Nasdaq has been on a roll for the last six plus months, submitting proposed rule changes to the SEC focused on tightening listing standards and purging the exchange of stocks that maybe shouldn’t be listed on an exchange anymore, or ever have been listed in the first place. In the latest filing with this theme, the exchange proposes to adopt IM-5101-4, “which will provide Nasdaq with the authority to delist a security where the Commission has previously suspended trading and Nasdaq determines it appropriate and in the public interest to do so.” The SEC has posted a notice for public comment. The background in the notice provides some context:

Nasdaq has recently observed problematic or unusual trading in certain listed companies, apparently effectuated through recommendations made to investors by unknown persons via social media to purchase, hold, and/or sell the securities. The Commission has expressed concern about this activity, and in some cases suspended trading in the securities, stating its belief that these recommendations appear to be designed to artificially inflate the price and volume of the securities and that the public interest and the protection of investors require a suspension of trading in the securities.

Nasdaq does not currently have authority to delist the securities of a company based on this type of third-party misconduct but believes that the ability for third parties to manipulate a security’s price can indicate that the security does not have sufficient liquidity, and the issuing company does not have sufficient market interest, for listing to be appropriate. Nasdaq therefore proposes to adopt new IM-5101-4 to provide additional authority to exercise discretion to delist a company from Nasdaq based on the potential for one or more third parties to engage in misconduct impacting a company’s securities where the SEC has implemented a temporary trading suspension.

The new authority is narrow — it only applies if the SEC has issued a suspension under Section 12(k). And even in those limited cases, Nasdaq will exercise case-by-case discretion to delist based on whether the listed securities may be susceptible to manipulation, assessed based on a laundry list of factors:

– Where the company is located, whether a person or entity exercises substantial influence over the company and, if so, where that person or entity is located
– Whether the public float, share distribution and trading patterns raise liquidity concerns
– Social media activity designed to influence price and demand
– Whether material announcements explain recent trading activity
– Whether the company has recently issued securities
– Concerns about the company’s auditors, underwriters, law firms, brokers, clearing firms, or other professional service providers
– The experience of the company’s management and board
– Any FINRA or SEC referrals
– The existence of a recent going concern audit opinion
– “Other factors” that raise concerns about management, the board, shareholders or advisors
– Other material information

If this list looks familiar, these are based on the qualitative factors Nasdaq considers (from IM-5101-3) to assess whether the company’s stock is susceptible to manipulative trading by unaffiliated third parties when determining whether to apply its new limited discretion to deny initial listing, even where the company meets all the initial listing requirements.

Now, I’m assuming that the majority of companies with these trading suspensions have serious and ongoing problems, and delisting makes sense. But keep in mind that the SEC’s trading suspensions are usually for up to 10 trading days (although there are implications thereafter), while the delisting decision is not temporary. And while some of the factors listed above seem to get to the likelihood that people directly involved with the company might be engaging in the manipulative misconduct, Nasdaq clarifies that the actual manipulative misconduct that triggers the suspension and delisting discretion in the first place might be by completely unaffiliated third parties:

Nasdaq Staff may use this authority even where the problematic or unusual trading appears to be driven by third parties with no known connection to the company, and even where Nasdaq Staff cannot determine whether the company or any associated individual was involved, if Nasdaq determines it is appropriate and in the public interest to do so.

“Concerns related to the company’s advisors” is now a risk factor for both initial and continued listing. Is prior involvement with a company that had problematic trading activity now like the “black spot” from pirate lore? Micro-caps, when vetting potential service providers, look beyond regulatory issues and suss out whether they’ve been involved with securities with problematic trading activity. Service providers, do the same when vetting potential clients. (Maybe diligence their other service providers.)

– Meredith Ervine