The Regulatory Role of the Stock Exchanges (Part 2)

We are discussing a recent article by the WSJ noting that regulators have targeted exchanges "amid concerns over their ability to police the markets they operate".  As the article noted:

  • Some financial regulators have lost patience with what they see as exchanges' failure to manage ever-more-complex technology, reflected in a stream of market-jarring software errors, according to people familiar with the regulators' thinking. Many of the errors have been driven by exchanges' efforts to boost profits by rolling out complicated new products sought by the speediest customers.

As we noted in the prior post, concern over the ability or willingness of self regulatory organizations to "police" the markets has been around at least since the 1930s.  Thus, in some ways, the concerns expressed by regulators are nothing new.

What is new, however, is that the NYSE and Nasdaq have become "for profit" companies.  The boards of for profit companies have a fiduciary obligation to profit maximize.  This also can potentially impact the regulatory function of the exchanges.  Exchanges may, for example, compete for listings, something that can generate a race to the bottom.

In obtaining SEC approval of its for profit status, the NYSE agreed to localize its regulatory functions in a separate entity (NYSE Regulation, a non-profit) with an independent board.  Other policies were put in place in an effort to ensure that NYSE Regulation remained independent of the "for profit" holding company.

Whether it is possible to have a separate entity to handle regulatory matters that is unaffected by the "for profit" goals of the holding companies remains unresolved.  Directors from the NYSE holding company, for example, can sit on the NYSE Regulation board (although they must be independent and must be a minority of the directors).  One currently does.  Moreover, the funding for NYSE Regulation is determined by an agreement that is not public.  The amount of funding and the degree of influence by the holding company is, therefore, not public.

Although retaining its regulatory role when transforming into a for profit company, the NYSE has gradually been shearing off its regulatory functions.  Oversight of brokers was transferred to the NASD in the merger that created FINRA.  Similarly, the market surveillance function was mostly transferred to FINRA in 2010.  The NYSE retains some oversight of intermediaries in the market but its main regulatory function is probably the adoption and enforcement of listing standards. The functions of NYSE Regulation are listed here.

Yet retaining a regulatory function, as Nasdaq is apparently about the demonstrate, can be expensive.  Moreover, the exchanges have a mountain of regulatory requirements that can interefere with a basic business model.  The benefits may also be declining.  To the extent that the exchanges view their regulatory role as a protection against private law suits, this may be changing.  Non-regulatory functions are not protected by immunity and, as for profit activities expand, more private law suits may be coming. 

The problems encountered by exchanges operating as self regulatory organizations and the increased interest by regulators will likely continue to grow.  Nasdaq and any settlement with the SEC over Facebook indicates the consequences of oversight.  As more fines are imposed, the exchanges may need to rethink their regulatory role.  Ultimately, they may decide that efforts to profit maximize are incompatible with significant regulatory oversight. 



The Regulatory Role of the Stock Exchanges (Part 1)

The WSJ noted that regulators have targeted exchanges "amid concerns over their ability to police the markets they operate".  The article focused on the expected settlement between the SEC and Nasdaq over the problems associated with the Facebook IPO.  The article suggested that the SEC would impose the largest fine ever on an exchange, an easy standard to surpass since this will be only the second time exchanges have been fined. 

The article touches on an area of regulatory concern that has existed since the 1930s.  When the securities laws were adopted in the 1930s, Congress did not simply transfer all oversight to the SEC (which by the way was only created in 1934; the FTC has initial duty to oversee the securities markets).  Instead, some oversight was left to the stock exchanges, which at the time were private organization run by members (brokers).  The SEC, however, was given the authority (something amended over time) to oversee the exchanges.  The exchanges had to run any rules by the SEC (including changes to listing standards) and the imposition of any sanctions in a disciplinary proceeding by an exchange could be appealed to the SEC.  At the same time, the exchanges had immunity from liability for actions that fell within their regulatory responsibilities.

The model was labeled "self regulation" since broker organization were regulating brokers.  The model from the very beginning raised concerns.  Even in the 1930s, there was concern that organizations run by members would have less incentive to enforce their own rules and requirements.  In the context of periodic reports, it is likely that Congress gave this authority to the SEC rather than the exchanges (even though, in 1934, the requirement was imposed only on exchange traded companies) out of concern over enforcement. 

So concerns in many respects, the concerns raised by regulators in the WSJ article over enforcement by exchanges are nothing new.  The issue is inherent within the "self regulatory" model.  Congress tried to address this with the creation of the PCAOB.  LIke the exchanges, the PCAOB was a non-governmental entity (a non-profit).   Unlike the exchanges, however, board members were not appointed by the industry regulated by the PCAOB (auditors) but by the Commission.  This likely reduced industry influence but increased to role of the government. 

Congress sought to alleviate the later concern by limiting the SEC's right of removal to cause.  Thus, once appointed, members of the PCAOB could act independently of industry and independently of the government.  Moreover, Congress defined "cause" to include the failure to enforce existing rules.  The PCAOB, therefore, represented a form of self regulation but with mechanisms designed to promote greater enforcement.  Unfortunately, the US Supreme Court struck down the removal restriction, disrupting the attempt to come up with a new more effective model of self regulation. 

We will continue this discussion in the next post.


Exchange Act Release No. 68640: SEC Approves Changes to NASDAQ Compensation Committee Rules

On September 25, 2012, NASDAQ filed a proposed rule change with the Securities and Exchange Commission (“SEC”) to amend Rules 5605 and 5615 to comply with the recently adopted Rule 10C-1.  17 CFR 240.10C-1.  Rule 10C-1  prohibits a national exchange from listing any equity security of an issuer (with certain exceptions), unless the issuer complies with the rules regarding compensation committees and compensation advisors.  On January 11, 2013, the SEC approved NASDAQ’s proposed changes, as amended.  See Notice of Filing of Amendments Nos. 1 and 2, and Order Granting Accelerated Approval of Proposed Rule Change, Exchange Act Release No. 68640 (Jan. 11, 2013).

Under the amended listing standards, Rule 5605(d) requires each listing company to have a compensation committee made up of independent directors and a committee charter detailing the committee’s responsibilities.  Issuers must comply with the new provisions by the earlier of either their first annual meeting after January 15, 2014, or October 31, 2014.  Issuers must also certify to NASDAQ that they have complied with Rule 5605(d) within 30 days of whichever deadline is applicable to that issuer.

Previously, NASDAQ had allowed listed companies the choice of having a formal compensation committee comprised of Independent Directors, or allowing the independent directors of the board to decide compensation decisions.  Under the amended rule, companies no longer have the choice.  A compensation committee with at least two members who are independent directors is now required.   

 Rule 5605(d), as amended, expands the factors that boards must consider in determining director independence.  Each member of a compensation committee is now prohibited from accepting, directly or indirectly, any consulting, advisory or other compensatory fee from the listed company or any of its subsidiaries.  In addition, the board must “consider whether the director is affiliated with the company, a subsidiary of the company, or an affiliate of a subsidiary of the company to determine whether such affiliation would impair the director’s judgment as a member of the compensation committee.”

NASDAQ’s rule also includes an exception that allows a director who does not meet the definition of an independent director to serve on a compensation committee in “limited and exceptional” circumstances.  A director, however, cannot be an executive officer (or their family member) and cannot serve more than two years.   Any company using this exception must disclose on its website or in its proxy statement the nature of the relationship and the reasons for determining that the membership is required in order to serve the best interests of the company and its shareholders.  Additionally, the Rule provides a cure period if a company fails to comply with the Independent Director standards. 

Under amended Rule 5605(d), a compensation committee is required to have a written charter that must be reviewed on an annual basis.  The charter must contain the following: (1) the specific scope of the “committee’s responsibilities and how it carries out those responsibilities, including structure, processes, and membership requirements”; (2) a statement specifying the “committee’s responsibility for determining or recommending to the board for determination, the compensation of the CEO and all other executive[s]”; and (3) a statement that the “CEO may not be present during voting or deliberations on his or her compensation.”

NASDAQ also amended Rule 5605(d)(3).  The provision grants the compensation committee the sole authority to obtain the advice of a compensation consultant, legal counsel, or other adviser other than in-house legal counsel.  Such advisers may only be selected after the committee has taken into consideration the six independence factors.[1]  Although consideration of the factors is mandatory, the Rule does not actually require that the committee select an independent compensation advisor.  Companies are mandated to comply with the new provisions of 5605(d)(3) by July 1, 2013.

In addition, NASDAQ retained some existing exemptions.   This included “exemptions for asset-backed issuers and other passive issuers, cooperatives, limited partnerships, management investment companies registered under the Investment Company Act of 1940 (“registered management investment companies”), and controlled companies.”  The SEC approved this continued exemption. 

Finally, NASDAQ addressed foreign private issuers.  A foreign issuer continues to be allowed to follow its home country practice in lieu of many of NASDAQ’s corporate governance listing standards, including the compensation-related listing rules.  Issuers adhering to their home country’s practices  must disclose in their annual report filed with the SEC each NASDAQ requirement not followed and describe the alternative home country practice.  In addition, foreign issuers must disclose the reasons why they do not have an independent compensation committee as required by NASDAQ’s standards in their annual report. The SEC also approved a phase-in schedule for initial public offerings, companies that lose their exemptions, companies transferring from other markets, and those deemed smaller reporting companies.

The SEC stated that it believes the rules being adopted “should benefit investors by helping listed companies make informed decisions regarding the amount and form of executive compensation.”  It also found these changes to be consistent with the requirements of Rule 10C-1. 

Therefore, the SEC issued an order granting the accelerated approval of the proposed changes.

The primary materials for this case may be found on the DU Corporate Governance Website

[1] The six factors the committee must take into account when selecting an advisor are the following: (1) the other services the advisor provides to the company, (2) the amount of fees the advisor receives from the company (as a percentage of the total revenue of the person employing the advisor), (3) the policies and procedures of the person that employs the advisor that are designed to prevent conflicts of interest,(4) any business or personal relationship of the advisor with a member of the compensation committee, (5) any company stock owned by the advisor, and (6) any business or personal relationship of the advisor or the person employing the advisor with an executive officer of the company.


Corporate Governance, Rule 10C-1, and the SEC: Board Diversity and the NYSE (Part 6)

There is a serious problem with diversity on the board of directors.  Women (more than 50% of the population) make up somewhere around 15% of the directors on the boards of public companies.  People of color (about 35% of the population) are even less represented on corporate boards.

Why do we bring this up in a discussion on director independence?  The NYSE adopted a listing standard that is not gender neutral but assumes that directors on the compensation committee will be men.  As the standard provides:

When considering the sources of a director’s compensation in determining his independence for purposes of compensation committee service, the board should consider whether the director receives compensation from any person or entity that would impair his ability to make independent judgments about the listed company’s executive compensation. Similarly, when considering any affiliate relationship a director has with the company, a subsidiary of the company, or an affiliate of a subsidiary of the company, in determining his independence for purposes of compensation committee service, the board should consider whether the affiliate relationship places the director under the direct or indirect control of the listed company or its senior management, or creates a direct relationship between the director and members of senior management, in each case of a nature that would impair his ability to make independent judgments about the listed company’s executive compensation.

Perhaps the NYSE has deliberately exempted women from these considerations.  Or perhaps the standard was meant to reflect the facts on the ground since most directors are male.  Or perhaps it was an oversight.  Whatever the explanation, the default standard for legal requirements in 2013 is gender neutral. 


Rounding Up Some Critical Commentary on the DOJ’s Suit Against Standard & Poor's

As the Huffington Post reports, this past Tuesday:

The Justice Department accused S&P of knowingly inflating its ratings of risky mortgage investments that helped trigger the crisis. It's demanding $5 billion in penalties.

I’ve been reading some of the commentary on the suit, and there seems to be a lot of skepticism about its viability.

Over at DealBook, Peter J. Henning and Steven M. Davidoff cite the following hurdles the DOJ must overcome:

[1] The government will have to prove that ratings were in fact faulty, and published intentionally so as to deceive investors in the securities…. [2] Even if the Justice Department can prove the agency acted to deceive investors, it still has to deal with something lawyers call reliance. In other words, did investors rely on these ratings to make their decisions? … [3] Even if a fraud claim is established, S.& P. is sure to raise an old defense: the First Amendment’s protection for freedom of the press.

As to the latter point, Henning & Davidoff do note that:

By accusing S.& P. of fraud, the Justice Department may be able to undermine any First Amendment claim by the company. The protections afforded by the Constitution do not extend to statements made as part of a fraudulent scheme.

Henning & Davidoff conclude that:

While one might think disgust with financial institutions and distaste for ratings agencies will carry the day, the government has had a hard time winning fraud cases in court when juries actually look at the facts. It all means that the Justice Department will have its work cut out for it this time. 

Personally, I came away from their review unconvinced that the DOJ couldn’t overcome each of the hurdles Henning & Davidoff cite.  Go read the whole thing and see what you think.

Meanwhile, John Carney had the following to say over at CNBC.com:

The 119-page civil complaint filed Monday night by the Justice Department abounds with evidence, much of it from emails and instant messages between S&P employees, that concern over the company's market share influenced its ratings decisions…. But this only looks bad if you make the additional assumption that the issuers of the credit products S&P was rating did not care about the quality of the ratings. That is, for the Department of Justice's basic theory of the case to make sense you have to believe that the investment banks creating collateralized debt obligations wanted high ratings at any cost—even if the ratings were highly inaccurate…. Which means that the Justice Department will have to prove that issuers demanded fraudulently high ratings in order to establish the claim that the agencies engaged in fraud by changing ratings in pursuit of market share.

I’m not so sure the DOJ will have to prove that.  Rather, it might be enough simply to prove that S&P thought that issuers demanded higher ratings.  By the way, I couldn’t help but be impressed by Carney’s ability to work a pejorative “socialist” reference into his review of the complaint:

The Justice Department … includes in its complaint an email from an executive … upset that proposed changes to rating criteria would include consideration of "market insight," ratings implications, and interviews with "3 to 5 investors in the product." … This isn't the voice of someone who believes in market processes. It's more like the voice of a socialist planner who thinks that his "search for truth" gives him unique access.

Speaking of the truth, over at Dealbreaker Matt Levine noted (apparently in defense of S&P) that:

[T]ruth-seeking is just one means to an end; the end is sales ….

Matt goes on to complain that:

Ten pages of the DoJ’s complaint ... are to the effect of “S&P kept telling people that its ratings weren’t influenced by commercial factors,” and that’s true [S&P did repeatedly proclaim that], but it’s in such obviously meaningless boilerplate that if you believed it you have no business investing in anything.

Again, I’m not sure that’s the greatest defense for S&P.

Finally, the fact that the DOJ is only suing S&P, while apparently leaving Moody’s and Fitch alone, was repeatedly mentioned as a weakness of the DOJ’s case.  In the meantime, however, it turns out that Moody’s and Fitch are also in the regulatory cross-hairs.


SEC Release No. 34-67967: NASDAQ Rule Change Allows Payment of Regulatory Fines Through Installment Plans

In Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Offer Members the Ability to Pay a Regulatory Fine Pursuant to an Installment Plan, Exchange Act Release No. 34-67967, 2012 WL 4580144 (Oct. 2, 2012), the Securities and Exchange Commission (the “Commission”) provided public notice of NASDAQ OMX BX, Inc.’s (the “Exchange”) proposed rule change to allow Exchange members to pay regulatory fines through an installment plan. The notice contained instructions for interested parties to submit comments regarding the proposed rule change, including whether the change is consistent with the purposes of the Securities Exchange Act of 1934 (the “Act”).

The Exchange’s proposed rule amends NASDAQ Stock Market Rule 8320 and alters procedures in several ways. Regulatory fines eligible for payment through an installment plan must be $50,000 or greater. To select the installment plan option, a member must submit a signed letter of acceptance, waiver, and consent and must include a down payment covering 25 percent or more of the total amount owed. At the time of the first installment payment, the member is also required to execute a promissory note for the remaining balance. Payments may be made in monthly or quarterly increments and the total term of the plan cannot exceed four years.

The Commission’s notice also included the Exchange’s reasons why the proposed rule change is consistent with the Act. The Exchange believes that, in accord with Section 6(b)(5) of the Act, “the proposal is designed to . . . facilitat[e] transactions in securities, [] remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest.” In addition, the rule change is consistent with other sections requiring fair disciplinary procedures and will promote settlement, which in turn will eliminate the costs of extended disciplinary procedures. Finally, the Exchange believes it will be able to charge higher fines and still receive full payment.

A proposed rule change usually does not go into effect until 30 days after the date it is filed, but pursuant to the Exchange’s request, the Commission waived this waiting period, making the rule operative on its filing date of September 24, 2012. The Commission found that immediate enactment of the rule was consistent with the goals of the Act and that the rule change does not impose any unnecessary burdens on competition. In arriving at this decision, the Commission noted that it “considered the proposed rule’s impact on efficiency, competition and capital formation” as required under 15 U.S.C. § 78(c)(f).

The Commission concluded by opening a comment period to the public for submission of comments regarding the rule change. All comments were due by October 30, 2012.

The primary materials for this case may be found on the DU Corporate Governance website.


Judicial Limitations on Investor Protection: Fiero v. FINRA (Part 6)

We note one final point about the decision.  Although entirely dictum, the court noted that position of the SEC that it could seek to collect fines where it had affirmed the sanction.  Rather than reaffirm the position, the court all but invited parties to challenge this authority as well.  As the opinion noted:

  • The SEC takes the position that it has the authority to bring an action in a federal district court to enforce any order it issues that affirms sanctions, including fines, imposed by FINRA. See Delegation of Authority to the Office of the General Counsel, SEC Release No. 42,488, 71 S.E.C. Docket 1910 (March 2, 2000); 15 USC 78(e)(1). Although several other Courts of Appeals have affirmed the SEC's authority to enforce FINRA-imposed sanctions pursuant to Section 21(e), this issue is not before us on this appeal.

The court, therefore, left open the possibility that even the SEC does not have the authority to enforce the judgment. 


Judicial Limitations on Investor Protection: Fiero v. FINRA (Part 5)

We are examining Fiero v. Financial Industry Regulatory Authority, 2011 U.S. App. LEXIS 20173 (2nd Cir. Sept. 29, 2011), the recent decision by the 2nd Circuit that concluded FINRA lacked the authority to file an action to collect fines imposed on members.

Is there a right answer to this question?  Congress clearly contemplated the imposition of fines.  The fines were to be part of the rules and regulations of the SRO.  The House and Senate Reports on the Maloney Act do not provide much additional insight.  See HR Report No. 2307, 75th Cong., 3d Sess. (MAY 6, 1938); Senate Report No. 1455, 75th Cong., 3d Sess. (Jan. 5, 1938). The argument that fines are meaningless if they cannot be collected seems to create a strong argument for the implicit authority to bring an action. 

Moreover, since members prior to 1983 did not have to join an SRO, the threat of expulsion for nonpayment arguably had little meaning.  It merely meant that the brokers would become subject to SEC oversight, rather than the oversight of the NASD.  Moreover, the comparison to the authority given to the SEC to bring actions is inapposite.  In addition to the fact that the authority to impose penalties (and bring actions for nonpayment) came long after the adoptin of the Maloney Act, a federal agency is a very different animal than an SRO.  Government agencies are entirely a matter of statute and can have no authority except what is in the statute.

An SRO is different.  Depending upon the business form used (a for profit company in the case of the exchanges, a non-profit in the case of the NASD/FINRA), the entity has certain types of legal authority that does not need to be granted by Congress.  Thus, for example, the rights of a non-profit are largely determined by state statutes, not Congress. 

All of this suggests that Congress did not consider the authority to impose fines a matter that required much thought.  At the same time, however, it suggests that Congress did not view the authority as superflous, something that would be the case if a broker could simply exit the NASD.  Most likely, Congress intended any registering organization to have whatever authority to enforce that it would have as is typical of that type of entity.  FINRA, as a non-profit, brought an action againt the member for collection of an amount under a theory of breach of contract.  A non-profit has status to maintain an action for breach.  In those circumstances, it would appear FINRA has the right to bring an action for nonpayment. 

Moreover, the determination of the New York court that the action had to be brought in federal court prevents one of the concerns raised by the Second Circuit from occuring.  Resolution of the issue, to the extent requiring an interpretation of the securities laws, will be undertaken by a federal court which has the expertise to do so.

The consequence of the decision is that the court has essentially eliminated fines as a mechanism by FINRA for enforcing the securities laws.  Since fines can only be enforced by revocation of membership, FINRA can only enforce the securities law by threatening to put the broker out of business.  This is not unlike the situation with the exchanges that can only suspend or delist companies (in addition to letters of admonition in some cases) in the case of violations of listing standards. 

In effect, therefore, the SROs have only a nuclear weapon as a penalty.  The SROs are unlikely to impose such a draconian remedy for modest violations.  One way of doing so is to reduce the willingness to find such a violation and to enforce the securities laws.   

In any event, whatever the outcome of the decision, the reasoning used by the Second Circuit panel was unpersuasive.  It will be of considerable interest to see whether FINRA challenges the decision.  To the extent it does not and it declines to seek recovery of fines, it will raise questions about whether FINRA is the appropriate regulator to ensure the protection of investors.


Judicial Limitations on Investor Protection: Fiero v. FINRA (Part 4)

We are examining Fiero v. Financial Industry Regulatory Authority, 2011 U.S. App. LEXIS 20173 (2nd Cir. Sept. 29, 2011), the recent decision by the 2nd Circuit that concluded FINRA lacked the authority to file an action to collect fines imposed on members.

There are a number of aspects of the decision that call into question the reasoning used by the court.  First, the case, as the court noted a number of times, depends upon congressional intent.  Yet the source of that intent, the legislative history to Section 15A, was entirely unexamined.  There are no references in the opinion to the hearings on the Maloney Act or the House/Senate Reports on the legislation.  

Second, the opinion placed considerable reliance on the explicit authority given to the SEC to seek and collect penalties in Section 21 of the Exchange Act.  But the SEC only received the authority to collect penalties in the 1980s, long after the adoption of Section 15A.  See Arthur B. Laby and W. Hardy Callcott, PATTERNS OF SEC ENFORCEMENT UNDER THE 1990 REMEDIES ACT: CIVIL MONEY PENALTIES, 58 Alb. L. Rev. 5 (1994) (“The debate over whether the SEC should have the power to seek or assess civil money penalties stretches over several decades. As enacted in the 1930's, the federal securities laws relied almost exclusively on non-monetary sanctions, such as injunctions, with the possibility of criminal prosecutions for egregious violations. The Exchange Act originally contained only one civil money penalty provision, Section 32(b), which allows a penalty of $ 100 per day against an issuer that fails to file required reports. This sanction has rarely been used; as of 1990, the SEC had invoked it only once.”). While the authority in Section 21 with respect to penalties may reflect the views of Congress in the 1980s and later, it is a stretch to use the same langauge to provide insight into what Congress intended in 1938. 

Third, the court relied on something akin to the reenactment doctrine.  Congress knew that the NASD did not have the authority to bring actions to collect fines and never did anything to legislatively correct the matter.  It is highly unlikely that Congress knew about the absence of authority.  More importantly, the NASD apparently began to bring these actions after 1990.  Yet Congress never stepped in to put an end to the practice, despite the adoption of SOX and Dodd-Frank.  To the extent there is a proper application of the reenactment doctrine, it is to show that Congress knew the practice was taking place yet did nothing to stop it.  In other words, it supports the opposite position taken by the Second Circuit. 

Finally, the court put considerable weight on the ability of the NASD to collect fines through alternative mechanisms.  To the extent members do not pay the requisite fines, they can be expelled from the NASD. 

  • FINRA fines are already enforced by a draconian sanction not involving court action. One cannot deal in securities with the public without being a member of FINRA. When a member fails to pay a fine levied by FINRA, FINRA can revoke the member's registration, resulting in exclusion from the industry.

The court, however, did not take into account that the scheme created by Congress in 1938 did not contemplate mandatory membership in an SRO.  Indeed, until the the 1980s, brokers were not required to be members of an SRO.  Those who were not were regulated directly by the SEC under the SECO program.  Indeed, the SEC only got the right to directly regulate these brokers in 1964.  See Exchange Act Release No. 9420 (Dec. 20, 1971) (“Nonmember broker-dealers are subject to the so-called "SECO program" of the Commission adopted pursuant to Sections 15(b)(8), (9), and (10) of the Securities Exchange Act of 1934 (the Act). Enacted in 1964 as amendments to the Act, these provisions empowered the Commission to establish for such nonmember broker-dealers and their associated persons supplementary regulatory procedures and rules comparable to those adopted by the NASD for its members and their associated persons.”). Only in 1983 was the SECO program discontinued and brokers made to join an SRO.  See Exchange Act Release No. 20409 (Nov. 22, 1983). 

To be sure, the Commission did eventually adopt a rule that provided expulsion by an SRO acted as a bar to registration under the SECO program.  See Exchange Act Release No. 9290 (August 23, 1971)(proposing rule 15b8-2).  But the rule was not in place until the 1970s.   Moreover, the rule applied to expulsions "for conduct inconsistent with just and equitable principles of trade".  Whether the nonpayment of a fine falls within this status us unclear.  Finally, a member not wanting to pay the fine could avoid expulsion by resigning, thereby avoiding any action by the NASD that might trigger denial under the SECO program.

In other words, back in 1938, the ability to expel members for nonpayment had little signficance.  It would not, as the court suggested, result in an expulsion from the industry.  The Second Circuit instead used legislative changes adopted in the 1980s to construe legislative intent in 1938.


Judicial Limitations on Investor Protection: Fiero v. FINRA (Part 3)

We are examining Fiero v. Financial Industry Regulatory Authority, 2011 U.S. App. LEXIS 20173 (2nd Cir. Sept. 29, 2011), the recent decision by the 2nd Circuit that concluded FINRA lacked the authority to file an action to collect fines imposed on members.

The court gave a number of reasons for concluding that the NASD lacked the authority to file an action to collect unpaid fines. 

First, it pointed out that with respect to the SEC, Congress was quite specific in setting out its authority to bring actions.  Specifically, the court looked to Section 21(d) of the Exchange Act and the “express statutory authority for the SEC to seek judicial enforcement of penalties.”  15 USC 78u.  With respect to the NASD, "Section 15A, in contrast, did not provide any mechanism for seeking judicial enforcement of the sanctions it imposed."  Said another way, the court relied on the negative implication arising from the absence of express authority. 

Second, the court divined a congressional intent not to allow actions to collect fines from the process contained in the Exchange Act.  Congress was careful to provide for an appeal to the Commission in any disciplinary proceeding brought by FINRA.  Given this, “[h]ad Congress intended judicial enforcement, it would surely have provided for some specific relief other than leaving SRO's to commonlaw proceedings in state courts or in federal district courts under diversity jurisdiction.”   

The court did note the conundrum created by the language in Section 15A that gave FINRA the authority to impose fines.  The language at least raised the possibility that Congress implicitly contemplated the ability to collect the fines imposed. The court, however, concluded that the inability to collect fines was unnecessary to ensuring enforcement of the securities laws.   

  • One might argue that an inference of congressional intent to authorize such legal actions by FINRA can be drawn from the seemingly inexplicable nature of a gap in the FINRA enforcement scheme: fines may be levied but not collected. However, the gap does not support an inference of inadvertent omission because  significant underenforcement of the securities laws and FINRA rules is hardly the inevitable result of FINRA's inability to bring fine-enforcement actions. FINRA fines are already enforced by a draconian sanction not involving court action. One cannot deal in securities with the public without being a member of FINRA. When a member fails to pay a fine levied by FINRA, FINRA can revoke the member's registration, resulting in exclusion from the industry. Moreover, where a fine is based on a violation of the Exchange Act, the violator will also face a panoply of private and SEC remedies.

Finally, the court noted that the NASD "[s]o far as we can tell" not tried to file actions to collect unpaid fines.  This supported an inference "that NASD believed that it lacked judicial enforcement power."   Moreover, this "longstanding reliance" on other methods of enforcement was known to Congress and Congress "left that reliance unaltered."

We will critique this analysis in the next post. 


Judicial Limitations on Investor Protection: Fiero v. FINRA (Part 2)

We are examining Fiero v. Financial Industry Regulatory Authority, 2011 U.S. App. LEXIS 20173 (2nd Cir. Sept. 29, 2011), the recent decision by the 2nd Circuit that concluded FINRA lacked the authority to file an action to collect fines imposed on members. 

FINRA has the authority to impose fines on members.  See Section 15A of the Exchange Act, 15 USC §78o-1.  Section 15A was added to the Exchange Act in 1938 as part of the Maloney Act, an attempt to address the over-the-counter market.  The provision provided that member organizations could register with the SEC if they met the requirements of the statute.  These included requirements that: 

  • its members and persons associated with its members shall be appropriately disciplined for violation of any provision of this title, . . . or the rules of the association, by expulsion, suspension, limitation of activities, functions, and operations, fine, censure, being suspended or barred from being associated with a member, or any other fitting sanction.

To the extent imposing a fine, the member can appeal to the SEC, 15 USC  §78s(d), and from there to the US Court of Appeals.  See 15 USC  §78y. Only one organization registered, the NASD.  See In re NASD, 5 SEC 627 (1939).  The approval was apparently not controversial.  See Id. ("After due notice a public hearing was held before the full Commission on August 1, 1939 on said application. No one appeared except representatives of the applicant and counsel to the Commission."). 

In Fiero, the NASD imposed a fine on a member.  The member did not appeal the action to the Commission.  See FINRA v. Fiero, 853 NYS 2d 267 (NY 2008).  The member, however, refused to pay the amount and FINRA brought an action in state court to collect the amount.  The action was, however, ultimately dismissed.  The state court found that the matter involved an action under the Exchange Act.  Because Section 27 vested exclusive jurisdiction in federal courts, state courts lacked subject matter jurisdiction.  See FINRA v. Fiero, 853 NYS 2d 267 (NY 2008). 

The member then brought an action seeking declaratory relief in federal court arguing that FINRA had no authority to collect fines through a judicial proceeding.  The district court declined to provide the requested relief.  On appeal, however, the Second Circuit sided with the member.  While Section 15A permitted the imposition of fines, it did not provide “express statutory authority for SRO's to bring judicial actions to enforce the collection of fines.”  In arriving at the decision, the court relied on the intent of Congress in adopting Section 15A. 

We will examine the analysis in the next post.


Judicial Limitations on Investor Protection: Fiero v. FINRA (Part 1)

We have noted on this blog before that one of the most significant impediments to investor and shareholder protection will come from the courts.  

In some respects, this includes the Delaware courts.  While they have always been management friendly, this has become more pronounced in recent years.  The days of shareholder victories such as Van Gorkom or not complete losses such as Unocal are long over, replaced by the likes of Disney and Airgas.  But the Delaware courts are simply engaging in a variation on an expected theme.

The federal courts, however, have been the most significant proponents of this approach.  The Supreme Court has, for example, stretched credible analysis in an effort to pin pack Rule 10b-5.  Certainly the recent decision in Janus fits into that category. 

Similarly, the DC Circuit's decision in Business Roundtable is not justifiable based upon the precedent.  While it may have been possible to write a narrow opinion to strike down Rule 14a-11, the court did nothing of the kind.  It chose: to second guess the studies used by the SEC, to require the SEC to assume legal violations then assess the costs, and to apply, during a cost benefit analysis, fiduciary duty standards that appear inconsistent with state law.  For more on this decision, see Shareholder Access an Uneconomic Economic Analysis:  Business Roundtable v. SEC.

The most recent addition to this approach is Fiero v. FINRA.  In what has to be viewed as a surprising decision, the Second Circuit decided that FINRA, which has the authority to assess fines, does not have the authority to collect them. 

The case is not necessarily wrong.  The language in the statute concerning FINRA's right to bring an action to collect unpaid fines is ambiguous.  But the analysis used by the Second Circuit suggests that the outcome was driven more by a desire to pin pack the authority of FINRA than to ascertain the real intent of Congress.  This can be seen from the analysis used by the court in reaching the unexpected conclusion. 

The case has broad potential implications.  It raises questions about the role of SROs in the enforcement of the federal securities laws.  We will spend the next few posts looking at the case and examining the reasoning used by the Second Circuit. 


The Changing Regulatory Role of the SROs

Self regulatory organizations play an important role with respect to corporate governance.  Primarily through the mechanism of listing standards, they impose a number of requirements on pubic companies, whether the need for certain board committees or the requirement that a majority of the board consist of independent directors.

The main SROs in the governance area are the NYSE, Nasdaq, and FINRA.  The NYSE and Nasdaq are "for profit" organizations, while FINRA is a Delaware non-profit.  The structure matters.  As for profit companies, the two exchanges have both a legal duty to profit maximize on behalf of shareholders and a legal duty to protect the securities markets, primarily by enforcing listing standards and other legal requirements. 

We note this in part because the courts are having to wrestle with the consequence of the change in status of the SROs.  Courts have traditionally given SROs immunity for actions taken as part of their regulatory function.  See California Public Employees' Retirement System v. NYSE, 503 F.3d 89 (2nd Cir. 2007) (written by Judge Sotomayor).  In the pre-profit maximization era, most of what the SROs did was regulatory.  As a result, the approach translated into a complete immunity from private law suits. 

With the advent of for profit activity, however, the two exchanges are more likely to engage in activity designed to promote commercial rather than regulatory activity.  The result has been a greater struggle by the courts to decide when immunity applies and when it does not.  Thus in Weissman v. NASD, 500 F.3d 1293 (11th Cir. 2007) (en banc) (a case involving activity by Nasdaq, then owned by the NASD), the court allowed a case against an SRO to go forward. 

All of this brings us to Standard Investment Chartered v. NASD, 637 F.3d 112 (2nd Cir. 2011).  The case arose out of the merger between the NASD and the broker-dealer regulatory function of the NYSE.  Plaintiff challenged the proxy solicitation involving a bylaw amendment.  The change was necessarily to effectuate the merger.

The court noted that the merger was a regulatory function and entitled to immunity.  The proxy solicitation, however, was "incidental" to the regulatory function. As the court reasoned:

  • The question confronting the court, however, was whether the proxy solicitation regarding amendments to the bylaws, which was incident to the consolidation, also constituted an exercise of NASD's regulatory function. On this point, the district court explained that, "[a]lthough the shareholder vote for which the proxy statement  was issued did not constitute a vote on the regulatory consolidation itself, the approval of the by-law amendments was not only a necessary prerequisite to the completion of that consolidation, but also was promoted as such in the proxy itself." Id. The district court further noted that "amendment of the by-laws itself falls within the parameters of NASD's statutory rule-making authority." Accordingly, as the district court correctly concluded, the proxy solicitation, which was the only vehicle available to NASD for amending its bylaws, was plainly "incident to the exercise of regulatory power," sand therefore an activity to which immunity attached.

The court emphasized that regulatory role of the SEC in the process.

  • We also believe that it is significant that  NASD cannot alter its bylaws without approval from the SEC, that the SEC is authorized to develop its own procedure for receiving input on new rules from those affected by any proposed changes, . . . and that the SEC retains discretion to amend the rules of any SRO, . . . The statutory and regulatory framework highlights to us the extent to which an SRO's bylaws are intimately intertwined with the regulatory powers delegated to SROs by the SEC and underscore our conviction that immunity attaches to the proxy solicitation here.

While the court emphasized the broad role of the Commission, the test itself ("incident to the exercise of regulatory power") did not seem to require it.  Thus, the court's analysis was narrow but the test actually adopted was very broad.  The test will make it even more difficult for courts to separate regulatory from non-regulatory actions. 

The Supreme Court may get an opportunity to weigh in on the matter.  Plaintiffs in the case have filed for cert.  The issue is:

  • Are SROs entitled to absolute immunity for unlawful conduct that is ‘‘incident to’’ their regulatory powers but does not involve performance of any regulatory duty on behalf of the government.

Whether or not the Court takes the case, the issue will continue to surface.  It may well provide another reason why some of the SROs (the stock exchanges, for example), ought to reconsider their role as regulators.      


The Declining Regulatory Role of the Stock Exchanges 

The NYSE is a for profit public company.  It has had that status since 2006.  See Exchange Act Release No. 53382 (Feb. 27, 2006).  As with all for profit corporations, the board has traditional fiduciary obligations that require it to act in the best interests of shareholders and to maximize profits.  At the same time, however, the NYSE retains a regulatory function.  At the moment of demutalization, the Exchange was responsible for broker-dealer oversight, surveillance, and listing standards, among other things.

The need to profit maximize potentially conflicts with the regulatory function.  Delisting a company or evicting a broker might adversely affect profits.  Both the SEC and the NYSE were aware of this tension at the time of demutalization.  One possibility would have been to remove all regulatory functions from the exchange, perhaps transferring them to the SEC or another self regulatory model.  Some countries have done this.  The other possibility, and the one ultimately selected, was the retnetion of regulatory responsibilities but with creation of a separate body within the NYSE designed to insulate the function from the profit making motives of the holding company. 

This was done through the creation of NYSE Regulation, a New York non-proft.  Although a subsidiary, , all directors on NYSE Regulation must be "independent" of the holding company's management.  While directors of the holding company can sit on the NYSE Regulate board, they must remain a minority of the board.  (Two of the eight directors of NYSE Regulation are also directors on the holding company).  The CEO of NYSE Regulation reports only to that board.  These requirements are ensconced in the bylaws of NYSE Regulation. 

Despite these prophylactic measures, some commentators at the time of demutalization remained concerned that the for-profit structure was inconsistent with regulatory functions.  A commentator raised concern about funding, questioning "whether NYSE Regulation will have to generate sufficient sanctions and penalties to fund its own operations, or, alternatively, whether NYSE Group and New York Stock Exchange LLC will be willing to adequately fund NYSE Regulation's expenses without regard to the impact on NYSE Group's 'bottom line.'"  Exchange Act Release No. 53382 (Feb. 27, 2006).

Nonetheless, the Commission allowed the NYSE to retain its regulatory function.  Since then, however, the NYSE has given up its regulatory functions at a rapid pace.  The merger between the NASD and the NYSE broker-dealer oversight function saw the consolidation of member regulation in the hands of FINRA.  See Exchange Act Release No.  56148 (July 26, 2007).  The transaction left the NYSE with some modest broker-dealer oversight responsibilities (mostly enforcement of NYSE only rules), surveillance responsibilities, and oversight of listing standards.  See Id. n. 13 ("Following the closing of the Transaction, NYSE Regulation will continue to oversee market surveillance and listed company compliance at the NYSE and NYSE Arca."). 

The next shoe to drop was the transfer of surveillance functions to FINRA.  In a press release dated May 4. 2010, FINRA and the NYSE announced that FINRA would assume "responsibility for performing the market surveillance and enforcement functions currently conducted by NYSE Regulation."  There was a compelling logic to the decision.  With much of the trading of NYSE stocks taking place off the exchange, surveillance by the NYSE of its own activities was capturing less and less of the market.

Nonetheless, the reality is that the latest transfer (once approved by the Commission) leaves that NYSE with only one significant regulatory function:  Listing standards.  Listing standards are critical components of the governance process.  Indeed, the market reforms likely to emerge from Congress will continue to use listing standards as a way of strengthening governance, particularly with respect to compensation committees of the board.

The time has come to reconsider whether the NYSE ought to spin off this remaining regulatory function.   How might that come to pass?  Perhaps the functions could be transferred to the Commission.  Indeed, this process is already underway.  In the financial reform legislation, the Commission is largely given the authority to define critical terms such as independent director (for the compensation committee) and independent compensation consultant.  In other words, listing standards will increasingly be written not by the NYSE but by the Commission.

The NYSE is a for profit company.  It deserves to engage in profit making activities without the constraints of regulatory obligations that can conflict with this goal.  


Deregulation and the Declining Competitiveness of US Stockmarkets

The Economist reported on a study by Grant Thornton about a decline in US securities markets.  The Study, A Wake-up Call for America, is here

It seems that as the number of listed companies decline, replacements are few and far between.  The lack of replacements comes from an IPO market that has yet to revive in any significant matter.  The reasons for the decline?  Not SOX, as much as some would like to believe. 

Instead, the problem can be traced to deregulation that encouraged "high-frequency" trading that largely ignores smaller public companies.  As the Economist described:

  • The slide in listings began in the mid-1990s, at around the time that America saw an array of regulatory changes designed to advance high-speed, low-cost trading, such as the introduction of online brokerages and new order-handling rules. An accidental victim of this technological revolution, the report says, was the ecosystem that helped bring small firms to market and then nourished them once there. “It’s a bargain-basement market today,” says David Weild, a co-author of the report. “You get what you pay for, and that’s nothing but trade execution.”     
  • The “high-frequency” traders who have come to dominate stockmarkets with their computer-driven strategies pay less attention to small firms, preferring to jump in and out of larger, more liquid shares. Institutional investors, wary of being stuck in an illiquid part of the market, are increasingly following them.
And, in the end, what does Grant Thornton recommend?  More, not less, regulation.
  • More is needed to stop the precipitous listings decline, argues Grant Thornton. It proposes a twofold solution: the establishment of a new market segment without automated trade execution but with fixed trading commissions, some of which would be used to fund research; and looser rules governing institutional investment in pre-IPO companies. Such upheaval would be controversial. But something dramatic may be needed if America wants to retain its stockmarket hegemony.

SOX and Protecting the NYSE from Itself

We haven't heard any good SOX bashing lately, particulary in an era when the need for more rather than less regulation of corporate governance is the order of the day.  Nonetheless, we were treated to a dose of criticism by Duncan Niederauer, the CEO of the NYSE.  After discussing the delisting of the insurance giant, Allianz, and conceding that the company went home because of deeper, more liquid markets, he turned his sights on SOX.

  • The bad news, according to Mr. Niederauer, is that while Allianz had some legitimate reasons to delist, the 2002 Sarbanes-Oxley law may very well have been the nail in the coffin. The act—which increased the reporting burden on companies—is "one of the things that has made us less competitive," and "hurt the U.S. capital markets competitiveness."
  • How so? He says some companies "use it as a differentiator because they don't have a strong reputation and don't come from markets with solid regulatory oversight." But "I'm afraid in the case of companies like Allianz, it's a drag," because complying with Sarbanes-Oxley ends up costing companies a lot of money. It is worth noting, he adds, that though five Russian companies are listed in New York, not one has been added since 2004.

There are several observations to make about this comment.  First, Allianz is a very large company, with 703 billion euros under management.  Could it really be the case that a company this large decided to delist because of the marginal costs associated with SOX?  Highly unlikely.

Second, Niederaus notes in his own remarks that 70 Chinese companies have listed on the NYSE.  These companies did not have to turn to the NYSE.  If they merely wanted a presence outside of China, they could have listed on the London Stock Exchange (LSE).  One reason they likely chose to list in the US is that the NYSE has a much tougher set of corporate disclosure and corporate governance requirements.  Because of these stricter requirements, investors in China know that companies listing on the NYSE are the best and safest.  As a result, they attract more investors and their share prices undergo a commensurate increase.  It has long been empirically demonstrated that foreign companies listing in their home market and on the NYSE see a statistically significant increase in share prices.  The same is not true for the LSE. 

In other words, SOX helped the NYSE get those 70 Chinese companies.  Regulations can go too far but in this case, the US (and the NYSE) benefited from the higher bar rather than the lower one that Niederauer seems to want.


Broker Non-Voting and the SEC: The Next Steps

With Rule 452 amended, are matters finished?  Not exactly. 

First, the rule applies to members of the NYSE.  Brokers that are not subject to the requirement are outside the rule's boundaries.  That means that brokers who hold shares for NYSE or Nasdaq companies but are not members of the NYSE (only members of FINRA) can vote in uncontested elections (or on any other matter).  The only limits are those imposed by state law.  As a result, management may still receive in each election a block of discretionary votes.  Having said that, it is likely that most discretionary votes are in the hands of NYSE brokers.  Moreover, non-NYSE brokers may follow Rule 452 anyway as a sort of safe harbor.

Second, the Rule continues to regulate discretionary voting in the negative.  There is no definition of routine.  Instead, there are 18 categories of non-routine and one catch-all category.  The catch-all provides:  

  • the person in the member organization giving or authorizing the giving of the proxy has no knowledge of any contest as to the action to be taken at the meeting and provided such action is adequately disclosed to stockholders and does not include authorization for a merger, consolidation of any matter which may affect substantially the rights or privileges of such stock.

In other words, a proposal that has the potential to substantially affect the rights or privileges of stock would be included. 

Notwithstanding the list, the NYSE will note each matter that is or is not subject to discretionary voting in the weekly bulletin.  See Rule 452.11 (“When member organization may not vote without customer instructions.—In the list of meetings of stockholders appearing in the Weekly Bulletin, after proxy material has been reviewed by the Exchange, each meeting will be designated by an appropriate symbol to indicate either (a) that members may vote a proxy without instructions of beneficial owners, (b) that members may not vote specific matters on the proxy, or (c) that members may not vote the entire proxy."). 

This places extraordinary discretion in the hands of the NYSE in determining when discretionary votes can be cast.  Indeed, the NYSE has been criticized on occasion for its exercise of discretion in this area.  See Amy Goodman & John Olson, A practical guide to SEC proxy and compensation rules, at 12.3[1], n. 21 (2001).

Rule 452 should be amended to reverse the presumption.  All matters submitted to shareholders should be deemed non-routine, with discretionary voting not allowed.  Only if specifically listed as routine would discretionary voting be permitted (approval of the auditor, etc.).  This will reduce the discretion of the NYSE and ensure that shareholders and investors are aware of the matters considered routine.  It will put on public display the matters that brokers can influence with their discretionary votes, making the system more transparent.

The amendment to Rule 452 adopted by the Commission is a start but there is a long way yet to go.


The Constitutionality of the PCAOB Goes to the Supreme Court

The Supreme Court has agreed to hear the case arguing against the constitutionality of the PCAOB.  The case raises issues about the limits that can be imposed on presidential removal authority for officials in the executive branch.  The PCAOB members can only be removed for cause by the Securities and Exchange Commission.  As a result, there is a double layer of removal restrictions, not something unheard of but the first time it has been raised so explicitly before the Supreme Court.  The PCAOB was a unique organization created with the intent of melding together private market sensibilities and government regulation.  Thus, the organization is a non-profit that pays private sector salaries but is overseen by the SEC. 

To the extent that the PCAOB is struck down (and there is reason to believe the conservative majority will do so), it will ironically eliminate an experiment with a more market driven form of regulation.  The PCAOB can instead be transformed into a full blown independent agency or a division of the SEC, something one would ordinarily think the plaintiffs in the case would eschew.


Nasdaq Listing Requirements Suspension Continued, Joined by NYSE

We wrote on Feb 4th that Nasdaq received an extension of its request to suspend the one dollar minimum listing standards until April 19th. That request has now been extended through July 19, 2009, and the NYSE filed a proposed rule to adopt a similar suspension until June 30.


The rule to be suspended requires that if a security fails to have a closing bid price of at least one dollar for 30 consecutive business days, it is considered deficient and given a 180-day period to regain compliance. Under the suspension, both the 30-day period and the 180-day period are held in abeyance until the suspension is ended.


In addition to suspending the dollar bid value requirement, the NYSE previously suspended its average global market capitalization listing requirement that companies not fall below $15 million for 30 consecutive days. This rule suspension was to have expired April 22, but is now proposed to be extended to June 30, corresponding to the dollar value suspension.


These requests for continued suspension of the listing standard are not surprising. The suspension is immediately effective and is certain to be approved as markets continue to be in “unprecedented turmoil.”


Nasdaq Listing Requirements Suspended Until (at least) April

Last October Nasdaq requested that the SEC allow it to suspend the listing requirement that requires companies to have a minimum bid price of $1. Nasdaq rules classify a security as “deficient” if it has a closing bid price of less than $1 for thirty consecutive business days. Once deficient, issuers have an automatic180 day period to regain compliance by having a closing bid price of at least $1 for ten consecutive business days, and can receive an additional 180 days if all other listing requirements are met. According to the Nasdaq proposal to the SEC, by October 9, 2008 there were 344 securities trading below $1, and another 300 securities trading between $1 and $2, up from 64 securities below $1 at the end of September.


The SEC agreed with Nasdaq’s assessment that this drop in bid price was not a result of a “fundamental change in the underlying business model or prospects” for these companies, but was a result of “decline in general investor confidence,” and that these companies remain “suitable for continued listing.” Since the proposed rule change would not endanger investors or burden competition and was in the best public interest, the SEC waived the 30-day operative delay between receipt of the proposal and its implementation. The rule suspension became immediately effective on October 16, 2008 and was to expire January 16, 2009.


The effect of the rule suspension is not only to ignore share bid price in determining whether a listing deficiency exists, but also to suspend calculating the 180-day recovery period for any security that was deficient before October 16. If a company’s security was 150 days into its initial deficiency period at October 16, the company would have 30 days after January 16th to recover or seek an additional 180-day extension.


On Dec 18, 2008, Nasdaq requested an extension of the rule suspension to April 19, 2009, noting that “extraordinary” market conditions continue. (As of January 30, 2009, there were 430 shares listed on Nasdaq for $1 or less.) Unlike the first proposal, for which the SEC waived the 30-day operative delay, there is time for the SEC to publish this rule for notice and comment. The initial proposal was published post-approval, and received one supportive comment.  One blogger suggests that the rule be permanently eliminated as a way to discourage companies from doing a reverse stock split merely to meet the listing requirement.  Comments must be submitted to the SEC referencing File Number SR-NASDAQ-2008-009 on or before February 5, 2009.


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