Nasdaq’s Rule 5101 gives the exchange significant discretionary power over the initial and continued listing of companies to protect investors, maintain public confidence, and ensure transparency in the market. This rule focuses on ensuring that companies meet high standards, including proper financial auditing, especially when companies operate in jurisdictions with restricted regulatory oversight.

Overview of Rule 5101 and Audit Integrity

Nasdaq’s Rule 5101 authorizes it to apply additional listing requirements or deny listings if a company’s auditor is in a jurisdiction where proper regulatory inspections cannot occur. This includes countries like China and Hong Kong, where the PCAOB cannot conduct audits. Nasdaq’s proposed rule changes outline factors it will consider when assessing a company’s auditor, such as PCAOB inspection status, audit quality, and the auditor’s expertise in U.S. standards.

Key Criteria for Auditors Under Rule 5101

Nasdaq’s assessment includes various criteria, such as:

• The auditor’s PCAOB inspection history
• Results from previous inspections
• Auditor expertise in U.S. GAAP and IFRS
• The adequacy of the auditor’s training program
• Whether the auditor belongs to a global network with standardized tools and methodologies

Additional criteria may include requiring higher equity or asset values for listing, higher float percentages, or lock-up agreements for insiders.

Addressing Risks from Restrictive Markets

For companies primarily operating in “Restrictive Markets,” where access to information is limited, Nasdaq considers factors like the location of business operations, board meetings, and headquarters. If concerns are raised, Nasdaq may require additional listing criteria to protect investors.

Nasdaq also reviews individuals associated with companies to protect against regulatory misconduct. This includes examining whether officers, directors, or shareholders have been involved in fraudulent activities or other regulatory violations.

Conclusion

Nasdaq’s Rule 5101 underscores the importance of audit integrity and investor protection. With broad discretion to impose heightened listing standards, Nasdaq ensures that companies listed on its exchange adhere to rigorous standards, especially in complex jurisdictions.