notice to Nasdaq.

The New York Stock Exchange has a similar provision that allows it to issue a public reprimand letter to listed companies that violate any NYSE listing standards except the financial and other continued listing standards provided in Chapter 8 of NYSE's Listed Company Manual, or of certain audit committee listing standards.

Landefeld

Stewart Landefeld, partner and chair of national business practice at Perkins Coie in Seattle, called the action as “a happy New Year present” from Nasdaq to investors and companies. “Until now, Nasdaq has only had a delisting procedure or a deficiency letter,” he said. “Nasdaq now has something smaller than a sledgehammer to use to swat when they see a mosquito that needs to be swatted.”

Landefeld added that the change “could signal that Nasdaq is going to feel freer to pay closer scrutiny to companies’ adherence to its corporate governance requirements, because they can now reprimand companies without hurting shareholders.”

A good New Year's resolution for a Nasdaq company, he continued, “would be to review their current compliance with Nasdaq listing requirements, because they are now at greater risk of getting a speeding ticket, even though they won’t necessarily get a delisting notice.”

Landefeld’s advice to a company that receives a reprimand letter: publicly announce its arrival within four days, decide immediately whether to appeal it, and keep Nasdaq Stock Watch, the listing department and hearing department advised on any press releases ahead of time.