SEC Charges Financial Advisor Jesus Rodriguez With Fraud For Stealing From Account Holders To Pay Personal Expense

On January 24, 2024, the Securities and Exchange Commission (SEC) charged Jesus Rodriguez, a former financial advisor, with fraud for misappropriating more than $3.475 million from ten brokerage account holders and advisory clients.

Case Summary

Complaint

The Securities and Exchange Commission (the "Commission") presents the following allegations in its complaint against defendant Jesus Rodriguez ("Rodriguez" or "Defendant"):

Summary

Between 2014 and 2021 (the "Relevant Period"), Rodriguez orchestrated a fraudulent scheme to embezzle over $3.4 million from at least ten investors ("the Investors"). During this time, he served as their registered representative and/or investment adviser representative at a major financial institution ("Firm A") that was dually registered with the Commission as a broker-dealer and investment adviser.

Rodriguez implemented his embezzlement scheme primarily through unauthorized ACH transfers, wire transfers, and cash journal transfers to other accounts within Firm A.

Footnote

ACH transfers refer to electronic, bank-to-bank transactions managed through the Automated Clearing House (ACH) Network.

In several cases, Rodriguez wrongfully extracted funds from the Investors' accounts by assuming unauthorized debt secured against their securities accounts. In other cases, he sold securities from the Investors' accounts just before stealing some or all of the proceeds.

As an investment adviser to three of the defrauded investors, Rodriguez violated his fiduciary responsibilities by misappropriating their funds and/or providing them with false information.

Violations

Based on the aforementioned conduct and the further allegations detailed here, the Defendant has breached Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. §§ 78j(b)] and Rule 10b-5 under it [17 C.F.R. § 240.10b-5], along with Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 ("Advisers Act") [15 U.S.C. §§ 80b-6(1) and (2)].

If the Defendant is not restrained and enjoined, he is likely to continue engaging in the actions, practices, transactions, and business activities described in this Complaint or in activities of a similar nature and purpose.

Nature Of The Proceedings And Relief Sought

The Commission initiates this action under the authority granted by Section 21(d) of the Exchange Act [15 U.S.C. § 78u(d)] and Sections 209(d) and 209(e) of the Advisers Act [15 U.S.C. §§ 80b-9(d) and (e)].

The Commission seeks a final judgment that:

Permanently restrains the Defendant from violating the federal securities laws and rules mentioned in this Complaint, as per Section 21(d)(1) of the Exchange Act and Section 209(d) of the Advisers Act.
Requires the Defendant to forfeit all gains obtained through the alleged violations, along with prejudgment interest, as outlined in Sections 21(d)(3), 21(d)(5), and 21(d)(7) of the Exchange Act.
Obligates the Defendant to pay civil penalties under Section 21(d)(3) of the Exchange Act and Section 209(e) of the Advisers Act.
Orders any other appropriate relief that the Court deems just and suitable.

Defendant

Jesus Rodriguez, 44, is a Mexican citizen living in El Paso, Texas. He started at Firm A in 2008 as a registered representative and investment adviser representative at their El Paso branch, after working at another dually-registered entity between 2004 and 2007. Rodriguez remained at Firm A until 2021, when he was dismissed after the conduct outlined in this complaint was uncovered. He held FINRA Series 7 and 66 licenses.

After leaving Firm A, Rodriguez submitted a letter of acceptance, waiver, and consent to FINRA, effectively barring him from any association with FINRA member firms. Currently, Rodriguez is being prosecuted by El Paso authorities due to allegations that he misappropriated funds from an investor’s Firm A account.

Facts

I. Background

During his employment at Firm A, Jesus Rodriguez encouraged clients, many of whom were based in Mexico, to open brokerage or advisory accounts with Firm A, where he acted as their registered representative and/or investment adviser representative.

Rodriguez gained the trust of his brokerage customers and advisory clients to manage their assets at Firm A, only to exploit this trust for his own financial gain. Between March 2014 and July 2021, he misappropriated over $3.4 million in total from the ten Investors.

None of these Investors permitted Rodriguez to withdraw funds from their accounts or use their money for personal purposes.

Rodriguez persuaded some Investors, specifically Investors D, E, and H, to have their Firm A account statements sent to an address he controlled, relying on him to provide accurate account information

Other Investors similarly relied on Rodriguez for account information because of limited access to their designated mailing addresses, language barriers that prevented them from understanding Firm A's English statements, or irregular review of their account statements.

II. Rodriguez's Primary Methods of Misappropriating from Investor Accounts

Rodriguez employed three main strategies to embezzle funds from the ten Investors.

He arranged unauthorized wire transfers from their accounts by forging internal forms and authorization letters.

He conducted unauthorized cash journal transfers from their accounts to other accounts at Firm A.

He initiated unauthorized ACH transfers from the Investors' accounts, mainly to cover his own credit card balances.

A. Unauthorized Wire Transfers

Between March 2014 and July 2021, Rodriguez embezzled over $1.7 million through more than 70 unauthorized wire transfers from the accounts of Investors A, C, D, E, G, and I for his personal gain. For nearly every unauthorized transfer, Rodriguez falsified Firm A’s internal authorization forms by falsely claiming he had received a verbal request for the transfer from the Investor. Either Rodriguez or his assistant, acting under his direction, completed and submitted these forms based on his false assertion that the Investor had verbally requested the wire transfer. Rodriguez also fabricated reasons for the transfers, such as “equipment for business purchase,” “loan balance payoff,” “payment of estate planning and business services,” “professional services,” and “property taxes.”

None of the Investors requested these wire transfers or authorized Rodriguez to conduct them. He arranged these unauthorized third-party wire transfers for his personal benefit.

For instance, Rodriguez directed more than $350,000 across 20 separate wires from the accounts of Investors C, D, and G to his mother’s bank account. Both Rodriguez and his mother used these funds to pay off credit card bills and car payments, withdraw cash from ATMs, and transfer money to Rodriguez’s bank account.

He also transferred $325,400 through 14 separate wires from the accounts of Investors A, D, and G to his then-wife or her controlled company.

In one instance, Rodriguez couldn't use a falsified verbal request authorization form because the amount exceeded Firm A’s limit on verbal transfers. Instead, he forged a written authorization letter and submitted it to Firm A.

In December 2018, he initiated a $125,000 wire transfer from Investor C’s account to finance his purchase of a Lamborghini. Without Investor C’s consent or knowledge, Rodriguez fabricated a written authorization letter claiming the funds were to “finalize the purchase of commercial property” and affixed Investor C’s signature to the letter without her approval. He even created a fake email account impersonating Investor C to convince Firm A to process the wire. He used this account to send the forged letter to his Firm A email account, from which he forwarded it internally and requested the wire transfer. Firm A processed the transfer.

B. Unauthorized Cash Journal Transfers

Between March 2016 and June 2021, Rodriguez misappropriated at least $1.3 million through dozens of unauthorized cash journal transfers from the accounts of Investors B, C, D, E, F, G, H, I, and J to other accounts at Firm A.

Much like his falsification of internal Firm A authorization forms for verbal wire transfers (as described in Paragraph 23), Rodriguez falsified similar internal authorization forms for purported verbally requested journal transfers. Either he or his assistant, acting on his instructions, filled out and submitted these forms based on Rodriguez's false representation that he had received a verbal request from the Investor for the transfer. He also provided fake justifications for these transfers, such as "stock purchase," "vacation rental," "estate planning and taxes," "capital contribution," and "professional services."

None of the Investors authorized these cash journal transfers or gave Rodriguez permission to conduct them.

In many cases, Rodriguez directed these fraudulent transfers to the accounts of his relatives or associates. For instance, he transferred more than $375,000 from the Firm A accounts of Investors B and E to a corporate account owned by his mother. Rodriguez and/or his mother used this account to wire money to himself and his then-wife and pay off credit card bills.

Similarly, in December 2019, he conducted an unauthorized journal transfer of about $8,000 from the Firm A account of Investor G to the account of a relative of his then-wife.

C. Unauthorized ACH Transfers

From November 2018 to July 2021, Rodriguez stole over $400,000 from the accounts of Investors B, C, D, E, F, and G through more than 100 unauthorized ACH transfers.

He conducted nearly all of these transfers via credit card companies, using the Investors' Firm A accounts to pay off his own credit card balances. In a few cases, he used an online payment app to withdraw money from an Investor's Firm A account and transfer it to his personal account within the app.

For each unauthorized ACH transfer, Rodriguez provided the account details for an Investor's Firm A account as the source of payment via the ACH system. By entering this information at the credit card company or payment app, he falsely claimed he had permission to debit the specified accounts.

These credit card companies or the payment app electronically sent the payment instructions to Firm A through the ACH system, and Firm A then processed them by deducting the amount from the Investor's account and transferring it to the credit card company or payment app. Rodriguez exploited Firm A's policies, which did not require account holder authorization for ACH transfers initiated by external financial institutions.

Using this method, Rodriguez misappropriated Investor funds to pay credit card balances across a dozen credit card companies.

None of the affected Investors authorized these ACH transfers or allowed Rodriguez to use their funds for this purpose.

III. Rodriguez’s Unauthorized Use of Securities-Backed Loans and Sales Proceeds for Misappropriation

Rodriguez financed much of his embezzlement from Investors A, B, C, D, E, G, I, and J by initiating unauthorized borrowing against their securities accounts.

He misappropriated funds from Investors A, C, D, G, and I by making withdrawals from loan accounts or lines of credit at Firm A, using their securities accounts as collateral. Similarly, he misappropriated funds from Investors B, E, and J by leveraging a margin feature on their securities accounts for unauthorized withdrawals.

The withdrawals, whether from loan accounts or lines of credit or by using margin, were backed by the Investors’ securities accounts. Such pledges of securities are classified as a "sale" under Section 10(b) of the Securities Exchange Act and Rule 10b-5.

Moreover, as part of his scheme, Rodriguez misappropriated from Investors D, E, F, and G by directly selling securities in their accounts and then misappropriating all or part of the proceeds within three days.

All unauthorized withdrawals from Investor F’s account were funded by automatic sales of Investor B’s holdings in a money-market securities fund.

In at least five instances, Rodriguez misappropriated $84,000 from Investor E within three days of a securities sale. He also misappropriated over $20,000 from Investor G and over $12,000 from Investor D through unauthorized transfers, which took place within three days of selling securities in their respective accounts.

IV. Rodriguez Breached His Fiduciary Duty to Advisory Clients

Rodriguez served as an investment adviser to Investors D, E, and H.

In this role, he provided them with investment advice on securities and earned a portion of the advisory fees they paid to Firm A for their advisory accounts.

As an adviser, he owed Investors D, E, and H a fiduciary duty of utmost good faith. However, he violated this duty by exploiting their trust to misappropriate funds from their advisory and brokerage accounts at Firm A.

Rodriguez embezzled around $440,000 from Investor D’s accounts at Firm A, all while serving as D’s investment adviser.

Similarly, he stole roughly $380,000 from Investor E’s accounts at Firm A during his time as E’s investment adviser.

He also took approximately $124,000 from Investor H’s accounts at Firm A, with at least $10,000 misappropriated while H was his advisory client.

V. Rodriguez Engaged in Additional Deceptive Conduct

Rodriguez used various deceptive methods to hide his fraudulent activities from the Investors.

For instance, he persuaded Investor E and her husband to establish and fund a Firm A account through a corporate entity while having their account statements sent to a P.O. Box under his control. With this arrangement, he initiated unauthorized transfers from Investor E’s account for his personal gain. On October 12, 2018, he transferred $25,000 from her account to another company where he had an investment, falsely stating on a “verbal wire processing form” that Investor E herself had requested the transfer as a “capital contribution.

After Firm A notified Investor E via email that her “wire transfer request” had been processed, she forwarded the message to Rodriguez, confused, as she hadn't requested any transfer. He falsely reassured her that he would "take care of it," but he didn't repay the money or disclose that he had initiated the transfer. With her statements being sent to the P.O. Box under his control, she couldn't see that the amount wasn't credited back to her account. Despite repeated requests to Rodriguez for her account statements, he made excuses and withheld them. His lies allowed him to misappropriate $380,000 from her between January 2017 and September 2020.

In another instance, when Investor J noticed cash missing from her account and asked Rodriguez about it, he falsely claimed it was an error. To cover up, he moved $16,460 from another account to partially reimburse Investor J.

Rodriguez also lied to Firm A to cover up his misappropriations. When Firm A staff questioned him about some Investors’ significant loan obligations, he fabricated explanations. In July 2018, he falsely told the firm's leverage review staff that Investor G had borrowed funds to buy commercial real estate and assured them that G had the capacity to repay the loan, although Rodriguez had taken out the loan without G's consent. In subsequent follow-up inquiries in September 2019, August 2020, and December 2020, he made similar false assurances.

In August 2019, when questioned about a large balance owed by Investor C, Rodriguez lied, saying she had borrowed to buy commercial real estate and was aware of the risk. In reality, most of her outstanding balance was due to Rodriguez's misappropriation, including his unauthorized purchase of a Lamborghini as previously noted.

VI. Rodriguez Used Misappropriated Funds to Support His Lifestyle

Rodriguez leveraged the funds he stole from the Investors to maintain an extravagant lifestyle, which included acquiring and maintaining several luxury vehicles like a Lamborghini, multiple BMWs, a Land Cruiser, a Land Rover, and a Toyota Yaris. He frequently traveled from El Paso to Austin to race these cars on a private track.

As previously detailed, Rodriguez racked up hundreds of thousands of dollars in credit card debt, which he partially paid directly from Firm A investor accounts or indirectly through transfers to his mother's bank account. Additionally, he unlawfully moved $325,000 to his then-wife from the accounts of Firm A investors.

Claims For Relief

I. First Claim for Relief Violations of Exchange Act Section 10(b) and Rule 10b-5

The Commission reaffirms and incorporates by reference the allegations set forth in paragraphs 1 through 70.

In connection with the purchase or sale of securities, and using the means or instrumentalities of interstate commerce, mail, or the facilities of a national securities exchange, Rodriguez, either directly or indirectly, alone or in collaboration, has:

Knowingly or recklessly utilized one or more devices, schemes, or artifices to defraud;
Made one or more false statements of material fact or failed to disclose necessary material facts, rendering his statements misleading under the circumstances; and/or
Engaged in one or more acts, practices, or business activities that constituted, or would constitute, fraud or deceit.

As a result of these actions, Rodriguez has directly or indirectly violated Exchange Act Section 10(b) and Rule 10b-5 and will likely violate them again unless restrained.

II. Second Claim for Relief Violations of Advisers Act Section 206

The Commission reaffirms and incorporates by reference the allegations set forth in paragraphs 1 through 70

At all relevant times, Rodriguez was classified as an investment adviser under Section 202(11) of the Advisers Act [15 U.S.C. § 80b-2(11)].

Using the mail or other means or instrumentalities of interstate commerce, Rodriguez, directly or indirectly, has:

Knowingly or recklessly utilized one or more devices, schemes, or artifices to defraud clients or potential clients, and/or
Knowingly, recklessly, or negligently engaged in transactions, practices, and courses of business that operated or would operate as a fraud or deceit on clients or prospective clients.

Therefore, Rodriguez, directly or indirectly, individually or in collaboration, has violated Sections 206(1) and 206(2) of the Advisers Act [15 U.S.C. §§ 80b-6(1) and 80b-6(2)] and, unless restrained, will continue to do so.

Prayer For Relief

The Commission respectfully requests that the Court issue a Final Judgment:

I.

Permanently enjoin Rodriguez, his agents, servants, employees, attorneys, and anyone acting in concert with him from directly or indirectly violating Exchange Act Section 10(b) [15 U.S.C. § 78j(b)], Rule 10b-5 [17 C.F.R. § 240.10b-5], and Sections 206(1) and 206(2) of the Advisers Act [15 U.S.C. §§ 80b-6(1) and 80b-6(2)].

II.

Order Rodriguez to return all illicit gains obtained directly or indirectly, along with pre-judgment interest, due to the cited violations.

III.

Require Rodriguez to pay civil monetary penalties as specified under Exchange Act Section 21(d)(3) [15 U.S.C. § 78u(d)(3)] and Section 209(e) of the Advisers Act [15 U.S.C. § 80b-9(e)].

IV.

Grant any additional relief the Court deems fair and appropriate.

Key Takeaways for Investors From the Case:

The following are the key takeaways for investors from the case:

1. Diversify Due Diligence

This case underscores the importance of conducting thorough due diligence on financial advisors. Investors should independently verify their advisor's credentials, track record, and regulatory compliance.

2. Direct Access to Accounts

Investors should have direct, unmediated access to their account statements, online banking, and notifications. Avoid forwarding important documentation through third parties, particularly advisors, to maintain transparency.

3. Red Flags and Vigilance

Be aware of red flags like unauthorized transactions, delays in receiving statements, or irregular explanations from the advisor. Regularly scrutinize your account statements for any discrepancies.

4. Regulatory Awareness

Understand the relevant regulations and protections for your investments. Familiarize yourself with your advisor's regulatory body (e.g., FINRA, SEC) and know your rights to file complaints or report suspicious activities.

5. Professional Fiduciary Responsibility

A fiduciary advisor is obligated to act in their clients' best interests. If an advisor breaches this duty, clients should report to regulatory authorities promptly and seek legal advice.

6. Independent Verification

Routinely consult independent third-party resources, such as another financial professional or a trusted attorney, to review your investment portfolio and financial strategy.

7. Trust, But Verify

While building a trusting relationship with an advisor is essential, ensuring regular cross-checks of their financial activities is crucial to mitigate fraud risks.

Key Takeaways for Financial Market Practitioners and Management

The following are the key takeaways for financial market practitioners and management from the case:

1. Robust Compliance Programs

This case emphasizes the need for comprehensive compliance programs that incorporate regular audits, staff training, and updated protocols to detect and prevent fraudulent activities.

2. Enhanced Internal Controls

Strengthening internal control measures, such as dual authorization for transactions and real-time transaction alerts, can deter unauthorized transfers and manipulation.

3. Client Education

Firms should regularly educate clients about potential fraud schemes, encourage them to monitor their accounts directly, and outline procedures for promptly reporting suspicious activities.

4. Proactive Risk Management

Developing a proactive risk management framework, which includes monitoring for unusual transactions and conducting frequent internal audits, is essential for mitigating reputational and financial damage.

5. Whistleblower Protections

Implement and promote whistleblower protection programs to encourage staff members to report unethical practices without fear of retaliation.

6. Stringent Hiring Practices

Conduct comprehensive background checks and periodically reassess employees in key positions, especially those dealing with sensitive financial transactions, to ensure ongoing integrity.

7. Regulatory Cooperation

Establish clear communication channels with regulatory bodies for swift information sharing and to remain updated on industry-wide compliance requirements and fraud trends.

8. Document Retention and Access

Ensure all clients have direct, unfettered access to their statements and transaction history, and adopt strict document retention policies to facilitate investigation and resolution if issues arise.

Gayatri GuptaMay 9, 2024

Nasdaq Compliance

The Nasdaq Stock Market features three tiers of listed companies, namely: (1) The Nasdaq Global Select Market, (2) The Nasdaq Global Market, and (3) The Nasdaq Capital Market. These tiers are characterized by progressively stringent listing requirements, with the Nasdaq Global Select Market setting the highest standards for initial listings and the Nasdaq Capital Market serving as the entry-level tier, particularly suitable for most small-cap issuers.

To list securities on Nasdaq, a company must fulfill minimum listing requirements, encompassing defined criteria related to financial performance, liquidity, and corporate governance. Nasdaq retains extensive discretion in the listing process and reserves the right to reject an application, even if the technical prerequisites are satisfied, if it deems such denial essential to safeguard the interests of investors and the public.

After securing a listing on Nasdaq, a company is obligated to adhere to ongoing listing standards. To initiate the listing process, a company seeking inclusion on Nasdaq must diligently complete and submit a comprehensive listing application to Nasdaq. This application should include specific documents and information as outlined by Nasdaq's requirements.

Typically, the application process spans a duration of four to six weeks. Once the application is submitted, a Nasdaq analyst is designated as the primary liaison with the company. Within two to three weeks of submission, the company can expect to receive an initial comment letter. The comment and review process persists until a decision is reached on the approval or denial of the application. Similar to filing with the SEC, a meticulously prepared Nasdaq application tends to attract fewer comments and facilitates a more streamlined process. Generally, the company's securities counsel assumes a leading role, serving as the primary contact for preparing the application and engaging in communication with Nasdaq.

Similarly to the SEC review process, Nasdaq conducts a thorough examination of publicly accessible information pertaining to a company. This encompasses, but is not limited to, SEC filings, the company's website, management communications and speeches, as well as press releases. The iterative nature of the review process typically doesn't necessitate a formal protocol, and communication is commonly facilitated through email correspondence and phone calls.

Listing Criteria For Nasdaq
For a company to list its securities on Nasdaq, it must satisfy the following criteria:

Specific Initial Requirements:
- Quantitative Standards: Meeting defined thresholds for both quantitative and qualitative factors.
- Qualitative Standards: Fulfilling certain qualitative benchmarks.
Continuing Requirements:
- Quantitative Criteria: Adhering to ongoing quantitative benchmarks.
- Qualitative Criteria: Maintaining specified qualitative standards.

The initial quantitative thresholds are typically set at a higher level than those required for continued listing. This distinction aims to ensure that companies achieve a sufficient level of maturity before being listed. Additionally, Nasdaq imposes rigorous corporate governance standards that listed companies must adhere to throughout their tenure on the exchange.

Before formally submitting a comprehensive listing application, a company has the option to pursue a preliminary listing eligibility review. In this stage, the Listing Qualifications Staff conducts a thorough examination of the company's public filings to assess its compliance with numerical listing requirements. Additionally, the team evaluates the company's adherence to corporate governance requirements outlined in the Marketplace Rules ("Rules"). This preliminary review provides valuable insights into the company's eligibility for listing on Nasdaq before committing to the full application process.

Upon completion of the preliminary review, the Listing Qualifications Staff will make an assessment regarding whether the company meets the numerical listing criteria. Additionally, any corporate governance or regulatory concerns raised during this phase will be considered to determine their impact on the listing approval. It's important to note that while the preliminary review provides insights, final approval necessitates the submission of a formal listing application. This application undergoes a thorough examination by the NASDAQ Listing Qualifications Staff. Furthermore, the final approval process involves satisfactory compliance with specific qualitative reviews. This includes an examination of the regulatory history of the company's officers, directors, and significant shareholders. Meeting these criteria is integral to obtaining the final approval for listing on Nasdaq.

Financial And Liquidity Requirements

    Requirements

    Equity Standard
    Market Value of Listed Standard
    Net Income Standard

    Listing Rules

    5505(a)
and
5505(b)(1)
    5505(a)
and
5505(b)(2)
    5505(a)
and
5505(b)(3)
    
    Stockholders Equity

    	$5 million
    	$4 million
    	$4 million
    
    The market value of publicly held shares

    $15 million
    $15 million
    $
      5 million
    
    Operating History

    	Two years
    N/A
    N/A
    
    The market value of listed securities

    N/A
    $50 million
    N/A
    
    Net income from continuing operations (in the latest fiscal
a year or in two of the last three
fiscal years)

    N/A
    N/A
    $750,000
    
    Publicly held shares

    	1 million
    	1 million
    	1 million
    
    Bid Price

    	$4
    	$4
    	$4)
    
    Closing Price

    	$3
    	$2
    	$43
    
    Corporate Governance

    Yes
    Yes
    Yes
    
    Total Shareholders

    300
    300
    300

Corporate Governance Requirements

Across all three tiers of the Nasdaq Stock Market, corporate governance requirements remain largely consistent. The categories encompassing corporate governance standards include:

Distribution of Annual or Interim Reports
Independent Directors
Audit Committee
Compensation Committee
Nomination of Directors
Code of Conduct
Annual Meetings
Solicitation of Proxies
Quorum
Conflict of Interest
Shareholder Approval
Voting Rights

These governance elements play a crucial role in ensuring transparency, accountability, and ethical conduct within listed companies, irrespective of the specific tier within the Nasdaq Stock Market.

Companies seeking listing on Nasdaq must adhere to specific corporate governance standards, including the following:

Compensation Committee with Independent Directors:
- The company is required to establish a compensation committee comprised of independent directors.
- The committee must consist of at least two members.
- Rule 5605(d)(2)(A) introduces an additional independence test for compensation committee members.
Responsibility for Executive Compensation:
- The compensation committee is tasked with determining or recommending to the entire board the compensation of the chief executive officer (CEO) and all other executive officers.

These standards are designed to ensure a level of independence and scrutiny in the decision-making processes related to executive compensation within the company.

The Application And Documents

The Nasdaq application package encompasses several key components:

Symbol Reservation Form:
- Used to request the reservation of a specific trading symbol for the company.
Listing Application:
- Requires supplemental documents and details about the company's financials, operations, and other pertinent information.
Listing Agreement:
- A formal agreement outlining the terms and conditions of the listing on Nasdaq.
Corporate Governance Certification:
- A certification affirming the company's commitment to meeting Nasdaq's corporate governance standards.
Initial Application Fee:
- Payable via check or wire transfer, this fee is a prerequisite for initiating the listing process.
Logo Submission Form:
- Used for submitting the company's logo for use in Nasdaq's materials.

These application forms are completed through the Nasdaq website listing center, utilizing the online platform to facilitate the submission of supplemental and supporting documents. It is advisable to thoroughly review all required paperwork in advance, ensuring that the necessary information is readily available before initiating the application process.

Symbol Reservation Form

The symbol reservation form is a concise, one-page electronic form where applicants input information for Nasdaq's consideration. Nasdaq symbols, limited to 1-5 characters, adhere to guidelines established by the Intermarket Symbols Reservation Authority (ISRA). The ISRA system is designed to organize symbols efficiently, prevent duplication, and reduce programming and operational complexities. The ISRA operates within the framework of the NMS Symbology Plan, a plan utilized by Nasdaq.

Key details about the symbol reservation process:

Symbol Choices:
- The form allows applicants to propose three symbol choices in order of preference.
- While Nasdaq generally honors the first choice if available, it retains the authority to assign, rescind, or reassign a trading symbol at its discretion.
ISRA and Nasdaq Authority:
- The ISRA and Nasdaq have overarching authority in managing the assignment of symbols.
Additional Information:
- The form captures essential details about the issuer and the planned public offering.
- Information may include the name of the attorney, lead underwriter (if applicable), CEO and CFO names, yearly revenues, company website, and the sector in which the company operates.

Completion of this symbol reservation form initiates the process of securing a trading symbol on Nasdaq, and it's essential to provide accurate and comprehensive information to facilitate this stage of the listing application.

The Application

The Nasdaq listing application process is comprehensive and varies based on the circumstances surrounding the listing sought. There are twelve distinct listing applications catering to different situations, including changes of control, switches from other exchanges or markets, spin-offs, and initial public offerings (IPOs). Each application, spanning approximately seven pages, collects detailed information about the company, covering areas such as address, contact and billing details, securities attorney and auditor information, transfer agent particulars, and the company's officers and directors. Specific information on the company's securities, including type, par value, and cusip number, is also required.

Furthermore, the application mandates disclosure of legal proceedings involving the company, its officers or directors, or significant shareholders over the past ten years. This encompasses inquiries, investigations, lawsuits, litigation, arbitrations, and other legal and administrative proceedings. Documents supporting the backup and final disposition of these matters must be provided.

Regarding private offerings within the prior six months, including bridge financings, shelf registrations, and Regulation S offerings, the company is required to disclose such activities. Additionally, the application delves into the company's background, posing questions to ensure compliance with seasoning rules.

While Nasdaq retains the right to request relevant supporting documents, specific documents are mandatory based on the application type. For an uplisting from an existing U.S. market, the application must include letters from three market makers confirming their commitment to making a market in the subject securities. Other required documents include a listing agreement, a logo submission form, a corporate governance certification form, regulatory correspondence over the past 12 months, and shareholder confirmation documents. Nasdaq often seeks confirmation from the company's transfer agent regarding the eligibility of the security for the direct registration program (DRS).

During the review of an up listing application, Nasdaq may request additional information, such as a Broadridge share range analysis and NOBO list, a certified shareholder list, details about mitigating any going concerns or opinions, income statement and/or balance sheet projections for the next 12 months, and confirmation of Sarbanes Oxley Section 302 and 906 certifications by the company, among other inquiries related to compliance and financial matters.

The Listing Agreement

The Listing Agreement is a concise document, spanning two pages, serving as a formal affirmation of the company's commitment to adhere to all rules and regulations set forth by the Nasdaq Stock Market. It includes provisions for indemnifying and holding Nasdaq harmless from liability. Notable points in the agreement include:

Compliance Assurance:
- The company explicitly agrees to comply with all rules and regulations stipulated by the Nasdaq Stock Market.
Indemnification Clause:
- The company indemnifies Nasdaq, meaning it undertakes to compensate or reimburse Nasdaq for any losses or damages incurred. This includes harm resulting from third-party trademark infringement claims related to the company's symbol and logo, as well as Nasdaq's use of the same.
Disclaimer of Warranty and Liability:
- The agreement contains a disclaimer of warranty and liability against Nasdaq for trading issues, with the exception of those resulting from gross negligence or willful misconduct.

This agreement establishes a clear framework for the relationship between the listed company and Nasdaq, emphasizing the company's commitment to regulatory compliance while providing indemnification for certain specified matters and delineating the scope of Nasdaq's liability.

Corporate Governance Certification Form

The corporate governance certification form certifies compliance with the governance requirements related to an audit committee, director nomination process, compensation committee, board composition, executive sessions, quorum, and codes of conduct. Where an exemption applies, the form requires specification of the exemption terms. The document specifies the different rules and exceptions in a check-the-box format.

Logo Submission Form

The logo submission form contains the guidelines for the logo and affirms Nasdaq’s rights to use the same. Nasdaq uses company logos in its marketing materials, on the MarketSite Video Wall and Tower, and websites.

Fees

Entry fees are based upon the aggregate number of shares to be listed at the time of initial listing, regardless of class, with a maximum cap of $75,000. Fees are assessed on the entry date in The Nasdaq Capital Market, except for $5,000, representing a non-refundable application fee. This fee must be submitted with the company’s application.

Nasdaq does not charge application or entry fees for any securities transferred from a national securities exchange.

Benefits Of Trading On An Exchange

There are many benefits to trading on an exchange instead of the OTC Markets. The most significant benefits to a business are the ability to attract analyst coverage and institutional investors and the corresponding increase in liquidity that comes with both. Stocks that trade on Nasdaq tend to have a lower bid/offer spread — again encouraging trading volume and liquidity. Exchange-traded securities are exempt from the penny stock definition, allowing more market maker and broker-dealer participation. As further explained below, a broker-dealer cannot recommend a penny stock transaction to its retail clients. Therefore, no analysts, financial advisors, or institutional investors make recommendations for purchases of penny stocks.

As an aside, this is one of the reasons that OTC Markets created the OTCQX market tier, which does not list penny stocks. It is also why the small-cap industry is pushing for a supported valid venture exchange (for further reading.

In today’s world, depositing stock and/or trade-in non-exchange traded securities is increasingly difficult. Despite the congressional efforts and SEC rulemaking in support of small-cap capital formation (for example, the JOBS Act, including the emerging growth company regulations, new Regulation A+ and Title III Crowdfunding and the new FAST Act), through enforcement and investigative proceedings, both the SEC and FINRA continue to apply pressure on broker-dealers, clearing firms and transfer agents to reduce the secondary trading and free flow of penny stocks. For more information on difficulties in depositing stocks.

Further On Penny Stocks

NASDAQ and NYSE MKT traded securities are exempted from the definition of a “penny stock” due to the initial and ongoing listing standards. Penny stock rules focus on broker-dealers’ activity in effectuating trades in penny stocks. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 (the “Penny Stock Act”) prohibits broker-dealers from effecting transactions in penny stocks unless they comply with the requirements of Section 15(h) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The rules promulgated thereunder, particularly Exchange Act rules 15g-1 through 15g-100 (the “penny stock rules”).

Section 15(h) of the Exchange Act provides that no broker or dealer may effectuate a customer’s purchase or sale of any penny stock unless such broker or dealer.

Approves the customer for the specific penny stock transaction and receives a written agreement to the transaction from the customer.
Furnishes the customer a risk disclosure document describing the risks of investing in penny stocks.
Discloses to the customer the current market quotation, if any, for the penny stock, including the bid and ask prices and the number of shares that apply to such bid and ask prices.
Discloses to the customer the amount of compensation the firm and its broker will receive for the trade.

In addition, after executing the sale, a broker-dealer must send its customer monthly account statements showing the market value of each penny stock held in the customer’s account.

Moreover, brokers and dealers subject to the penny stock rules are subject to additional disclosure requirements outlined in Rules 15g-2 through 15g-9. For my information on penny stocks and the rules affecting broker-dealer activity.

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