Nasdaq is proposing to codify the standards of review that govern appeals and reviews before the Nasdaq Listing and Hearing Review Council, referred to as the Listing Council. When a listed company receives a Staff Delisting Determination or a Public Reprimand Letter, or when its application for initial listing is denied, the company may request a review before a Hearings Panel. The decision by the Hearings Panel may then be reviewed by the Listing Council, either on appeal by the company or on the Listing Council’s own initiative. Nasdaq observes that the use of the Listing Council “helps address the perception of conflicts that may otherwise exist given Nasdaq’s status as both a self-regulatory organization and a for-profit entity.” Currently, however, there is no standard of review applicable to these Listing Council reviews of Hearings Panel decisions and, as even Nasdaq acknowledges, the Listing Rules are ambiguous regarding the extent of the Listing Council’s mandate in this context. Accordingly, Nasdaq now proposes to adopt two new standards of review: one standard—intended to “limit frivolous and baseless appeals”—for appeals of Hearings Panel decisions before the Listing Council and a second standard for Hearings Panel decisions called for review by the Listing Council. Nasdaq would apply the new standards of review to all matters that enter the Listing Council review process following approval of the proposal; matters pending review by the Listing Council when the proposal becomes effective would remain subject to current rules. [Update: Nasdaq has withdrawn this proposal.]
The new proposal is designed to provide clarity both to the Listing Council in understanding “whether and under what circumstances to consider companies’ efforts to comply with applicable Listing Rules after the Hearings Panel has rendered its decision,” as well as to companies in determining “whether appeals to the Listing Council are likely to be viable or futile.” A standard would also “promote consistency in the Listing Council’s decisions, which in turn is important to ensuring that the Listing Council is regarded as a fair and reasonable appellate body and that its decisions garner respect.”
Appeals of Hearings Panel Decisions. To begin with, the proposal would first state that, as a general principle, when reviewing Hearings Panels’ decisions, the Listing Council “ordinarily shall not substitute its judgment for that of the Hearings Panel.” Nasdaq believes that deference to the judgment of the Hearings Panel is usually appropriate given that a Hearings Panel conducts an extensive examination of the law, rule and facts in each matter, while the Listing Council typically relies on that record and focuses instead “on discrete questions of law, rule, or fact raised in the appellate briefs.”
The proposed rule also requires the Listing Council to affirm a decision of the Hearings Panel “unless it determines that: (i) the specific grounds on which the Panel Decision is based did not exist, as a matter of fact; (ii) the Panel Decision is inconsistent with law or Nasdaq Rules; or (iii) there exist extraordinary circumstances that warrant reversal, modification or remand, consistent with the public interest and protection of investors.” The goal is to “limit frivolous and baseless appeals”: in Nasdaq’s experience, companies often file appeals with the Listing Council just to seek additional time to regain compliance. In the future, in the absence of “extraordinary circumstances,” the Listing Council “would not entertain such appeals.” Nasdaq notes that this proposed standard is similar to the SEC’s standard for review of self-regulatory organization decisions.
With respect to clause (i), the proposal would limit the Listing Council’s authority to consideration of the facts existing when the Hearings Panel rendered its decision. Nasdaq cautions that the purpose of an appeal is not to secure “a de facto additional extension period during which a company may demonstrate compliance with applicable listing requirements.” Rather, if a company is properly removed by a Hearings Panel and wants to be relisted, it “should satisfy the initial listing requirements and follow the application process.”
However, Nasdaq proposes to include an exception to these rules in clause (iii) that would allow the Listing Council to reverse, modify or remand a Hearings Panel decision under “extraordinary circumstances,” defined in proposed Listing Rule 5820(d)(1)(A), as “unusual and infrequent circumstances that are either: (i) outside of the reasonable control of a company or anyone acting on its behalf (such as where non-compliance with a Listing Rule is caused by a natural disaster or another force majeure event); or (ii) indicative of widespread difficulties among similarly situated companies in complying with the relevant Listing Rules, where delisting those companies’ securities would pose an unnecessary burden on investors and the market.” Application of this exception would require a fact-specific inquiry on a case-by-case basis, taking into account any recommendation by the Hearings Panel or Listing Qualifications Department.
Examples of circumstances that are “beyond the reasonable control of a company or someone acting on its behalf” might be “a storm, fire, war, terrorist act, or other force majeure event that, despite reasonable protective measures, destroys, damages, delays, or otherwise impedes the ability of a company to meet its obligations under the Listing Rules. By contrast, a circumstance that likely would not be beyond the control of a company would be an error by a company employee,” even if the company’s management was unaware of the employee’s action.
Examples of “widespread difficulty” might include a “good faith misunderstanding or misinterpretation of a new or complex accounting standard that impacts a large number of public companies and requires them all to restate their financial statements.” In that event, “the Listing Council may determine that delisting all of the impacted companies for the same reason could unduly disrupt the market and result in greater harm than good for investors.” But if “a company knowingly or willfully misapplied the accounting standard in the above example, or did not act diligently to restate its financial statements, then the Listing Council could determine that the company was not ‘similarly situated’ with other listed companies and that it therefore is ineligible for additional time to regain compliance with the Listing Rules.”
The exception for extraordinary circumstances would be not be available where the relief is beyond the discretion of the Listing Council, for example, a request for additional time to file a delinquent periodic report, where the report is already more than 360 days late, even though the delinquency was the result of extraordinary circumstances.
Listing Council Calls for Review of Hearings Panel Decisions. As proposed, a different standard, de novo review, would apply in the event the Listing Council called a matter for review. In a de novo review, the Listing Council could “consider facts and circumstances that did not exist at the time when the Panel rendered its decision” and “draw different conclusions based on the facts than the Hearings Panel.” Nasdaq believes this standard would facilitate oversight by the Listing Council through its call-for-review function. For example, Nasdaq notes, there might be a call for review where the Listing Council observes a lack of consistency among different Hearings Panels in granting exceptions based on similar plans of compliance. With de novo review, the Listing Council could “call that matter for review and reverse the Hearings Panel’s decision even though the Hearings Panel did not make a factual error in its decision and Nasdaq’s Rules would allow the Hearings Panel to grant such an exception.” Apparently, calls for review are rare and solely in the control of the Listing Council, resulting in little risk of companies’ “exploiting the review process to belatedly regain compliance.”
Finally, Nasdaq proposes to reorganize and clarify the existing text of Listing Rule 5820(d) to make it easier to understand. For example, the reorganization will clarify that “the Listing Council’s general authority to grant an exemption will apply except where non-compliance involves delinquencies in filing periodic reports or failures to hold annual meetings,” which, in different subsections, specify their own maximum time periods for Listing Council exceptions.
