December 29, 2008

Nasdaq Extends its Suspension of Price and Market Value Tests

Nasdaq has announced that it filed a rule change with the SEC extending – until April 20, 2009 – the exchange’s suspension of its continued listing standards which require a minimum $1 closing bid price and minimum market value. Nasdaq is seeking the extension now, given that there is little sign of a market turnaround that would provide relief to listed issuers with shares trading below $1 or with otherwise depressed market values. In its rule filing, Nasdaq notes that since the temporary suspension took effect back in October, the number of securities trading below $1 and between $1 and $2 has increased.

Nasdaq has also proposed to change the minimum bid price required for initial listing on the Nasdaq Global and Global Select Markets from $5 to $4. In its rule filing, Nasdaq indicates that it “believes that this change will permit the listing of more companies on Nasdaq, thereby enhancing investor protection by allowing these companies, and their investors, to benefit from Nasdaq’s liquid and transparent marketplace, supported by strong regulation including Nasdaq’s listing and market surveillance and FINRA’s independent regulation.” The proposed $4 price is also similar to the recently adopted requirement for initial listing on the New York Stock Exchange.

Don’t Forget to Watch those Reps and Warranties

This Sullivan & Cromwell memo notes how the Ninth Circuit Court of Appeals recently took an approach consistent with the SEC’s position expressed in the 21(a) report regarding The Titan Corporation, Exchange Act Release No. 51283 (March 1, 2005). In Glazer Capital Management v. Magistri, No. 06-16899 (9th Cir., Nov. 26, 2008), the Ninth Circuit rejected a company’s argument that a complaint alleging securities fraud should be dismissed because alleged misstatements were contained in an acquisition agreement included as an exhibit to an Exchange Act report, rather than as part of the disclosure included in the body of the report.

As 10-K season approaches, this recent decision serves as a good reminder to look at the totality of disclosure provided by the report and the exhibits, and to consider what additional explanatory language might be necessary to clearly describe the context in which representations and warranties in an agreement should be considered.

For more guidance, take a look at our “Disclosure” Practice Area on If you are not a member, check out a 2009 No-Risk Trial, and if you are already a member, be sure to renew now for 2009.

SEC Takes Steps to Create A CDS Exchange

You know that pesky Christmas gift that you received but did not necessarily want or need in the first place and don’t really know what to do with now that you have it? It seems that the SEC was going for that effect with its Christmas Eve “gift” for the credit default swap (CDS) market (or at least some part of the CDS market).

As I have noted before in the blog, the credit default swap market has been merrily chugging along with little or no oversight from the Federales for many years now, laying the foundation for the financial equivalent of “nuclear winter” all along the way. While many have gone out of their way to note the systemic risk that these instruments have created throughout the financial system, perhaps not surprisingly CDS have only received focused regulatory attention in the past three months or so – pretty much since the stuff has hit the fan. [Other than, perhaps, the SEC’s prescient decision in June 2007 to permit trading of credit default options on the CBOE – a great way to spread some credit default exposure to retail investors who didn’t have enough already through their money market and mutual funds.]

Now the SEC has announced that it has granted temporary exemptions to allow an organization named LCH.Clearnet Ltd. to operate as a central counterparty for CDS. Further, the SEC has established (by order) an automated trading system approach for any exchange created for the purpose of trading certain CDS. All well and good, except for the fact that market participants may not have thought that they needed any such exemptions given the question of whether in fact CDS are securities subject to SEC jurisdiction. Clearly, the philosophy at play here is: “If you build it, they will come”

The SEC’s current actions are also limited by the continuing effect of that brilliant legislative initiative from sunnier days otherwise known as the Gramm-Leach-Bliley Act, which specifically excludes both non-security-based and security-based swap agreements from the definition of security under Section 3(a)(10) of the Exchange Act. The SEC points out that this inconvenient provision will continue to apply, so the Commission’s actions will only apply to those CDS that are not swap agreements.

It seems more and more likely now that the question of how to deal with CDS and the broader question of what to do about the larger OTC derivatives market will be high on the legislative agenda as regulatory reform picks up steam in the coming months.

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– Dave Lynn