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Proposed NYSE Amendment to Rule 123D Regarding Reverse Stock Splits16 May 2024

The New York Stock Exchange (“NYSE”) adopted a rule change to amend Rule 123D (Halts in Trading) regarding reverse stock splits, creating a new listing rule – Rule 123D(f) – which took effect on May 11, 2024.

Prior to May 11, 2024, the NYSE processed reverse stock splits overnight, with trading available on a split-adjusted basis on other markets at 4:00 am ET. Concerns were raised regarding the potential for errors or problems with orders during early trading sessions, which could adversely affect investors, market participants and issuers, particularly if the number of issued and outstanding shares, and the number of shares held by a particular shareholder, are incorrectly reflected following a reverse stock split.

"Concerns were raised regarding the potential for errors or problems with orders during early trading sessions, which could adversely affect investors, market participants and issuers."

On April 11, 2024, the NYSE filed a proposed rule change to provide specific requirements for halting and resuming trading in a security undergoing a reverse stock split. Rather than maintaining optional authority to institute trading halts, the new Rule 123D(f), now in effect, mandates that the NYSE halts trading in a security on the day before the market effective date of a reverse stock split. The halt will generally commence at 7:50 pm ET and will generally resume starting at 9:30 am ET on the day the reverse stock split is effective. This change aims to give investors and market participants sufficient time to review orders and quotes for the security and ensure that their systems have properly adjusted for the reverse stock split.

The NYSE noted in its proposed rule change filing that the SEC recently approved a similar rule change by Nasdaq, indicating a growing trend among exchanges to address concerns related to reverse stock splits. Nasdaq’s rule changes were prompted by an observed increase in reverse stock split activity, prompting the need for consistency across exchanges in trading halt rules. Harmonizing the trading halt rules for reverse stock splits with that of Nasdaq, “would enhance investor protection and maintain fair and orderly markets by minimizing the chance that market participants might make erroneous trades in a security because they were unaware that it had undergone a reverse stock split.” (Securities and Exchange Commission Release No. 34-99974; File No. SR-NYSE-2024-22).

In addition to proposing similar amendments to its trading halt rules, Nasdaq also revised its notice and disclosure requirements concerning reverse stock splits, demonstrating a concerted effort by exchanges to adapt to market dynamics and ensure fair and orderly trading practices.

If you have any questions or concerns regarding how this amendment may impact your trading activities, please do not hesitate to contact us for further clarification.

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