Securities Regulation: Improvements Needed in the Amex Listing	 
Program (27-NOV-01, GAO-02-18). 				 
								 
The Chairman of the Securities and Exchange Commission (SEC)	 
stated that one-third of Amex's new listings did not meet the	 
exchange's equity listing standards. Amex's listing guidelines	 
address factors that are the same or similar to those addressed  
by other U.S. stock markets. Quantitative requirements addressed 
share price, stockholders' equity, income, and market value of	 
publicly held shares. However, the minimum thresholds for meeting
these requirements varied to reflect the differences in the	 
companies that each market targeted for listing. The most	 
significant difference between Amex's guidelines and the listing 
standards of other U.S. stock markets was that Amex was one of	 
only two markets that retained discretion to initially list	 
companies that did not meet all of its quantitative requirements.
Amex had not implemented the Office of Compliance Inspections and
Examinations' (OCIE) recommendations on the exchange's		 
discretionary listing decisions. OCIE officials told GAO that in 
the absence of an Amex agreement to address the recommendations, 
they would include them among the open significant		 
recommendations to be reported to the SEC Commissioners as a	 
result of a 1998 GAO recommendation. The Commission has the	 
authority to require Amex to implement OCIE's recommendations.	 
Amex officials told GAO that the exchange was fulfilling its	 
self-regulatory organization responsibilities, in part, by	 
individually monitoring the status of companies that did not meet
its continued listing guidelines and summarizing information in  
monthly reports to management.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-18						        
    ACCNO:   A02487						        
  TITLE:     Securities Regulation: Improvements Needed in the Amex   
Listing Program 						 
     DATE:   11/27/2001 
  SUBJECT:   Securities regulation				 
	     Self-regulatory organizations			 
	     Stock exchanges					 
	     Stocks (securities)				 

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GAO-02-18
     
Report to the Ranking Minority Member, Energy and Commerce Committee, House
of Representatives

United States General Accounting Office

GAO

November 2001 SECURITIES REGULATION

Improvements Needed in the Amex Listing Program

GAO- 02- 18

Page i GAO- 02- 18 Amex Listing Program Letter 1

Results in Brief 2 Background 5 Listing Requirements Have Generally
Addressed the Same Factors,

but Amex Has Not Required That All Quantitative Requirements Be Met 6 Amex
Did Not Agree to OCIE?s Recommendations on Listing

Requirements and Public Disclosures 9 Amex Did Not Prepare Management
Reports That Demonstrated

the Effectiveness of Its Listing Program 15 Conclusions 16 Recommendations
to the Chairman, SEC 17 Agency Comments and Our Evaluation 17 Scope and
Methodology 19

Appendix I Comments From the American Stock Exchange 21

Appendix II Comments From the Securities and Exchange Commission 28

Tables

Table 1: Comparison of Quantitative Initial and Continued Listing
Requirements for Selected Factors in the Largest U. S. Stock Markets
(October 25, 2001) 7 Table 2: Duration of Time That Companies Did Not Comply
With

Amex?s Continued Listing Guidelines (July 31, 2001) 11

Abbreviations

Amex American Stock Exchange NASD National Association of Securities Dealers
NYSE New York Stock Exchange OCIE Office of Compliance Inspections and
Examinations SEC Securities and Exchange Commission SRO self- regulatory
organization Contents

Page 1 GAO- 02- 18 Amex Listing Program

November 27, 2001 The Honorable John D. Dingell Ranking Minority Member
Committee on Energy and Commerce House of Representatives

Dear Mr. Dingell: A September 2000 press account questioned the quality of
companies newly listed for trading on the American Stock Exchange (Amex) and
warned that Amex risked losing its reputation by listing an increasing
number of very small companies. The Chairman of the Securities and Exchange
Commission (SEC) subsequently advised you that about onethird of Amex?s new
listings in the first 8 months of 2000 did not meet the exchange?s equity
listing standards, 1 which Amex referred to as guidelines. 2 The Commission
stated separately that investors rightfully presume that the companies
listed on Amex meet its guidelines and that the Commission would be
concerned if Amex routinely approved listings that did not meet them. 3 The
development and implementation of listing guidelines fall within Amex?s role
as a self- regulatory organization (SRO). 4 As part of its oversight of Amex
in this role, the SEC Office of Compliance Inspections and Examinations
(OCIE) inspected the operations of the Amex listing program and reported the
results to Amex in April 2001. 5

1 Equity listing standards are a market?s minimum quantitative and
qualitative requirements that companies must meet for their stock to be
eligible for initial and continued listing for trading.

2 Amex referred to its listing requirements as guidelines because it had
retained discretion to list companies that did not meet all of its
quantitative requirements. 3 65 Fed. Reg. 58136 (Sept. 27, 2000) (SEC order
approving amendments to the Amex listing standards). 4 SROs have an
extensive role in regulating the U. S. securities markets, including
ensuring that members comply with federal securities laws and SRO rules.
National securities exchanges and registered securities associations, along
with registered clearing agencies and the Municipal Securities Rulemaking
Board, are collectively termed SROs under Section 3( a)( 26) of the
Securities Exchange Act of 1934. 15 U. S. C. sect. 78c( 26) (1994).

5 OCIE inspection reports are nonpublic and are issued to the SRO.

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 02- 18 Amex Listing Program

This report responds to your increased concern about the adequacy of the
guidelines that Amex has used to list a company?s stock for trading and the
exchange?s adherence to them. On the basis of your September 2000 request
letter, subsequent correspondence, and meetings with your staff, this report
(1) describes the key differences between the Amex equity listing guidelines
and the equity listing standards of other U. S. stock markets; (2) reviews
certain OCIE recommendations to Amex for improving its equity listing
program, focusing on areas of disagreement between OCIE and Amex; and (3)
examines how Amex monitors the effectiveness of its equity listing
department operations.

Amex?s quantitative and qualitative equity listing guidelines have addressed
factors that are the same as or similar to those addressed by the equity
listing standards of the other U. S. stock markets. Quantitative
requirements generally addressed such factors as share price, stockholders?
equity, income, and market value of publicly held shares. 6 However, the
minimum thresholds for meeting these requirements varied to reflect the
differences in the characteristics such as size of the companies that each
market targeted for listing. For example, depending on the listing
alternative, the minimum market value of a company?s public shares was
expected to be either $3 million or $15 million under the Amex initial
listing guidelines, while this minimum value was either $60 million or $100
million under the New York Stock Exchange (NYSE) standards. In all the U. S.
markets, the quantitative requirements for continued listing were generally
lower than those for initial listing. Also in all the markets, the
qualitative listing requirements generally addressed corporate governance
requirements, including such factors as conflicts of interest by corporate
insiders, the composition of audit committees, and shareholder approval of
corporate actions. The most significant difference between Amex?s equity
listing guidelines and the listing standards of the other U. S. stock
markets was that Amex was one of only two markets that retained discretion
to initially list companies that did not meet all of its quantitative
requirements. 7

6 Market value of publicly held shares, also referred to as the market value
of public float, generally refers to the value of shares listed and posted
for trading that are not held directly or indirectly by a company insider.

7 Nasdaq also retained discretion to initially list companies that did not
meet its quantitative requirements. According to Nasdaq, as of October 25,
2001, the market had not listed a company pursuant to a waiver of a
quantitative listing standard since May 20, 1999. Results in Brief

Page 3 GAO- 02- 18 Amex Listing Program

As of September 7, 2001, Amex had not agreed to implement OCIE?s
recommendations related to the exchange?s use of its discretion in making
listing decisions. After identifying a dramatic increase in listings- from 9
percent to 22 percent- that did not comply with Amex?s initial guidelines
over the two periods examined, OCIE concluded that the investing public was
not receiving sufficient information about the eligibility of companies to
trade on Amex. Accordingly, OCIE recommended that Amex provide more
certainty to the investing public by converting its discretionary guidelines
into mandatory standards. Additionally, in response to concerns that Amex
was deferring the delisting of companies for what OCIE termed ?excessive?
time periods and did not have requirements for determining when to begin
delistings, OCIE recommended that Amex set firm time limits within which
noncomplying companies would have to meet its continued listing guidelines.
Pending action on these recommendations, OCIE further recommended that Amex
publicly disclose the identity of those companies that did not meet its
initial or continued guidelines- for example, by attaching a modifier to the
trading symbol. Amex responded to OCIE that it did not want to relinquish
its discretionary authority or modify its stock symbols. The exchange
stressed the importance of evaluating companies for listing on an individual
basis, the adequacy of its existing public disclosure, and the significance
of the actions it has already taken to improve its program. Nonetheless,
until OCIE?s recommendations are addressed, the public could be misled into
believing that all Amex listings meet the exchange?s guidelines. Reflecting
the seriousness of their concerns, OCIE officials told us that in the
absence of an Amex agreement to adequately address the recommendations, they
would include them among the open 8 significant 9 recommendations to be
reported annually to the SEC Commissioners as a result of a 1998 GAO
recommendation. 10 The Commission has the authority to require Amex to
implement OCIE?s recommendations.

8 Open recommendations, as defined by OCIE, are those recommendations that
an SRO has expressly declined to adopt or has failed to adequately address
in its response to an inspection report.

9 OCIE determines that recommendations are significant based on such factors
as whether areas of fundamental importance to the SRO?s regulatory programs
are involved and on the potential impact on investors and the marketplace.

10 See Securities Regulation: Oversight of SRO?s Listing Procedures Could Be
Improved

(GAO/ GGD- 98- 45, Feb. 6, 1998).

Page 4 GAO- 02- 18 Amex Listing Program

Amex officials told us that the exchange was fulfilling its SRO
responsibilities related to its equity listing operations in part by
individually monitoring the status of companies that did not meet its
continued listing guidelines and summarizing related information in monthly
reports to management. However, the listing department did not prepare
management reports that aggregated and analyzed overall statistics to
measure listing program results, such as the percentage of companies granted
or denied exceptions to the initial and continued listing guidelines, or the
percentage of companies granted exceptions that returned to compliance or
were delisted. As a result, Amex and OCIE have lacked information that could
be used to demonstrate the effectiveness of Amex?s exceptions- granting
policies and its initial and continued listing guidelines. Responding to an
earlier GAO recommendation, OCIE has required two other markets to develop
periodic management reports on their listing programs? operating results.
According to an OCIE official, these reports are useful in monitoring the
listing activities of the related markets.

This report contains recommendations that the Chairman of SEC, as part of
SEC?s ongoing efforts to ensure that Amex addresses weaknesses in the
management of its equity listing program, (1) direct Amex to implement
mandatory quantitative listing requirements or provide ongoing public
disclosure of noncompliant companies, and (2) require Amex to report
quarterly to its Board of Governors on the operating results of its equity
listing program and make these reports available to OCIE for review. Such
reports should contain sufficient information to demonstrate the overall
effectiveness of the Amex equity listing program, including, at a minimum,
that of its exceptions- granting policies and its initial and continued
listing guidelines.

We requested comments on a draft of this report from Amex and SEC. The
comments are described in detail later in this report, and the written
comments appear in appendixes I and II, respectively. Amex committed to
taking action to address our recommendation for improving public disclosure
of its listing requirements by replacing its discretionary guidelines with
mandatory initial and continued listing standards. Also, in response to our
recommendation, Amex committed to enhancing its management reports. While we
support Amex?s proposed changes to its management reports, we believe that
these reports could be further enhanced by adding data on the effectiveness
of Amex?s practices for continued listings. SEC officials said that they
were pleased that Amex would be addressing our recommendations and added
that they would

Page 5 GAO- 02- 18 Amex Listing Program

continue working with the exchange to ensure that its proposed changes are
implemented effectively.

As of June 30, 2001, Amex was the third- largest U. S. market in terms of
the number of companies whose common stock it listed. 11 With the common
stock of 704 companies listed, Amex trailed only Nasdaq, which had 4,378
listings, 12 and NYSE, which had 2,814 listings. Overall, about 98 percent
of the common stocks listed on U. S. markets were listed on Amex, Nasdaq, or
NYSE. The remaining markets had significantly fewer listings. For example,
the fourth- largest market in terms of the number of companies listed was
the Boston Stock Exchange, with 84 listings, 46 of which were also listed on
Nasdaq. 13

In 1998, the National Association of Securities Dealers (NASD), which also
owns and operates Nasdaq, purchased Amex. Although Amex retained its
independence as an exchange, in July 1999 its equity listing program was
moved from New York City to Gaithersburg, Maryland, and integrated with the
Nasdaq listing program. In June 2000, NASD completed the first phase of its
plan to restructure Nasdaq as a stand- alone stock- based organization.
According to Amex officials, as a result of this restructuring, the Amex
equity listing department began moving back to New York in November 2000,
and the move was completed about 6 months later.

Under federal law and consistent with its responsibilities as an SRO, each
U. S. market establishes and implements the rules that govern equity
listings in its market with the intent of maintaining the quality of the
markets and public confidence in them. In general, a company applies to have
its stock listed for trading in a specific market, subject to that market?s
rules. This process includes submitting an application for review, together
with supporting information such as financial statements, a prospectus, a
proxy statement, and relevant share distribution

11 Common stocks are securities that represent an ownership interest in a
corporation. If the company has issued preferred stock, common stockholders
assume the greater risk but generally exercise greater control and may
receive greater returns in the form of dividends and capital appreciation.

12 Nasdaq is a two- tier market made up of the Nasdaq National Market, which
as of June 30, 2001, listed 3,567 larger companies, and the Nasdaq SmallCap
Market, which as of the same date listed 811 smaller companies.

13 The U. S. markets are not limited to trading in the stocks that they
list. Under SEC regulations and market rules, stocks may be traded under
unlisted trading privileges in markets other than those in which they are
listed. Background

Page 6 GAO- 02- 18 Amex Listing Program

information. As part of making an initial listing decision, the market?s
equity listing department reviews these submissions for compliance with its
listing requirements and conducts background checks of company officers and
other insiders. The equity listing department will also monitor companies
for compliance with the market?s continued listing requirements and, in
accordance with the market?s rules, will take action when these requirements
are not met.

SEC?s oversight of a market?s equity listing requirements includes reviewing
the SRO?s proposed rules to ensure that they are consistent with the
requirements of the Securities and Exchange Act of 1934. These rules, which
make up the market?s initial and continued equity listing guidelines or
standards, must be approved by SEC and can be changed only with SEC?s
approval. SEC also reviews the SRO?s listing decisions, either on appeal or
by its own initiative, and SEC?s OCIE periodically inspects the SRO?s
listing program to ensure compliance with the market?s listing requirements.

In all U. S. markets, quantitative and qualitative listing requirements for
equities have generally addressed the same or similar factors. Two aspects
of the quantitative listing requirements are noteworthy. First, the minimum
thresholds for meeting them varied according to the characteristics of the
companies the markets sought to attract. Second, initial listing
requirements were generally higher than continued listing requirements.
Qualitative listing requirements addressed corporate governance and other
factors. The most significant difference between the equity listing
requirements of Amex and those of other U. S. stock markets was that Amex
was one of only two markets that retained the discretion to initially list
companies that did not meet all of its quantitative requirements.

Amex?s quantitative initial listing guidelines for equities have generally
addressed factors that are the same as or similar to those addressed by the
initial listing standards of the other U. S. stock markets, including
factors such as minimum share price, stockholders? equity, income, market
value of publicly held shares, and number of shareholders. However, the
minimum thresholds for meeting the requirements of each market have varied
to reflect the differences in the characteristics- such as size- of the
companies that each market targeted for listing. For example, Amex has
marketed itself as a niche market designed to give growth companies access
to capital and to the markets. A company could qualify for initial listing
on Amex under one of two alternatives. Under both alternatives, a Listing
Requirements

Have Generally Addressed the Same Factors, but Amex Has Not Required That
All Quantitative Requirements Be Met

Quantitative Listing Requirements Generally Addressed the Same Factors,
Although Minimum Thresholds Varied

Page 7 GAO- 02- 18 Amex Listing Program

company was required to have a minimum share price of $3 and minimum
stockholders? equity of $4 million (see table 1). In addition, under one
alternative, a company could qualify for listing with no pretax income, a
minimum market value of publicly held shares of $15 million, and a 2- year
operating history. Under the other alternative, a company was required to
have minimum pretax income of $750,000, either in the latest fiscal year or
in 2 of the most recent 3 fiscal years, and a minimum market value of
publicly held shares of $3 million.

Table 1: Comparison of Quantitative Initial and Continued Listing
Requirements for Selected Factors in the Largest U. S. Stock Markets
(October 25, 2001)

Nasdaq a Selected factors Amex SmallCap Market National Market NYSE

Initial Continued Initial Continued Initial Continued Initial Continued

Share price $3 NR b $4 $1 $5 $1 or $3 NR $1 Stockholders? equity (dollars in
millions) $4 $2 or $4 $5 $2.5 NR, $15, or

$30 NR or $10 NR $50 Income: pretax or net c (dollars in millions) NR or $.
75 d NR $. 75 d $. 5 d $1 d NR $6.5 e NR Market value of publicly held
shares (dollars in millions)

$3 or $15 $1 $5 $1 $8, $18, or $20 $5 or $15 $60 or

$100 $50 f Number of shareholders 400 or 800 300 300 300 400 400 500 to

2,200 400 or 1,200 Note: This table does not include all the markets?
listing requirements, which typically involve two or more factors and two or
more listing alternatives. When multiple requirements are shown for a
factor, the actual requirement will depend on the listing alternative, which
may not be fully reflected in the table. a In response to the September 11,
2001, terrorist attacks on the United States, Nasdaq implemented

an across- the- board moratorium on the minimum- bid and market value of
public- float requirements for continued listing on Nasdaq, effective
through January 2, 2002. b No requirement (NR) exists for this factor.

c The income requirements are pretax, except for the Nasdaq SmallCap Market,
where they are net. d The income shown is for the latest fiscal year or 2 of
the 3 most recent fiscal years. e The income shown is a 3- year cumulative
requirement in which each year must have positive income. f The requirement
is for total market value of all shares, rather than market value of
publicly held

shares. Sources: Individual markets? listing guidelines or standards, as
applicable.

The Nasdaq SmallCap Market focused on smaller companies that were generally
similar in size to those listed on Amex, and its listing standards and
minimum thresholds were similar to Amex?s. To be eligible for listing on the
Nasdaq SmallCap Market, a company was required to have, among

Page 8 GAO- 02- 18 Amex Listing Program

other things, a minimum share price of $4, a minimum market value of
publicly held shares of $5 million, a 1- year operating history, and either
a minimum net income of $750,000 in the latest fiscal year or in 2 of the
most recent 3 fiscal years, or $5 million of stockholders? equity.
Alternatively, if the company did not meet the operating history, income, or
equity requirements, the minimum market value of all shares was required to
be $50 million.

In contrast to Amex and the Nasdaq SmallCap Market, the Nasdaq National
Market and NYSE targeted larger companies, and their listing standards had
higher minimum thresholds. For example, the Nasdaq National Market required
in part that listing companies have a minimum of $1 million in pretax income
in the latest fiscal year or in 2 of the 3 most recent fiscal years, along
with a minimum market value of publicly held shares of $8 million, depending
on the listing alternative. In comparison, NYSE required a company to have,
among other things, a minimum total pretax income of $6.5 million for the
most recent 3 years and a minimum market value of publicly held shares of
$60 million or $100 million, depending on the listing alternative.

The quantitative continued listing requirements (the minimum thresholds that
listed companies must maintain to continue to be listed) were generally
lower than those for the initial listing requirements (see table 1). For
example, although Amex?s initial listing guidelines required, under one
alternative, that a company have at least $4 million of stockholders? equity
and $750,000 in pretax income, a company could remain in compliance with the
continued listing guidelines even if it had losses in 3 of the last 4 years
(beginning with its listing date), provided that it maintained $4 million in
stockholders? equity. Such differences between initial and continued listing
requirements were typical of all the U. S. markets.

The qualitative listing requirements for equities in all U. S. markets
addressed corporate governance requirements as well as various other
factors. Corporate governance requirements are generally concerned with the
independence of corporate management and boards of directors, as well as
with the involvement of shareholders in corporate affairs. These
requirements address such factors as conflicts of interest by corporate
insiders, the composition of the audit committee, shareholder approval of
certain corporate actions, annual meetings of shareholders, the solicitation
of proxies, and the distribution of annual reports. Qualitative Listing

Requirements Have Addressed Corporate Governance and Other Factors

Page 9 GAO- 02- 18 Amex Listing Program

U. S. markets may also consider various other qualitative factors when
considering a company for listing. These factors are inherently subjective
and are not subject to comparison among markets. For example, Amex?s
guidelines stated that even though a company may meet all of the exchange?s
quantitative requirements, it may not be eligible for listing if it produces
a single product or line of products, engages in a single service, or sells
products or services to a limited number of companies. In addition, in
making a listing decision, Amex would consider such qualitative factors as
the nature of a company?s business, the market for its products, the
reputation of its management, and the history or recorded pattern of its
growth, as well as the company?s financial integrity, demonstrated earning
power, and future outlook.

Although all U. S. markets had rules giving them the discretion to apply
additional or more stringent requirements in making an initial or continued
listing decision, only Amex and Nasdaq retained the discretion to initially
list companies that did not meet their quantitative requirements. 14 The
Amex listing guidelines stated that the exchange?s quantitative guidelines
are considered in evaluating listing eligibility but that other factors are
also considered. As a result, Amex might approve a listing application even
if the company did not meet all the exchange?s quantitative guidelines. Amex
believed that it was important for the exchange to retain discretion to
approve securities for initial listing that did not fully satisfy each of
its quantitative requirements because it would be impossible to include
every relevant factor in the guidelines, especially in an evolving
marketplace.

As of September 7, 2001, Amex had not agreed to implement OCIE?s
recommendations related to the exchange?s use of its discretion in making
listing decisions. Amex was unwilling to relinquish its discretionary
authority or to modify its stock symbols to address OCIE?s concerns. OCIE
officials told us that if these recommendations were not addressed, OCIE
would include them among the open significant recommendations that are to be
reported annually to the SEC Commissioners.

14 As noted earlier, Nasdaq also retained this discretion, but had not
listed a company pursuant to a waiver of a quantitative listing standard
since May 20, 1999. Amex Retained the

Discretion to List Companies That Did Not Meet Its Quantitative Guidelines

Amex Did Not Agree to OCIE?s Recommendations on Listing Requirements and
Public Disclosures

Page 10 GAO- 02- 18 Amex Listing Program

OCIE reported in April 2001 that the Amex listing department was generally
thorough in its financial and regulatory reviews of companies seeking to be
listed on the exchange. However, OCIE also reported that Amex was using its
discretionary authority more often than was appropriate to approve initial
listings that did not meet the exchange?s quantitative guidelines, and that
it did so without providing sufficient disclosure to the investing public.
OCIE reported that the percentage of companies Amex listed that did not meet
the exchange?s initial quantitative guidelines increased from approximately
9 percent for the 20 months between January 1, 1998, and August 31, 1999, to
approximately 22 percent for the subsequent 14.5 months ending on November
13, 2000. OCIE noted that although Amex?s listing guidelines are
discretionary, investors rightfully presume that the companies listed on
Amex generally meet its quantitative and qualitative guidelines.

In response to concerns that the investing public was not receiving
sufficient information about the eligibility of companies to trade on Amex,
OCIE recommended that Amex amend its rules to provide mandatory initial
quantitative listing requirements. Until the mandatory listing requirements
are in place, OCIE recommended that Amex provide some form of public
disclosure to identify companies that do not meet its initial listing
guidelines. For example, Amex could attach a modifier to the trading symbols
of these companies. The report indicated that another alternative would be
to issue a press release each time Amex lists a company that does not meet
its quantitative guidelines. However, OCIE officials said that a press
release was not the preferred form of public disclosure because it was a
one- time occurrence, while a symbol modifier would accompany a listing
until the company complied with Amex listing requirements.

OCIE also expressed concerns about Amex?s use of its discretionary authority
in making continued listing decisions. The concerns it raised in its April
2001 inspection report were similar to those raised in a 1997 report. In
both reports, OCIE concluded that Amex did not identify noncompliant
companies in a timely manner and that it deferred delisting actions for too
long and without good cause. In addition to citing lapses in Amex?s timely
identification of companies that did not meet its continued listing
guidelines, OCIE reported in 2001 that for 5 of 34 companies reviewed, or 15
percent, Amex either granted excessive delisting deferrals or did not begin
delisting proceedings in a timely manner. Also, we learned from Amex that 71
companies- about 10 percent of the exchange?s 704 listings- did not meet all
aspects of its continued listing guidelines as of OCIE Recommendations

Addressing Amex?s Use of Its Discretion Remained Open

Page 11 GAO- 02- 18 Amex Listing Program

July 31, 2001. Of these, 12 companies had been out of compliance with its
guidelines for more than 2 years, and 20 companies had been out of
compliance for between 1 and 2 years (see table 2).

Table 2: Duration of Time That Companies Did Not Comply With Amex?s
Continued Listing Guidelines (July 31, 2001)

Duration of time Number of companies

Less than 6 months 25 a 6- 12 months 14 b, c 1- 2 years 20 a, b More than 2
years 12 Total 71 a Includes one company that was delisted.

b Includes one company that came into full compliance after July 31, 2001. c
Includes one company for which an appeal of a delisting notification was in
progress as of September 6, 2001. Source: Amex.

In addition, under a November 2000 Amex rule change, listed companies were
required to issue a press release to inform current and potential investors
when Amex notified the companies of a pending delisting decision. 15
According to Amex, the exchange had sent notices to 18 companies of
potential delisting between the time of the rule change and August 30, 2001.
Amex informed us that these companies had not been in full compliance with
the continued listing guidelines for an average of about 6.5 months before
receiving the notice.

In response to the concerns OCIE expressed in 1997 about Amex deferring
delisting action without good cause, the exchange agreed to review on a
quarterly basis the status of companies that did not meet its continued
listing standards and to document its rationale for allowing noncompliant
companies to remain listed. OCIE believed that by more closely scrutinizing
the actions that companies were taking to comply with the exchange?s
continued listing guidelines, Amex would be more likely to delist companies
that were noncompliant for excessive periods. However, OCIE found in its
most recent inspection that although Amex had performed the agreed- upon
quarterly reviews, the exchange was still not taking timely action to delist
noncompliant companies.

15 See Release No. 34- 43559, File No. SR- Amex- 00- 43.

Page 12 GAO- 02- 18 Amex Listing Program

OCIE recommended in its 2001 inspection report, as it had in its 1997
report, that Amex identify in a more timely manner the companies that did
not comply with its continued listing guidelines, grant delisting deferrals
to noncompliant companies only if the companies could show that a reasonable
basis existed for assuming they would return to compliance with the listing
guidelines, document reviews of each company?s progress in coming into
compliance with the listing guidelines, and place firm time limits on the
length of delisting deferrals. The report also recommended that Amex append
a modifier to the company?s listing symbol or devise an alternative means of
disclosure to denote that a company was not in compliance with Amex?s
continued listing guidelines. 16

As of September 7, 2001, OCIE and Amex were in ongoing discussions about the
actions Amex would take to address OCIE?s recommendations. However, in
responding to OCIE?s 2001 inspection report and in subsequent discussions
with OCIE officials, Amex indicated that it did not want to relinquish its
discretionary authority or to modify its stock symbols. Amex stressed the
importance of being able to evaluate a company?s suitability for listing on
a case- by- case basis. The exchange further responded that its published
listing policies put potential investors on notice that Amex would evaluate
an applicant based on a myriad of factors and might approve companies for
listing that did not meet all of its quantitative guidelines. In addition,
Amex cited the November 2000 rule change under which companies are required
to issue a press release to inform investors of a pending delisting
decision. Amex officials also told us that investors could obtain sufficient
information about a company?s operating condition from other public sources,
obviating the need for a stock symbol modifier or other public notice.

OCIE officials said that they believed additional disclosure to the
investing public would be necessary until Amex turned its equity guidelines
into firm standards. The officials remained concerned that individual
investors were unaware that Amex?s listing guidelines provided broad
discretion in making listing decisions. They emphasized that they were
concerned about Amex?s discretion to list companies that did not meet its
quantitative guidelines, stressing that they did not want to remove Amex?s
discretion to apply additional or more stringent requirements in making

16 Although the OCIE report specifically recommended that Amex ?consider?
appending a symbol, OCIE officials told us that Amex was expected to act on
the recommendation. Amex Did Not Agree to

Relinquish Its Discretionary Authority or to Modify Its Stock Symbols

Page 13 GAO- 02- 18 Amex Listing Program

listing decisions. Further, although the OCIE report acknowledged that
alternative disclosure mechanisms existed, OCIE officials said that
attaching a modifier to a stock?s listing symbol to indicate that a stock
did not meet either the initial or continued listing standards would provide
the broadest and therefore most preferred type of disclosure. For example, a
company?s press release making public a delisting decision would not be a
preferred form of disclosure because, depending on the circumstances, a
company could remain out of compliance with Amex?s continued listing
requirements for months or years without being subject to a delisting
decision. To address this concern, NYSE requires a company to issue a press
release when the exchange notifies the company that it does not meet the
continued listing requirements. Nonetheless, a press release is a one- time
notice and, as such, may limit potential investors? awareness of a company?s
listing status.

Amex also expressed concern that OCIE was imposing strict requirements on
its market that would not be applicable to other markets. Amex specifically
noted that neither the Nasdaq National Market nor NYSE appended a symbol to
listed securities that did not meet their continued listing requirements.
Amex officials told us that requiring Amex to do so could mislead investors
into believing that other markets do not follow listing practices similar to
those of Amex. Amex also said that a modifier would place an unwarranted
negative label on the company and send an inappropriate message to the
market. As noted above, companies listed on Amex have more closely resembled
those listed on the Nasdaq SmallCap Market than those listed on the Nasdaq
National Market. According to a Nasdaq official, the Nasdaq SmallCap Market
has used a modified listing symbol for all companies that fall below its
continued listing requirements since the market began operating in 1982, 17
and 10 stocks had modified symbols as of August 15, 2001. Nonetheless, OCIE
officials said that they are in the process of inspecting the listing
programs at Nasdaq and NYSE and would, if they determined that companies
were listed that did not meet the markets? equity listing standards,
recommend that stock symbol modifiers be used to identify such companies.

17 According to Nasdaq, when the National Market and SmallCap Market were
formed in 1982, Nasdaq?s existing practice of using symbol modifiers was
discontinued for the National Market because Amex and NYSE did not have such
a requirement.

Page 14 GAO- 02- 18 Amex Listing Program

Finally, Amex said that a November 2000 rule change, 18 as well as
significant staffing changes that include a new department head, were having
the effect of reducing the number of stocks approved for listing that did
not meet the exchange?s quantitative guidelines. According to Amex, from
November 1, 2000, through August 27, 2001, 6 of the 39 new listings-
approximately 15 percent- were granted exemptions to the exchange?s
quantitative listing guidelines. Five companies were approved for listing
based on an appeal to the Committee on Securities, and one company was
approved by the listing department staff because it had ?substantially? met
all of the exchange?s initial listing guidelines. According to Amex, the
determination of substantial compliance was based on the fact that the
applicant had met all the exchange?s guidelines, except that the company?s
price at the time of approval was $2.9375, instead of the $3.00 minimum
required by the guidelines. As discussed earlier, OCIE had found that 22
percent of new listings for a prior period had been granted exemptions. Amex
officials said that they expected the downward trend to continue in the
number of stocks approved for listing that did not meet the exchange?s
quantitative guidelines. OCIE officials told us that they had considered the
changes to the Amex listing program in making their recommendations.

In a 1998 report, we recommended that the SEC Chairman require OCIE to
report periodically on the status of all open, significant recommendations
to the SEC Commissioners. Our rationale was that involving the Commissioners
in following up on recommendations would provide them with information on
the status of corrective actions that OCIE had deemed significant. Also,
because the Commissioners have the authority to require the SROs to
implement the staff?s recommendations, reporting to them would provide the
SROs with an additional incentive to implement these recommendations. After
preparing its first annual report in August 1998, including both significant
recommendations on which action had been agreed to but not completed and
recommendations that had been rejected, OCIE determined that future reports
would include only the status of

18 Before the rule change, Amex listing staff could forward an application
that did not meet the quantitative listing guidelines to Amex?s Committee on
Securities with a recommendation for approval. Under the rule change, an
applicant that is not approved for listing is responsible for appealing the
determination to the Committee, thereby elevating authority for granting the
exception. However, listing staff are still authorized to approve a company
for listing if they determine that a company is in ?substantial? compliance
with Amex?s listing requirements. (See Release No. 34- 43308, File No. SR-
Amex- 00- 12.) OCIE Planned to Report to

the SEC Commissioners on Significant Recommendations That Amex Did Not Agree
to Implement

Page 15 GAO- 02- 18 Amex Listing Program

significant recommendations that an SRO had expressly declined to adopt or
had failed to adequately address. Reflecting the seriousness of their
concerns about the open recommendations related to Amex?s use of its
discretionary authority in making initial and continued listing decisions,
OCIE officials told us that in the absence of an Amex agreement to
adequately address these recommendations, OCIE would include them among the
open significant recommendations to be reported annually to the SEC
Commissioners.

Amex officials told us that the exchange was fulfilling its SRO
responsibilities related to its equity listing operations in part by
individually monitoring the status of companies that did not meet its
continued listing guidelines and, beginning in January 2001, by summarizing
related information in monthly reports to management. These monthly reports
provided information on the output of the department?s activities, including
the names and total number of companies that did not meet the continued
listing guidelines, the reasons that individual companies did not meet the
guidelines, the date of the latest conference with each company to discuss
its listing status, the total number of such conferences held, and the total
number of decisions made on the basis of these conferences.

The Amex listing department did not, however, prepare management reports
that aggregated and analyzed overall statistics to measure program results
over time. As a result, Amex could not demonstrate the effectiveness of its
exceptions- granting policies or its initial and continued listing
guidelines. For example, Amex did not routinely aggregate or analyze
statistics on the percentage of applicants listed that were granted
exceptions to initial or continued listing guidelines, or on the length of
time that companies were not in compliance with the continued listing
guidelines and their progress in coming back into compliance with them.
Collecting and analyzing such data over time, especially in conjunction with
the outcomes for these companies- whether they achieved compliance or were
delisted- could provide Amex and OCIE with an indicator of the effectiveness
of Amex?s process for granting exceptions. Analysis of this information
could also help Amex and OCIE determine whether a significant difference
exists between the outcomes for companies that meet the listing guidelines
and those that do not. Also, although Amex told OCIE that it continually
?monitors? to determine whether its guidelines need to be revised, Amex did
not develop and aggregate statistics on the number of companies delisted or
on the reasons for delistings, such as noncompliance with listing
requirements or a move Amex Did Not

Prepare Management Reports That Demonstrated the Effectiveness of Its
Listing Program

Page 16 GAO- 02- 18 Amex Listing Program

to another market. As indicated above, Amex provided us with some of this
information in response to a specific request but also told us that the
listing department did not routinely aggregate such information for
management purposes. Collected and analyzed over time, this information
could provide Amex and OCIE with an indicator of the effectiveness of Amex?s
initial and continued listing guidelines and, therefore, could be useful in
identifying appropriate revisions to them.

Other markets have developed this kind of management report. In response to
concerns about the effectiveness of Nasdaq?s listing department, we
recommended in 1998 that SEC require NASD to develop management reports
based on overall program statistics. The resulting quarterly reports to
senior Nasdaq management and OCIE include data on the number and disposition
of listing applications, number and reasons for noncompliance with continued
listing standards, disposition of companies that do not comply with the
continued listing standards, requests for and results of hearings, status of
companies granted temporary exceptions to the continued listing standards as
a result of hearings, and number of and reasons for delistings. As a result
of a 1998 OCIE recommendation, NYSE submits reports containing similar
information to the NYSE Board of Directors and, upon request, to OCIE.
According to an OCIE official, the resulting quarterly reports are useful
for monitoring the listing activities of these markets.

Amex?s use of its discretion to initially list and continue to list
companies that do not meet the exchange?s quantitative guidelines for
equities could mislead investors, who are likely to assume that the
companies listed on Amex meet the exchange?s listing guidelines. Because
investors are entitled to clear information for use in making investment
decisions, they should be informed when listed companies do not meet these
guidelines. Amex has reiterated its concern about the potentially negative
impact of being the only market to publicly identify listings that do not
meet its guidelines. The Nasdaq SmallCap Market already uses stock symbol
modifiers for companies that do not meet its continued listing standards.
Also, OCIE officials told us they would recommend that other markets
disclose noncompliance with their continued listing standards. (OCIE did not
identify noncompliance with initial listing standards as an issue.)
Ultimately, Amex could avoid concerns about the negative impact of public
disclosure by adopting firm quantitative guidelines. In the meantime,
including the recommendations that Amex rejected in the OCIE annual reports
to the SEC Commissioners- who have the authority to Conclusions

Page 17 GAO- 02- 18 Amex Listing Program

require their implementation- would provide an additional incentive for Amex
to act.

Notwithstanding Amex?s expectation that changes to its listing program would
result in diminished use of its discretion, the ongoing concerns about
weaknesses in program operations and the potentially negative impact of
exchange practices on public confidence warrant continued monitoring of
Amex?s listing program. Both Amex and OCIE could use routine management
reports that reflect the performance of the exchange listing program to
improve oversight of the program. Amex officials did not use aggregated and
analyzed information on the results of the listing process to help judge its
overall effectiveness, including that of its exceptions- granting policies
or its initial and continued listing guidelines. Such information would
include, among other things, the number and percentages of companies listed
that have exceptions to the initial and continued listing guidelines, the
number and percentages of companies in each group that are delisted, the
reasons for the delistings, and the turnover rate for listings. Aggregating
and analyzing such information could help Amex and OCIE to identify and
address weaknesses in Amex?s listing program operations.

As part of SEC?s ongoing efforts to ensure that Amex addresses weaknesses in
the management of its equity listing program, we recommend that the
Chairman, SEC,

 direct Amex to implement mandatory quantitative equity listing
requirements or provide ongoing public disclosure of noncompliant companies,
and  require Amex to report quarterly to its Board of Governors on the

operating results of its equity listing program and make these reports
available to OCIE for review. Such reports should contain sufficient
information to demonstrate the overall effectiveness of the Amex equity
listing program, including, at a minimum, that of its exceptions- granting
policies and its initial and continued listing guidelines.

We obtained written comments on a draft of this report from Amex and SEC
officials. The written comments are presented in appendixes I and II,
respectively. Amex committed to taking action to address our recommendation
for improving public disclosure of its listing requirements by replacing its
discretionary guidelines with mandatory initial and continued listing
standards (see appendix I, exhibits A and B). Recommendations to

the Chairman, SEC Agency Comments and Our Evaluation

Page 18 GAO- 02- 18 Amex Listing Program

Also in response to our recommendation, Amex committed to enhancing its
management reports as they relate to its initial listing program. SEC
officials commented that they were pleased that Amex would be making changes
to its listing program that would address the findings and recommendations
outlined in our report, and they said they would continue working with Amex
to ensure that the proposed changes are implemented effectively.

Amex noted in its comment letter that its proposals are broad and that the
various details would be finalized as part of the rule approval process,
which involves SEC. In earlier discussions with Amex about its draft
proposals, we expressed the view that Amex?s rules would provide for greater
investor protection if they included specific time frames for notifying the
public about material events related to a company?s listing status. For
example, such time frames would provide for expeditiously notifying the
public after Amex advises a company that delisting proceedings are to be
initiated. We also observed that Amex had not established other critical
time frames for procedures such as advising a company that it does not meet
the exchange?s continued listing requirements. Amex indicated in its comment
letter that it intends to include applicable time frames as it works out the
details of its proposals. SEC officials told us that they would work with
Amex to ensure that appropriate time frames are established.

In agreeing to enhance its management reports to address our recommendation,
Amex acknowledged the potential value of these reports in light of proposed
changes to its initial listing requirements. Under these proposed changes,
companies could qualify for initial listing under Amex?s ?regular? listing
standards or, subject to mitigating circumstances, under its less stringent
?alternative? standards. Amex committed to enhancing its management reports
with information on companies that have been approved under the proposed
alternative standards to provide for executive management review of the
continued status of such companies, as compared with those approved for
listing pursuant to its regular listing standards. Amex believes that its
enhanced management reports should be useful in providing feedback on the
application of the alternative standards to the Amex Board of Governors,
Amex Committee on Securities, and SEC. SEC officials told us that they would
use the enhanced reports to monitor implementation of the alternative
standards. Although we support the changes proposed by Amex, we believe that
the management reports would be of even greater use to Amex and SEC in their
oversight if they included data on the effectiveness of Amex?s practices for
continued listings in addition to data on the exchange?s

Page 19 GAO- 02- 18 Amex Listing Program

exceptions- granting practices for initial listings. Our report discussed
the kinds of aggregated and analyzed data that would be important to include
in Amex?s management reports and that Nasdaq and NYSE include in their
reports. Amex would benefit by working with SEC to ensure that the
exchange?s reports contain similar information.

To describe the key differences between the Amex initial and continued
equity listing guidelines and the equity listing standards of other U. S.
stock markets, we compared the quantitative and qualitative guidelines and
standards of the seven U. S. markets that are registered to trade stock and
that have listing requirements. These markets include six national
securities exchanges- Amex, the Boston Stock Exchange, the Chicago Stock
Exchange, NYSE, the Pacific Exchange, and the Philadelphia Stock Exchange-
and one national securities association, the Nasdaq Stock Market. The
seventh national securities exchange, the Cincinnati Stock Exchange, trades
only stocks that are listed on other exchanges and does not have listing
standards. We also interviewed officials from SEC?s OCIE and from Amex,
Nasdaq, and NYSE to gain a further understanding of the initial and
continued listing requirements of each market. This report places greater
emphasis on the results of our comparison of Amex guidelines with the
standards of Nasdaq and NYSE, because about 98 percent of U. S. common
stocks were subject to the listing requirements of one of these three
markets at the time of our review.

In reviewing OCIE recommendations to Amex for improving its equity listing
program, we discussed the contents of the April 2001 inspection report and
Amex?s written response to it with officials of OCIE and Amex?s Listings
Qualifications Department and Office of General Counsel, focusing on the
areas of disagreement between OCIE and Amex. Additionally, we examined
OCIE?s 1997 inspection report on Amex?s listing activities, Amex?s response,
and associated correspondence to determine the nature of weaknesses
identified in the OCIE inspection and how they were resolved. We also
reviewed related GAO reports.

To examine how Amex monitors the effectiveness of its equity listing
department operations, we interviewed Amex and OCIE officials. We also
reviewed related GAO reports and examined the Nasdaq and NYSE quarterly
management reports that are provided to OCIE.

We conducted our work in Chicago, IL; New York, NY; and Washington, D. C.,
from November 2000 through October 2001, in accordance with generally
accepted government auditing standards. Scope and

Methodology

Page 20 GAO- 02- 18 Amex Listing Program

As agreed with you, unless you publicly release its contents earlier, we
plan no further distribution of this letter until 30 days from its issuance
date. At that time, we will send copies to the Chairmen and Ranking Minority
Members of the Senate Committee on Banking, Housing, and Urban Affairs and
the House Committee on Financial Services; the Chairman of the House Energy
and Commerce Committee; and other interested congressional committees and
organizations. We will also send copies to the Chairman of SEC and to the
Chairman and Chief Executive Officer of Amex. Copies will also be made
available to others upon request.

If you or your staff have any questions regarding this report, please
contact me at (202) 512- 8678, hillmanr@ gao. gov, or contact Cecile Trop,
Assistant Director, at (312) 220- 7705, tropc@ gao. gov. Key contributors
include Neal Gottlieb, Roger Kolar, Anita Zagraniczny, and Emily Chalmers.

Sincerely yours, Richard J. Hillman Director, Financial Markets and
Community Investment

Appendix I: Comments From the American Stock Exchange

Page 21 GAO- 02- 18 Amex Listing Program

Appendix I: Comments From the American Stock Exchange

Appendix I: Comments From the American Stock Exchange

Page 22 GAO- 02- 18 Amex Listing Program

Appendix I: Comments From the American Stock Exchange

Page 23 GAO- 02- 18 Amex Listing Program

Appendix I: Comments From the American Stock Exchange

Page 24 GAO- 02- 18 Amex Listing Program

Appendix I: Comments From the American Stock Exchange

Page 25 GAO- 02- 18 Amex Listing Program

Appendix I: Comments From the American Stock Exchange

Page 26 GAO- 02- 18 Amex Listing Program

Appendix I: Comments From the American Stock Exchange

Page 27 GAO- 02- 18 Amex Listing Program

Appendix II: Comments From the Securities and Exchange Commission

Page 28 GAO- 02- 18 Amex Listing Program

Appendix II: Comments From the Securities and Exchange Commission

250010

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