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Frequently Asked Questions
  Non-GAAP Measures: Questions and Insights
Identification Number 1511
Clearhouse
Non-GAAP Measures: Questions and Insights
Publication Date: April 9, 2018

Cindy Fornelli is the Executive Director of the Center for Audit Quality (CAQ).

The use of financial measures that do not conform to US Generally Accepted Accounting Principles (GAAP) has long been the subject of debate—even controversy. While it has ebbed and flowed over the years, this discussion is unlikely to disappear.

Consistent with its mission to convene and collaborate with stakeholders to advance the discussion of critical issues, the CAQ held a series of 2017 roundtable discussions regarding the presentation and use of non-GAAP measures—and the opportunities to enhance trust and confidence in this information. Each roundtable was attended by approximately 20 to 25 individuals including audit committee members, management, investors, securities lawyers, and public company auditors. Because the presentation and use of non-GAAP measures can vary from industry to industry, each roundtable focused on a specific industry: pharmaceutical, real estate, and technology.

These events each began with a set of key questions, on which participants provided no shortage of insights. We have published a full report, Non-GAAP Measures: A Roadmap for Audit Committees, on the roundtables' findings, as well as a companion video that provides additional context and real-life examples of how audit committees are thinking about non-GAAP measures.

Here, we provide some high-level key themes.

Why is GAAP so important?

No discussion of non-GAAP measures can take place without a discussion of GAAP itself. At the roundtables, participants made clear that they view the GAAP information as the "bedrock" or "starting point" for the financial information that companies present. GAAP, they said, provides a useful baseline that offers comparability from one company to the next.

If GAAP is the bedrock, why do companies present non-GAAP measures?

Participants were asked to share their views on what drives the presentation and use of non-GAAP measures. Several common themes emerged from the discussion.

  • Demand from investment analysts: Participants shared that requests from investment analysts are often a primary reason company management chooses to present a non-GAAP measure. Investment analysts find that non-GAAP measures help them better understand the company's underlying business performance or forecast the company's long-term value in their proprietary models.
  • Desire to tell the company's story: Participants also acknowledged, however, that company management does not present non-GAAP measures solely for investment analysts. Rather, non-GAAP measures can be a tool to help tell a company's story and provide users of the information with insight into how management evaluates company performance internally. In some cases, non-GAAP measures are also an input into how the company compensates employees for company performance.

What are top challenges related to non-GAAP measures?

Participants acknowledged that non-GAAP measures present challenges to certain stakeholders in the financial reporting supply chain.

  • Investors are challenged by the lack of consistency in the calculation of non-GAAP measures from one company to the next. Such irregularity makes it difficult for non-GAAP measures to be compared across companies—even within the same industry. It also can be a challenge for end-users to know whether the performance reported by the press is a GAAP measure or a non-GAAP measure.
  • Management representatives indicated that they spend a significant amount of time (1) discussing what information to include in or exclude from non-GAAP measures they present, and (2) making sure the information is presented fairly and disclosed transparently.
    Audit committees noted that their challenges related to non-GAAP measures tend to be an extension of management's challenges. Audit committees want to understand the reason the company is presenting the measure, and the roles and responsibilities of those involved with the information, including company personnel (e.g., finance and internal audit) and the external auditor. Further, they want to know how the company's non-GAAP measures compare with the information presented by peer companies.

To address challenges, should non-GAAP measures be standardized?

Not necessarily. Representatives from management at all of the roundtables indicated that standardization may limit their ability to tell their companies' story.

The real estate industry makes use of a supplemental standardized non-GAAP measure: funds from operations (FFO). The FFO measure, which was defined by Nareit, is in widespread use and is recognized by the Securities and Exchange Commission. That said, in addition to reporting Nareit defined FFO, companies report various forms of FFO (e.g., adjusted FFO, normalized FFO, company FFO). So even within one industry that has agreed on a standardized non-GAAP measure, there are still variations on how it is reported.

Why is dialogue so important around non-GAAP measures?

Participants emphasized the significant judgment involved in determining how to treat a one-time transaction or event in non-GAAP measures, and they agreed that company management and audit committees strive to execute good judgment when making these decisions. To that end, many companies have enhanced the rigor of their presentation and disclosure of these metrics.

There was consensus among participants that audit committees can promote rigor related to non-GAAP measures by having a dialogue with company management as well as internal and external auditors. Among other things, this dialogue can help the audit committee to set clear expectations regarding the roles and responsibilities—relative to non-GAAP measures—of each member of the financial reporting supply chain.

What is the external auditor's non-GAAP role?

In a nutshell, the external auditor's opinions on the company's financial statements and, when required, the effectiveness of the company's internal control over financial reporting (ICFR) do not cover non-GAAP measures. Professional auditing standards indicate that the auditor should read non-GAAP measures presented in documents containing the financial statements (such as annual and quarterly reports) and consider whether non-GAAP measures or the manner of their presentation is materially inconsistent with information appearing in the financial statements or a material misstatement of fact.

Though external auditors do not audit non-GAAP measures as part of the financial statement or ICFR audits, audit committees and management may consider leveraging the external auditors as a resource when evaluating non-GAAP measures.

How can the audit committee enhance its non-GAAP role?

At the roundtables, there was wide recognition of the benefits of increased audit committee oversight and involvement with non-GAAP measures. The CAQ's full roundtable report offers audit committees insights on the way forward. It is available free of charge at the CAQ website.

***

Also from the CAQ see Preparing for the Leases Accounting Standard: A Tool for Audit Committees. This tool is designed to help audit committees exercise their oversight responsibilities as companies implement the new lease accounting standard, which will begin to take effect in January 2019.

***

A securities lawyer, Cindy Fornelli has served as the Executive Director of the Center for Audit Quality since its establishment in 2007.


The views and opinions expressed herein are the views and opinions of the author at the time of publication and may not be updated. They do not necessarily reflect those of Nasdaq, Inc. The content does not attempt to examine all the facts and circumstances which may be relevant to any particular company, industry or security mentioned herein and nothing contained herein should be construed as legal or investment advice.

Publication Date*: 4/9/2018 Mailto Link Identification Number: 1511
Frequently Asked Questions
  Revitalize Biotech with these 5 Policy Initiatives
Identification Number 1509
Clearhouse
Revitalize Biotech with these 5 Policy Initiatives
Publication Date: April 3, 2018

In this post, Charles Crain of the Biotechnology Innovation Organization (BIO) highlights five legislative and regulatory reforms that he believes would address some of the principal challenges facing biotech companies that go public. Notably, several of these proposals are modest revisions to existing SEC rules and federal legislation, including the JOBS Act. These proposed reforms are consistent with Nasdaq's comprehensive blueprint for stronger, more robust public markets: The Promise of Market Reform: Reigniting America's Economic Engine.

1. Bring transparency to short seller positions

Biotech companies, many in the pre-revenue phase, are easy targets for short sellers. That's primarily due to a lack of liquidity in their stocks and blinded FDA clinical studies that make it easy to circulate false information in the market to drive down stock prices. This includes a new spurious breed of short sellers who initiate patent challenges for the sole purpose of driving the stock price down to make money. This disturbing behavior is highly damaging to industries that are based on intellectual property—like biotech.

BIO has been working with Nasdaq to advocate for increased transparency around short selling positions, which would help inform the market and prevent biotech companies from being taken advantage of by investors who don't have the best interest of long-term investors (and patients of these potentially life-saving drugs and therapies) at heart.

2. Establish SEC oversight of proxy advisory firms

Proxy advisory firms have developed an outsized market influence over biotech companies, relative to their theoretical mission. These firms claim they're only providing recommendations to investors, but what they're actually doing is inserting their own judgment over investors, company management, and corporate boards in terms of how companies should be run.

In an industry like biotech, which has a unique business model that isn't directly comparable to other industries, these one-size-fits-all recommendations can be misleading to investors and damaging to the companies themselves.

BIO and Nasdaq both support the Corporate Governance Reform and Transparency Act, a bi-partisan bill that has already passed the House of Representatives. This bill provides for SEC oversight of proxy advisory firms, and BIO believes it will help reduce conflicts of interest and allow investors to make informed proxy voting decisions.

3. Allow pre-revenue small businesses to maintain SOX 404(b) exemption for 10 years

External auditing of a company's internal controls, as required by SOX 404(b), is expensive for small businesses, potentially costing upwards of $500,000 annually. That money could otherwise be spent on life-saving R&D, and given the simple business model and straightforward corporate structure of small biotech firms, the benefits don't justify the costs. These companies typically have 30 or 40 employees, almost all of whom are scientists, so there's not much complicated financial maneuvering going on; clinical trial results and scientific data are more material concerns.

The JOBS Act was tremendously helpful to the biotech industry; more than 250 emerging biotech companies relied on provisions in the law to help them go public. This compares to just 55 biotech IPOs in the five years before passage of the JOBS Act. The positive impact of this legislation was due in part to the five-year exemption from the SOX 404(b) external auditing requirements granted to emerging growth companies. However, it can take upwards of 15 years to develop a biotech drug, not five, so the cost burden of external auditing is still going to hit some companies in their pre-revenue phase.

BIO has endorsed the Fostering Innovation Act, a bi-partisan legislative solution to reduce the cost of auditing internal controls. The Fostering Innovation Act extends the five-year exemption to 10 years for certain pre-revenue companies. Given that it's a very targeted piece of legislation (only the smallest of companies are still pre-revenue at year six), we have been able to get strong congressional momentum behind this solution, which has already passed the House.

4. Expand the SEC's definition of "non-accelerated filer"

The SEC's non-accelerated filer definition, which scales compliance requirements for small businesses (including a SOX 404(b) exemption), is presently limited to companies with a public float below $75 million. In BIO's view, that limit is too low: a 20 or 30-person biotech may be valued as high as $150-$200 million. That doesn't mean such a company actually has $200 million sitting in their bank account to be spending on Section 404(b); it means their investors are optimistic about the company's potential to fight devastating diseases one day in the future.

BIO is working with the SEC, as well as allies like Nasdaq, to expand the definition of a non-accelerated filer to allow companies with a public float below $250 million to qualify, and to add a revenue component that exempts pre-revenue companies from SOX 404(b) compliance. This will allow pre-revenue companies to focus investor funds on R&D, instead of external auditing that doesn't provide additional value to investors.

Based on the SEC's initial analysis, there are 782 additional public companies that would be added to the universe of non-accelerated filers if the public float limit was raised from $75 million to $250 million. Assuming each of these companies spent on average of $500,000 per year in external auditing, expanding the definition would divert nearly $400 million from compliance to R&D and business development. On the flip side, investor exposure is minimal. If the SEC makes this small, technical change to the definition, only 0.03% of the total float in the market would be exempted from SOX 404(b) compliance via the non-accelerated filer exemption.

5. Implement tax code reforms that incentivize investment in pre-revenue innovators

While 90% of BIO's membership is in the pre-revenue phase, the remainder are revenue-generating companies that have long been hamstrung by high corporate tax rates in the U.S. BIO member companies were therefore very pleased that Congress was able to lower the corporate rate, move to a territorial system, and maintain the R&D credit in the Tax Cuts and Jobs Act. The reduction in the corporate rate will allow those companies more capital to invest in R&D in the United States, and create opportunities to pursue partnerships and mergers with smaller biotech businesses (which is often how smaller biotech companies fund the next stage in their research).

More could be done, however. There are tax policy levers that Congress can pull on the pre-revenue side to incentivize innovation for these small businesses and pre-revenue companies, including investor-side incentives and rules to help companies better utilize net operating losses (NOLs) and/or R&D credits, neither of which pre-revenue companies can use because they don't have a tax liability to offset. For example, BIO supports allowing a small R&D company's NOLs to be carried forward after a financing round or M&A event, rather than being limited by Section 382 of the tax code. We also want to make sure the qualified small business stock rules in Section 1202 work as effectively as possible to attract investors to growing biotechs via the Section's 100% capital gains exclusion.

For more information, read Nasdaq Talks to Congressman Sean Duffy and Vitae Pharmaceuticals' CEO Jeff Hatfield about Proxy Advisor Legislation and Short Selling Transparency >>

***

Charles Crain is the Director of Tax & Financial Services Policy at the Biotechnology Innovation Organization (BIO). Charles's portfolio includes capital markets, securities, accounting, and tax policies that impact BIO's member companies, including the JOBS Act, legislation to enhance capital markets access for emerging companies, market structure reform, decimalization and tick size, and small company auditing standards. Charles serves as BIO's representative to the Equity Capital Formation Task Force and the SEC Government-Business Forum on Small Business Capital Formation.

BIO is the world's largest trade association representing biotechnology companies, academic institutions, state biotechnology centers and related organizations across the United States and in more than 30 other nations. BIO represents more than 1,100 biotechnology companies, academic institutions, state biotechnology centers, and related organizations.


The views and opinions expressed herein are the views and opinions of the author at the time of publication and may not be updated. They do not necessarily reflect those of Nasdaq, Inc. The content does not attempt to examine all the facts and circumstances which may be relevant to any particular company, industry or security mentioned herein and nothing contained herein should be construed as legal or investment advice.

Publication Date*: 4/3/2018 Mailto Link Identification Number: 1509
Frequently Asked Questions
  Five Things Your Company Can Do Now to Prepare for GDPR
Identification Number 1499
Clearhouse
Five Things Your Company Can Do Now to Prepare for GDPR
Publication Date: March 1, 2018

Enforcement of the EU's General Data Protection Regulation (GDPR) begins in just a few months on May 25th of this year. Consistent with the EU's approach to privacy as a "fundamental human right," the regulation requires businesses established outside of the EU to protect personal data and individuals' privacy rights when offering goods and services in the EU or monitoring the behavior of EU citizens. Companies that fail to comply face steep fines (up to four-percent of total "turnover" or revenue). The business case for compliance with GDPR goes beyond fines from the EU: Poor data security can costs businesses dearly in terms of data breach mitigation costs as well as consumer confidence and trust.

Time is running out for U.S. companies transacting business in the EU to become "GDPR ready," but given that the GDPR leaves much to interpretation, the exact requirements of the law are likely to evolve over time. Michael Kallens, Associate General Counsel, Ethics and Compliance at Nasdaq, shares practical advice for companies in the midst of ensuring their privacy programs meet GDPR's and EU regulator expectations.

1. Think of May 2018 as milestone, not a deadline.

GDPR is a standards and principles-based law, rather than prescribing precise technical requirements. Formal guidance from the EU is pending on many fronts, so there is a great deal of uncertainty about what exactly the law requires, how it will be interpreted, and how it will be enforced.

As companies prepare to meet the regulation's enforcement date of May 25, it's important to remember that an entire eco-system will impact how this law is applied. This includes:

  • Enforcement and audits (which will not occur until after May 2018);
  • National laws implementing the GDPR, which can add or vary requirements in the regulation;
  • Intersection of the GDPR with other laws, such as MiFID2, ePrivacy, and employment laws;
  • General best practices and industry-specific best practices;
  • Customer requirements, especially if the company is a processor, in the B2B space or delivering services to large multi-national companies;
  • Actions by public interest groups;
  • Shareholder expectations; and
  • Events including privacy incidents, hacks, and data mishandling.
Even if a company has put in place compliance measures to meet core elements by May, it will need to adjust the program and monitor for any changes as the initial enforcement actions and cases alleging non-compliance will bring more clarity to how obligations will be applied in practice.

2. Prioritize, plan and get buy-in.

When developing the plan to become compliant with GDPR, consider all the necessary stages of rollout: outreach to build initial awareness, baselining compliance program and identifying improvements, operationalizing enhancements, and maintaining continuing compliance. A project of this magnitude requires a formal project manager in addition to subject matter experts to allocate work, manage tasks and provide rigor and accountability around the effort. The project needs to include a clear transition point where the effort will convert from a "project" to an ongoing, operational compliance program that will continue indefinitely.

Consider the following when prioritizing compliance activities and/or enhancements:

  • Tasks with long lead times or dependencies like programming or system changes;
  • Changes to core business processes (as opposed to minor adjustments or changes to contingent/ancillary processes);
  • Processes like data mapping that involve data calls, which always take a longer time to complete than estimated;
  • Regulatory impacts particular to your company's industry, including requirements needed to comply with customer commitments or continue to deliver services; and
  • Opportunities for privacy to be incorporated with other change efforts (e.g., existing projects to improve information security or data governance).
Once the plan comes together, buy-in and continued engagement from senior executives is critical to ensuring the plan will be adhered to and necessary decisions are escalated to the right level.

Companies should not try to do everything at once but rather prioritize based on needs and risk. During the awareness phase of the project, publicize the project plan, including the calendar for implementation. A good outreach and awareness effort will provide details to the departments and functions that will be involved in compliance, while simultaneously communicating how the project will be staged so the teams know when requirements relevant to them will be addressed.

3. Build out the implementation team and delegate.

Responsibility for building up to compliance with the GDPR should be distributed throughout the organization, with leads reporting to a central project team and supported by compliance – not compliance doing everything for everyone. Any enterprise of significant size will need to establish a formal project management structure using well-established governance practices for significant change management projects, including a steering committee, a project manager following project management discipline, subject matter experts, and work streams with assigned leads.

The GDPR will affect virtually every type of professional discipline supporting the organization, including HR, marketing, audit, law, and finance. Professional organizations in each of these disciplines are setting up forums and crafting best practices to support compliance. Corporate compliance should encourage project leads within these various disciplines to be engaged with their professional associations to gather best practices and remain informed. It is important to ensure that the project does not become a "legal project" or an "information security program" as success is dependent on engagement in all departments throughout the organization.

Beyond what the law requires, companies serving as data processors need to consider the legal obligations that GDPR introduces directly on the data processors as well as customer requirements and market practices of competitors. To help account for this, sales and account management teams should also be involved.

4. Document, document, document.

A core tenant of privacy compliance is to "say what you do and do what you say" regarding personal data handling. With GDPR, contemporaneous documentation of how customer data is being handled within the organization is critical. A key update to the law is maintaining a record of processing regarding each type of personal data used by the organization. Documenting processes is a tedious task, but one that requires assigned responsibility to ensure it is completely in a timely manner and consistently maintained. Companies should consider requiring key business owners to certify to the accuracy of their portions of the record of processing similar to how they certify compliance with SOX requirements.

5. Account for cultural challenges to compliance.

A company's culture can have greater impact than policies and procedures on compliance; therefore, any GDPR compliance program needs to account for the culture of the organization. Consider whether the company is a "hoarder of information," "asks forgiveness rather than permission when innovating" and other ways corporate culture may impact data privacy compliance. And as with any major change, a plan to build to compliance with the GDPR should consider ways to influence the levers of change within the organization. Any such change should look to build on the strengths of the culture to achieve compliance.



Learn more about Nasdaq BWise and how BWise can support your organization with all aspects of GDPR compliance >>

***

Michael Kallens is an Associate General Counsel in Nasdaq's Office of General Counsel and a senior member of Nasdaq's Global Ethics and Compliance Team. Michael has led industry working groups on developing best practices for corporate ethics programs and is a frequent speaker on ethics and compliance topics. In 2014, he received the Outstanding In-House Counsel Award from the Association of Corporate Counsel-National Capital Region for his work in the area of corporate ethics and compliance.

Publication Date*: 3/1/2018 Mailto Link Identification Number: 1499
Frequently Asked Questions
  Nasdaq Proposes to Modify Shareholder Approval Rules
Identification Number 1494
Clearhouse
Nasdaq Proposes to Modify Shareholder Approval Rules
Publication Date: February 21, 2018 

During 2016 and 2017, Nasdaq solicited comments from, and held discussions with, market participants regarding whether, given the changes in the capital markets over the past 30 years, Nasdaq could update its shareholder approval rules to enhance the ability for capital formation without sacrificing investor protections. Based on the feedback received, and Nasdaq's experience, Nasdaq has proposed to amend its rules to: (i) change the definition of market value for purposes of the shareholder approval rules from the closing bid price to the lower of the closing price or the average closing price of the common stock for the five trading days immediately preceding the signing of the binding agreement; and (ii) eliminate the requirement for shareholder approval of issuances at a price less than book value but greater than market value.

The Securities and Exchange Commission is seeking comments on this proposal. We encourage all interested parties to review the detailed description of these proposed changes in our rule filing and provide comments to the SEC before March 13, 2018.

Read the proposed rule change in the Federal Register >>

Submit a comment on SR-NASDAQ-2018-008 >>
Publication Date*: 2/21/2018 Mailto Link Identification Number: 1494
Frequently Asked Questions
  Enhancing Transparency in Regulation
Identification Number 1480
Clearhouse
Enhancing Transparency in Regulation
Publication Date: January 10, 2018 

At Nasdaq, we believe transparency of our Listing Rules, policies and procedures results in fairer and more effective regulation. To this end, in 2012, Nasdaq created the Listing Center's Reference Library, which today houses more than 400 frequently asked questions about listing matters, 100 anonymized versions of appellate listing decisions and 350 written Staff interpretations of the Listing Rules. To reinforce the critical role transparency plays in our regulatory program, we continue to develop and enhance the utility of our Listing Center's Reference Library website and expand the information available through this free web portal.

It is with this in mind that Nasdaq Staff, in conjunction with the Nasdaq Listing Hearing and Review Council, developed the Listing Qualifications Transparency Report. This report includes anonymized information regarding the facts and circumstances that prompted Listing Qualifications Staff and Hearings Panels to exercise the discretion afforded by the Listing Rules to impose additional or more stringent criteria or to shorten time frames otherwise available to companies. It also describes instances when, following Listing Qualifications Staff review of certain share issuances, listed companies made significant changes to their transactions. We believe that sharing this information helps companies better understand how Nasdaq applies its listing rules, which helps companies and their advisors better comply with those rules. It is our expectation that we will prepare this report annually. We look forward to your comments, which can be emailed to us at staffinterpretations@nasdaq.com.

View the Transparency Report Here >>
Publication Date*: 1/10/2018 Mailto Link Identification Number: 1480
Frequently Asked Questions
  SEC Guidance on Pay Ratio Disclosure Rules
Identification Number 1273
SEC Guidance on Pay Ratio Disclosure Rules
Publication Date: October 26, 2016

The SEC recently released five Compliance & Disclosure Interpretations regarding the upcoming company pay ratio disclosure rules. These rules require companies to provide disclosure of their pay ratios for their first fiscal year beginning on or after Jan. 1, 2017. For most companies with a fiscal year that ends on December 31, the initial pay ratio disclosure must be included in the 2018 proxy statement using 2017 compensation.

Read more from the SEC >>
Publication Date*: 10/26/2016 Mailto Link Identification Number: 1273
Frequently Asked Questions
  Nasdaq MarketWatch: Making Market Surveillance SMARTer
Identification Number 1263
Clearhouse
Nasdaq MarketWatch: Making Market Surveillance SMARTer
Publication Date: October 7, 2016

In order to keep pace with sophisticated trading technology and manipulation techniques being used to gain a trading advantage, trading venues need the same level of sophisticated tools as trading professionals. For exchanges, the ability to maintain a fair, transparent and safe market is critical to attracting liquidity. Proven at over 50 marketplaces and regulators, SMARTS Market Surveillance is an industry benchmark for real-time and T+1 solutions for market surveillance, supervision and compliance. Nasdaq MarketWatch leverages Nasdaq’s own SMARTS technology to power surveillance on multiple exchanges around the world. In addition to its exchange and regulator audience, SMARTS surveillance solutions also power surveillance for over 120 market participants and 139+ markets.

Q:  What is SMARTS? 

A: SMARTS Market Surveillance leverages 20+ years of expertise from working with a wide range of needs – from simple to complex – to provide organizations with a robust platform to manage cross-market, cross-asset, multi-venue surveillance. The technology has powerful visualization tools to simplify the monitoring process by distilling complex information into a single snapshot that provides clear guidance on where to focus an investigation. Additionally, the technology correlates real-time and historical data with detection patterns to ensure early detection of unusual trading patterns that could be potential breaches of exchange trading rules and practices.

Q:  How does SMARTS benefit investors?

A: The graphical visualization tools that SMARTS provides help market surveillance analysts monitor the market in order to detect and prevent market manipulation and keep the market fair for all investors. SMARTS technology allows analysts to investigate specific time periods when trading occurred by distilling thousands of data points into an intuitive visualization that can pinpoint trading activities down to the millisecond. This allows for making a fair and equal assessment of all trading made by market participants.

Tools available for a surveillance analyst include graphical displays of trading activity, order book replays, market maker monitoring, market overview and statistical evaluation, data mining etc.

Q:  What is the future of SMARTS and market surveillance?

A: The future in market surveillance lies within market intelligence and machine learning. Instead of an analyst working through piles of data and sorting out false positives versus real indicators of market manipulation, the solution infrastructure will contain an intelligent machine that has pre-sorted and added logic to the alerts and the data, based on historical observations and patterns. This will highly improve the effectiveness of market surveillance and introduce more opportunities to include profiling of behavior and market participants into surveillance patterns. The future of market surveillance is evolving to meet the ongoing change in investor behavior and to adapt to new attempts to manipulate the market.

***

Learn More about Nasdaq’s state-of-the art market surveillance in this Dow Jones story >>

Publication Date*: 10/10/2016 Mailto Link Identification Number: 1263
Frequently Asked Questions
  Nasdaq Petitions SEC for Short Position Disclosure
Identification Number 1211
Clearhouse
Nasdaq Asks SEC for Short Position Disclosure
Publication Date: December 9, 2015

On December 7, 2015, Nasdaq filed a petition asking the SEC to adopt rules to require public disclosure by investors of short positions in exact parity with the disclosure requirements currently applicable to long investors, including the timing for such disclosure and when updates are required. In Nasdaq’s view, this is a much needed improvement to transparency around short positions.



Among other benefits, enhanced transparency will: (1) provide companies with insights into trading activity to help them engage with market participants and (2) give investors information to help them make meaningful investment decisions -- all of which enhance market efficiency and fairness.

Read the full petition >>

 
Publication Date*: 12/9/2015 Mailto Link Identification Number: 1211
Frequently Asked Questions
  How Exchanges Regulate Short Sales?
Identification Number 1191
Clearhouse
How Exchanges Regulate Short Sales
Publication Date: November 18, 2015

While short selling is generally legal, abusive short sale practices, including short sales affected to manipulate the price of a stock, are prohibited. The Securities and Exchange Commission and the Listing Exchanges regulate short selling through Regulation SHO.

Rule 201 of Regulation SHO is designed to prevent short selling in a security that has already experienced a significant intra-day price decline. In this manner, Rule 201 prevents further downward pressure on the security from short selling and allows long holders to sell first in the event of such a decline. Listing Exchanges, including Nasdaq, implement Rule 201.

What does Rule 201 of Regulation SHO require?

Rule 201 generally prohibits a trading center from executing or displaying a short sale order of an Exchange-listed security at a price that is less than or equal to the current national best bid price, if the price of that security has decreased by 10% or more from the prior day’s closing price.

How does Rule 201 of Regulation SHO operate for Nasdaq-listed securities?

Nasdaq systems enforce Rule 201 for Nasdaq-listed securities. If a Nasdaq-listed security has decreased by 10% or more from the prior day’s closing price, Nasdaq systems prevent the security from being sold short for the reminder of that day and until the close of trading on the next trading day.

If Nasdaq determines that the prior day’s closing price for a listed security was incorrect in the system and resulted in an incorrect determination of the trigger price, Nasdaq may correct the prior day’s closing price and lift the short sale prohibition before the end of that time period.

Similarly, if Nasdaq determines that the short sale prohibition was triggered because of a clearly erroneous execution in the security, Nasdaq may also lift the prohibition before the end of that time period.

What reference price does Nasdaq use to calculate the short sale prohibition?

Nasdaq systems calculate the Short Sale prohibition based upon the prior day’s closing price. If a security did not trade on Nasdaq on the prior trading day (such as due to a trading halt, trading suspension or otherwise), the prohibition will be based on the last sale on Nasdaq for that security on the most recent day on which the security traded.

In the case of a new security offering, such as an IPO, there will not be a closing price for the prior day and, thus, the Short Sale prohibition will not apply until the second day of trading.

How Does Nasdaq monitor for short sale violations?

Nasdaq MarketWatch monitors all trading that takes place on the Nasdaq exchanges. MarketWatch reviews stocks that are subject to short sale restrictions to establish that the restriction was triggered correctly and to investigate the reason for the decline in the stock. MarketWatch may contact the company for assistance in this investigation. If a company receives a call from Nasdaq MarketWatch, the company can always call MarketWatch back at the published phone number available on www.nasdaq.net to verify that the call came from Nasdaq.

Who can I talk to about short selling restrictions?

Companies with questions about short selling in their securities can contact Nasdaq MarketWatch at +1 800 537 3929 or at +1 301 978 8500. In appropriate situations, MarketWatch will work with FINRA to review short selling activity.

Where can I obtain more information about Regulation SHO?

More information about Regulation SHO is available at:

http://www.sec.gov/investor/pubs/regsho.htm

http://www.nasdaqtrader.com/Trader.aspx?id=RegSho

 
Publication Date*: 11/18/2015 Mailto Link Identification Number: 1191
material_search_footer*The Publication Date reflects the date of first inclusion in the Reference Library, which was launched on July 31, 2012, or a subsequent update to the material. Material may have been previously available on a different Nasdaq web site.
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