The New York Stock Exchange’s (NYSE) amendments to NYSE Rule 123D (Rule 123D) (Halts in Trading) will become effective on May 11, 2024. The amendments to Rule 123D (NYSE Amendments) provide for a regulatory halt to trading at the end of trading on the day immediately before the market effective date of a reverse stock split and a delayed opening of the security on the market effective date.

In November 2023, the SEC approved[1] amendments to the Nasdaq Stock Market LLC’s (Nasdaq) Listing Rule 4120 (Limit Up-Limit Down and Trading Halts) and Rule 4753 (Nasdaq Halt Cross) that set forth similar requirements for halting and resuming trading in a security that is subject to a reverse stock split. A stated aim of the NYSE in implementing the NYSE Amendments is to harmonize its rules with Nasdaq’s.

REVERSE STOCK SPLITS

In a reverse stock split, a company decreases the number of issued and outstanding shares by a specified ratio without affecting its total market capitalization. Reverse stock splits are frequently used by public companies to increase the per share range at which their common equity is trading, including to prevent the delisting of their shares due to the failure to satisfy the minimum share price requirements of the applicable securities exchange.

REASONS FOR THE NYSE AMENDMENTS

In connection with the increase in completed reverse stock splits in recent years, the NYSE is adopting the NYSE Amendments. According to the NYSE, it is adopting the NYSE Amendments at the request of market participants who claim they would benefit from a consistent approach across exchanges with respect to regulatory halt rules in connection with reverse stock splits.

Market participants have recently expressed concerns with allowing trading on an adjusted basis during early morning trading sessions, noting that it is not optimal because system errors or problems with errors may go unnoticed for a period of time when a security that has undergone a reverse stock split opens for trading with other thousands of securities.

Such errors have the potential to adversely affect investors, market participants and the issuer. For example, problems in connection with the processing of a reverse stock split could result in a broker executing trades selling more shares than customers held in their accounts, resulting in a temporary short position.

The NYSE has stated that it believes that the halt and delayed opening for trading of the affected security post-reverse stock split will promote fair and orderly trading as it will provide market participants and the NYSE ample opportunity to notice errors or problems with orders for the affected security. Such errors or problems could arise due to market participants’ misunderstanding of the impact of a reverse stock split on the value of an issuer’s securities resulting from investors’ lack of advanced knowledge of the reverse stock split. Potential errors resulting in a material effect on the market from market participants’ processing of the reverse stock split include incorrect adjustment or entry of orders.

THE NYSE AMENDMENTS

The NYSE Amendments add new subparagraph (f) to Rule 123D, which provides that the NYSE will halt trading in a security for which the NYSE is the Primary Listing Market[2] before the end of post-market trading on other markets on the day immediately before the market effective date of a reverse stock split. Such a trading halt due to a reverse stock split will be mandatory.

In connection with a reverse stock split, the NYSE has stated that it expects to initiate the halt at 7:50 pm EST, prior to the end of post-market trading on other markets at 8:00 pm EST, on the day immediately before the market effective date of the reverse stock split. Trading in the security will resume with a Trading Halt Auction[3] starting at 9:30 am EST on the market effective date of the reverse stock split.

For additional information regarding the NYSE Amendments, see SEC Release No. 34-99974; File No. SR-NYSE-2024-22.

[1] See Securities Exchange Act Release No. 98878 (November 7, 2023) (SR-NASDAQ-2023-036).

[2] The term “Primary Listing Market” is defined in Section XI(a)(i)(H) of the Consolidated Tape Association (CTA) Plan as “the national securities exchange on which an Eligible Security is listed. If an Eligible Security is listed on more than one national securities exchange, Primary Listing Market means the exchange on which the security has been listed the longest.”

[3] The term “Trading Halt Auction” is defined in NYSE Rule 7.35(a)(1)(B) as an auction ‘‘that reopens trading following a trading halt or pause.’’ The Trading Halt Auction would be effectuated by the security’s designated market maker (‘DMM’) pursuant to NYSE Rule 7.35A (DMM-Facilitated Core Open and Trading Halt Auctions). An Exchange-listed security that opens trading for the day with a Trading Halt Auction would not undergo a Core Open Auction (defined in NYSE Rule 7.35(a)(1)(A)).

[View source.]