    Securities Markets: Opportunities Exist to Enhance Investor
    Confidence and Improve Listing Program Oversight (08-APR-04,
    GAO-04-75).

    The equity listing standards of the three largest U.S. securities
    markets--the American Stock Exchange (Amex), the Nasdaq Stock
    Market, Inc. (NASDAQ), and the New York Stock Exchange
    (NYSE)--have received heightened attention as part of efforts to
    restore investor confidence following the 2001 terrorist attacks
    and the unexpected corporate failures beginning that year. GAO
    was asked to discuss (1) the status of the Securities and
    Exchange Commission's (SEC) recommendations to the three largest
    markets for improving their equity listing programs, (2) SEC's
    oversight of NASDAQ's moratorium on the enforcement of certain of
    its listing standards and the status of affected listed companies
    (issuers), and (3) actions the three largest markets have taken
    to strengthen corporate governance.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-04-75
        ACCNO:   A09688
      TITLE:     Securities Markets: Opportunities Exist to Enhance
    Investor Confidence and Improve Listing Program Oversight
         DATE:   04/08/2004
      SUBJECT:   Internal controls
    	     Investments
    	     Noncompliance
    	     Self-regulatory organizations
    	     Standards and standardization
    	     Standards evaluation
    	     Stock exchanges
    	     Stocks (securities)

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    GAO-04-75

    United States General Accounting Office

                         GAO Report to Congressional Requesters

    April 2004

    SECURITIES MARKETS

     Opportunities Exist to Enhance Investor Confidence and Improve Listing Program
                                       Oversight

                                           a

    GAO-04-75

    Highlights of GAO-04-75, a report to congressional requesters

    The equity listing standards of the three largest U.S. securities
    markets-the American Stock Exchange (Amex), the Nasdaq Stock Market, Inc.
    (NASDAQ), and the New York Stock Exchange (NYSE)-have received heightened
    attention as part of efforts to restore investor confidence following the
    2001 terrorist attacks and the unexpected corporate failures beginning
    that year. GAO was asked to discuss (1) the status of the Securities and
    Exchange Commission's (SEC) recommendations to the three largest markets
    for improving their equity listing programs, (2) SEC's oversight of
    NASDAQ's moratorium on the enforcement of certain of its listing standards
    and the status of affected listed companies (issuers), and (3) actions the
    three largest markets have taken to strengthen corporate governance.

    This report includes 12 recommendations to SEC designed to enhance
    investor confidence in the markets, further strengthen the listing
    standards of the selfregulatory organizations (SRO) that oversee the
    markets, and improve SEC and SRO oversight of the markets' listing
    programs. SEC generally agreed with the recommendations; the SROs
    expressed concerns about those related to notifying the public of
    noncompliance with listing standards and enhancing board independence.

    www.gao.gov/cgi-bin/getrpt?GAO-04-75.

    To view the full product, including the scope and methodology, click on
    the link above. For more information, contact Rick Hillman at (202)
    512-8678 or hillmanr@gao.gov.

    April 2004

    SECURITIES MARKETS

    Opportunities Exist to Enhance Investor Confidence and Improve Listing Program
    Oversight

    The only significant open recommendation from SEC's inspections of the
    three largest U.S. markets' equity listing programs was a recommendation
    that these markets append a modifier to the stock symbol of issuers that
    do not meet their continued listing standards to provide the public early
    and ongoing notification of issuers' noncompliance with these standards.
    NYSE has taken steps to implement this recommendation for its quantitative
    standards by transmitting an indicator of an issuer's noncompliance with
    stock data to information vendors, but concerns remain about the further
    distribution of this information from the vendors to investors. NASDAQ has
    provided some ongoing notification of noncompliance with certain listing
    standards since before 1980. More recently, NASDAQ and Amex have proposed
    using indicators to address SEC's recommendation, but the indicators
    generally would not be transmitted early in the deficiency process. In the
    absence of voluntary action by the markets, further SEC action is
    warranted to ensure that the public receives early and ongoing
    notification of issuers' noncompliance with listing standards.

    Following the market instability after September 11, 2001, SEC allowed a
    NASDAQ rule to remain in effect that imposed a 3-month moratorium on
    enforcing NASDAQ's bid-price related listing standards. While its full
    effect could not be determined, the moratorium met its objective of
    allowing noncompliant issuers more time to trade without facing the threat
    of delisting. According to NASDAQ, the moratorium provided relief to at
    least 509 issuers-about 11 percent of all its issuers. SEC subsequently
    approved another NASDAQ rule that allows some issuers to trade up to 2
    years while noncompliant with the bid-price standard-a long time absent a
    means of providing the public with both early and ongoing notification of
    an issuer's listing status.

    In response to a 2002 SEC request and rules implementing the
    Sarbanes-Oxley Act of 2002, the three largest U.S. markets have adopted
    changes to their corporate governance listing standards that when
    implemented should promote stronger board oversight and greater
    accountability. Increasing the role and authority of independent directors
    is central to these governance reforms. Consistent with the position of
    some market participants, GAO encourages SEC, in conjunction with the
    markets, to seriously consider using listing standards to further
    strengthen board independence by requiring a supermajority of independent
    directors and separating the positions of chief executive officer and
    board chairman. Also, to better ensure that they hold themselves
    accountable to standards consistent with those imposed on issuers, SEC
    asked the three largest markets to evaluate their own governance. SEC's
    timely review of both the markets' oversight of issuers' compliance with
    the new corporate governance standards and the markets' changes to their
    governance will be important to ensuring the effectiveness of issuers and
    markets' actions.

    Contents

      Letter

    Results in Brief
    Background
    TheSROs Have Addressed All OCIE Recommendations, Except One

    to Use Stock Symbol Modifiers OCIE Does Not Routinely Use SRO Internal
    Review Reports in Planning and Conducting Inspections The NASDAQ
    Moratorium and Subsequent Rule Changes Allowed Issuers to Remain Listed
    Longer Listing Standards Have Been Used as a Vehicle for Improving

    Corporate Governance Conclusions Recommendations for Executive Action
    Agency Comments and Our Evaluation

    1 4 9

    13

    28

    32

    40 66 69 70

    Appendixes

    Appendix I:

    Appendix II:

    Appendix III:

               Appendix IV: Appendix V: Appendix VI: Appendix VII: Appendix VIII:
                                                                     Appendix IX:

    Scope and Methodology 77

    Quantitative Listing Standards for Domestic Issuers of the
    Three Largest Markets 81

    Deficiency and Hearing Processes for Domestic Issuers
    Listed on the Three Largest Markets 88
    The Amex Deficiency and Hearing Processes for Domestic

    Issuers 88 The NASDAQ Deficiency and Hearing Processes for Domestic

    Issuers 90 The NYSE Deficiency and Hearing Processes for Domestic

    Issuers 96

    Market Participants Contacted During This Review 100

    Comments from the Securities and Exchange Commission 101

    Comments from the American Stock Exchange 104

    Comments from the Nasdaq Stock Market, Inc. 107

    Comments from the New York Stock Exchange 112

    GAO Contacts and Staff Acknowledgments 118 GAO Contacts 118 Staff
    Acknowledgments 118

                                        Contents

    Tables Table 1:

    Table 2:

    Table 3: Table 4: Table 5: Table 6: Table 7: Table 8: Table 9:

    Lowest and Highest Numbers of Issuers Trading
    Noncompliant with Quantitative Continued Listing
    Standards in Calendar Year 2003, by SRO
    Total Number of Issuers Trading Noncompliant with
    Quantitative Continued Listing Standards in Calendar Year
    2003 and Their Listing Status on December 31, 2003, by
    SRO
    The American Stock Exchange's Quantitative Standards
    for Initial Listing of Domestic Issuers
    The American Stock Exchange's Quantitative Standards
    for Continued Listing of Domestic Issuers
    The NASDAQ National Market's Quantitative Standards for
    Initial Listing of Domestic Issuers
    The NASDAQ National Market's Quantitative Standards for
    Continued Listing of Domestic Issuers
    The NASDAQ SmallCap Market's Quantitative Standards
    for Initial Listing of Domestic Issuers
    The NASDAQ SmallCap Market's Quantitative Standards
    for Continued Listing of Domestic Issuers
    The New York Stock Exchange's Quantitative Standards
    for Initial Listing of Domestic Issuers

    18

    19 81 82 83 84 85 85 86 87

    Table 10: The New York Stock Exchange's Quantitative Standards for
    Continued Listing of Domestic Issuers

    Figures Figure 1:

    Figure 2: Figure 3: Figure 4:

    Figure 5:

    Figure 6:

    Maximum Number of Calendar Days in NASDAQ
    Bid-Price Compliance Periods from August 1991
    (Premoratorium) through December 2003 (Latest Rule
    Change) 40
    Key Points in Amex's Deficiency Process for Domestic
    Issuers 89
    Key Points in Amex's Hearing Process for Domestic
    Issuers 90
    Key Points in NASDAQ's Equity, Total Assets and Total
    Revenue, Publicly Held Shares, and/or Round-Lot
    Shareholders Deficiency Process for Domestic Issuers 91
    KeyPointsin NASDAQ's Market Value of ListedSecurities
    and Market Makers Deficiency Process for Domestic
    Issuers 92
    Key Points in NASDAQ's Market Value of Publicly Held
    Shares Deficiency Process for Domestic Issuers 93

    Contents

    Figure 7:	Key Points in NASDAQ's SCM and NNM Bid-Price Deficiency Process
    for Domestic Issuers 94

    Figure 8:	Key Points in NASDAQ's Hearing Process for Domestic Issuers 96

    Figure 9:	Key Points in NYSE's Price Deficiency Process for Domestic
    Issuers 97

    Figure 10: Key Points in NYSE's Nonprice Deficiency Process for Domestic
    Issuers 98

    Figure 11: Key Points in NYSE's Hearing Process for Domestic Issuers 99

    Abbreviations

    AFEP-AGREF Association of French Private Sector Companies and Association
    of Major French Corporations AFL-CIO American Federation of Labor and
    Congress of Industrial

    Organizations Amex American Stock Exchange CEO Chief Executive Officer
    CFTC Commodity Futures Trading Commission EDGAR Electronic Data Gathering,
    Analysis, and Retrieval IG Inspector General NASD National Association of
    Securities Dealers, Inc. NASDAQ Nasdaq Stock Market, Inc. NNM NASDAQ
    National Market NYSE New York Stock Exchange OCIE Office of Compliance
    Inspections and Examinations SEC Securities and Exchange Commission SCM
    SmallCap Market SRO self-regulatory organization

    This is a work of the U.S. government and is not subject to copyright
    protection in the United States. It may be reproduced and distributed in
    its entirety without further permission from GAO. However, because this
    work may contain copyrighted images or other material, permission from the
    copyright holder may be necessary if you wish to reproduce this material
    separately.

    A

    United States General Accounting Office Washington, D.C. 20548

    April 8, 2004

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

    The Honorable Barney Frank Ranking Minority Member Committee on Financial
    Services House of Representatives

    The Honorable Paul E. Kanjorski

    Ranking Minority Member

    Subcommittee on Capital Markets, Insurance, and Government Sponsored
    Enterprises Committee on Financial Services House of Representatives

    The equity listing standards of the three largest U.S. securities markets-
    the American Stock Exchange (Amex), Nasdaq Stock Market, Inc. (NASDAQ),
    and New York Stock Exchange (NYSE)-have received heightened attention as
    part of public and private efforts to restore investor confidence in the
    markets.1 Listing standards have been the focus of attention because they
    govern which companies can be listed for trading on a particular market
    and are intended in part to maintain public confidence in the markets. In
    its role as a self-regulatory organization (SRO), each market establishes
    and enforces the standards that companies must meet to be listed for
    trading.2 To oversee the effectiveness of the SROs' listing programs, the
    Securities and Exchange Commission (SEC), through its Office of Compliance
    Inspections and Examinations (OCIE), periodically

    1Amex, NASDAQ, and NYSE are the three largest U.S. securities markets for
    equities trading based on the number of listed U.S. companies.

    2The markets are regulated under a combination of self-regulation (subject
    to oversight by the Securities and Exchange Commission) and direct federal
    regulation. Except where the context otherwise requires, we use the term
    "SRO" to include NASDAQ, although as of March 10, 2004, NASDAQ's
    application for registration as a national securities exchange was pending
    at the Securities and Exchange Commission. Until its application is
    approved, NASDAQ is not an SRO. Instead, NASDAQ proposes its rules through
    the responsible SRO, the National Association of Securities Dealers, Inc.

    inspects these programs and makes recommendations intended to improve
    them.

    Your ongoing interest in learning how the three largest SROs have
    addressed OCIE's recommendations for improving their listing programs,
    particularly those related to protecting investors, has broadened as
    listing standards have increasingly become the focus of solutions to
    challenges facing the markets.3 First, in response to the market turmoil
    resulting from the September 2001 terrorist attacks on the United States,
    NASDAQ, subject to SEC's oversight, implemented a rule that imposed a
    moratorium on enforcing its listing standards for bid price4 and market
    value of publicly held shares5 and subsequently implemented two additional
    rules that further relaxed its bid-price standard. These actions raised
    questions about how NASDAQ and SEC, in their regulatory roles, balanced
    the goal of market stability against that of investor protection. Second,
    the unexpected failures of several major corporations beginning in 2001
    focused congressional and regulatory attention on improving issuers and
    SROs' corporate governance-that is, the way boards oversee management to
    ensure that organizations are well-run and shareholders are treated
    fairly.6

    As agreed with your offices, we discuss the following in this report: (1)
    the status of OCIE's recommendations to the three largest SROs for
    improving their markets' equity listing programs, focusing on a
    recommendation intended to ensure early and ongoing public notification of
    issuers' noncompliance with continued listing standards; (2) the extent to
    which OCIE uses SROs' internal review reports in its inspection process;7
    (3) SEC's oversight of NASDAQ's moratorium and subsequent bid-price rule
    changes and the listing status of the issuers directly affected by these

    3The term "three largest SROs" is used in this report to refer to Amex,
    NASDAQ, and NYSE.

    4NASDAQ defines bid price as the price a buyer is willing to pay for a
    security.

    5Market value of publicly held shares is the bid price multiplied by the
    number of outstanding shares held by investors that are not officers,
    directors, or 10 percent or greater shareholders.

    6Issuers are organizations such as corporations that are selling or have
    sold their securities to the public.

    7The term "internal review reports," as used in this report, includes
    internal audit reports, management review reports, and internal reports
    prepared by outside consultants or auditors.

    changes; and (4) actions the three largest SROs have taken to strengthen
    corporate governance for issuers and themselves.

    To report on the status of OCIE's recommendations to the three largest
    SROs for improving their markets' equity listing programs, we reviewed
    OCIE's inspection reports and related workpapers and obtained available
    information from OCIE, Amex, NASDAQ, and NYSE officials on OCIE's
    recommendations and the SROs' efforts to address them. In addition to
    these steps, in reviewing actions to address OCIE's recommendation
    intended to ensure early and ongoing public notification of issuers'
    noncompliance with continued listing standards, we contacted 11
    information vendors, visited their Web sites, or both, to determine
    whether they were distributing the information on issuers' noncompliance
    with NYSE's quantitative continued listing standards.8 To report on the
    extent to which OCIE uses SROs' internal review reports in its inspection
    process, we obtained and reviewed information from OCIE and other
    regulatory agencies on their policies for using these reports in planning
    and conducting inspections and examinations and reviewed authoritative
    standards and selected SRO internal review reports. To report on SEC's
    oversight of NASDAQ's moratorium and subsequent bid-price rule changes and
    the listing status of issuers directly affected by these changes, we
    reviewed relevant NASDAQ proposed and final rules and discussed their
    purposes with NASDAQ officials, obtained information from SEC officials on
    their review of the proposals, and analyzed data provided by NASDAQ.
    Finally, to report on the actions the three largest SROs have taken to
    strengthen corporate governance for issuers and themselves, we reviewed
    SROs' proposed and final (new) corporate governance rules for issuers and
    self-evaluations of their own governance. We obtained information from
    regulatory officials on the purpose of the new rules and their plans for
    ensuring compliance with them. We also obtained selected market
    participants' views of the adequacy of the SROs' new rules.9 We performed
    our work from April 2002 through March 2004 in accordance with generally
    accepted government auditing standards. Appendix I provides a detailed
    discussion of our scope and methodology.

    8Quantitative continued listing standards are the minimum financial
    requirements that issuers must meet to remain listed for trading on a
    market. See appendix II for Amex, NASDAQ, and NYSE's quantitative listing
    standards.

    9See appendix IV for a list of the market participants that we contacted
    during this review.

    Results in Brief	OCIE has concluded that the three largest SROs have
    addressed the recommendations that were unique to their markets from its
    inspections of their listing programs. The only significant, open
    recommendation applies to all three SROs-that they append a modifier to
    the stock symbols of issuers that do not meet their continued listing
    standards to provide the public early and ongoing notification of issuers'
    noncompliance with these standards. OCIE's recommendation addressed its
    concern that the SROs were allowing noncompliant issuers to remain listed
    for significant periods of time without providing adequate notification to
    investors. To avoid investor confusion caused by temporary changes to
    stock symbols, NYSE has implemented procedures for transmitting an
    indicator with the issuer's stock quotation data over the consolidated
    tape10 to information vendors,11 beginning 5 business days after NYSE
    notifies the issuer of its noncompliance with the market's quantitative
    continued listing standards. OCIE officials said that NYSE's response
    could meet the intent of OCIE's recommendation as it relates to
    quantitative listing standards, if concerns about distributing the
    information transmitted by the indicator from vendors to investors were
    resolved. A NASDAQ official told us that NASDAQ has used a symbol modifier
    since before 1980 to provide the public ongoing notification of some
    issuers' noncompliance with quantitative listing standards. In April 2003,
    NASDAQ tentatively proposed replacing the modifier with an indicator that
    would be used in a manner similar to NYSE's. However, as in the case of
    its symbol modifier, the indicator would not be transmitted early in the
    deficiency process. Amex has also proposed using an indicator that would
    not be transmitted early in the deficiency process. Complementing OCIE's
    efforts, SEC's Division of Corporation Finance (Corporation Finance) has
    proposed a rule that would require, among other things, that an issuer
    report on SEC's Form 8-K12 the receipt of a notice of noncompliance with
    quantitative or qualitative

    10The consolidated tape is a high-speed electronic system that
    continuously provides the last sales price and volume of securities
    transactions in listed Amex and NYSE stocks to information vendors. NASDAQ
    operates a similar, but separate, tape to transmit information on its
    stocks to information vendors.

    11Information vendors supply quotation and market data for investors' use.

    12Issuers use the Form 8-K to report significant specified corporate
    events as well as any other event or change that the issuers deem to be of
    importance to investors and that has not been previously reported.
    (Proposed Rule: Additional Form 8-K Disclosure Requirements and
    Acceleration of Filing Date, SEC Release No. 33-8106, June 17, 2002.)

    continued listing standards,13 along with an explanation of the facts
    surrounding the issuer's noncompliance, within 2 business days of
    receiving the notice.14 If finalized, the revised filing requirement would
    provide investors the early notification that OCIE seeks as well as
    information that would allow them to better understand the issuer's
    noncompliant status. OCIE officials told us that further use could be made
    of modifiers or indicators to identify issuers that do not meet the
    markets' qualitative listings standards, which include corporate
    governance standards. For example, a NASDAQ official said that since
    before 1984, NASDAQ has appended a modifier to the stock symbols of
    issuers that do not comply with its qualitative listing standard that
    requires timely filing of SEC quarterly and annual financial reports and
    in doing so has provided investors early and ongoing notification that
    significant corporate information has not been made available. OCIE plans
    to report to the Commission on the SROs' progress in implementing its
    recommendation, and the Commission has authority under the Securities
    Exchange Act of 1934 (the Exchange Act) to resolve implementation issues
    or to take alternative actions to ensure that the public receives early
    and ongoing notification of issuers' noncompliant status.

    OCIE officials told us that they do not routinely use SROs' internal
    review reports in planning and conducting inspections designed to assess
    the quality of SROs' oversight. These officials said that OCIE does not
    have a written policy that specifically addresses the use of internal
    review reports in inspections and that OCIE relies on the guidance
    provided in a policy memorandum addressing their use in examinations of
    broker-dealers, investment advisers, and investment companies. Under the
    policy, internal review reports would be used in inspections when OCIE
    believed specific problems existed at an SRO that warranted further
    investigation. According to OCIE officials, routine use of the reports
    would have a "chilling effect" on the flow of information between SRO
    internal review staff and other SRO employees, thereby reducing the
    effectiveness of the internal review function. Nonetheless, professional
    standards recommend the use of the reports for planning and conducting
    inspections, and officials of the Inspectors General (IG) offices for the
    Commodity Futures Trading Commission (CFTC) and the Department of the
    Treasury (Treasury) told us

    13Qualitative continued listing standards are the market's minimum
    nonfinancial requirements that issuers must meet to remain listed for
    trading on a market.

    14Corporation Finance officials told us that they are considering
    alternatives to the proposed 2-business-day filing requirement based on
    public comments.

    that they routinely use the reports for these purposes. Also, our work
    showed that some of the SROs' reports addressed topics that OCIE has
    addressed in its listing program inspections, such as internal reviews of
    SROs' initial and continued listing programs, and that the reports could
    have been useful to OCIE in planning and conducting its inspections.
    However, according to OCIE officials, to the best of their knowledge, they
    have never requested an SRO internal review report as part of a listing
    program inspection.

    In September 2001, SEC allowed a NASDAQ rule to remain in effect that
    imposed a 3-month moratorium on enforcing continued listing standards for
    bid price and market value of publicly held shares.15 NASDAQ had concluded
    that the moratorium was necessary because of the increasing number of
    issuers that were falling below the applicable standards after September
    11. NASDAQ officials expressed concern that delisting these issuers would,
    among other things, disadvantage investors who would be limited to trading
    the related securities in markets that were not subject to the same level
    of regulation and transparency as NASDAQ.16 According to NASDAQ data, the
    moratorium provided relief from pending or potential delisting to at least
    509 issuers, or about 11 percent of all NASDAQ issuers.17 After the
    moratorium expired, SEC allowed another NASDAQ rule to remain in effect
    establishing a pilot program that (1) extended from 90 days18 to almost 1
    year the period that SmallCap Market (SCM) issuers that were noncompliant
    with the market's bid-price continued listing standard could remain listed
    and (2) established procedures that allowed NASDAQ National Market (NNM)
    issuers that remained noncompliant with the bid-price standard to transfer
    to the SCM.19 As of February 28, 2003, 246

    15NASDAQ proposed the moratorium in a filing with SEC under procedures
    contained in federal securities law and SEC regulations that allowed the
    proposal to become effective upon filing, subject to a waiting period that
    SEC waived.

    16Transparency is, among other things, the degree to which trade and
    quotation information is available to the public.

    17NASDAQ stopped tracking individual issuers' compliance with the
    bid-price and market value of publicly held shares standards during the
    moratorium; therefore, the total number of issuers affected by the
    moratorium could not be determined.

    18Unless otherwise indicated, all days in this report are calendar days.

    19NASDAQ is a two-tier market, consisting of the SCM, which as of December
    31, 2003, listed 685 smaller companies, and the NNM, which as of December
    31, 2003, listed 2,648 larger companies. Quantitative listing standards
    are generally lower for the SCM than the NNM.

    of the 509 issuers receiving relief through the moratorium (48 percent)
    continued to trade on NASDAQ.20 Of these, 132 took advantage of the
    extended compliance period. The remaining 263 of the 509 issuers (52
    percent) were delisted because they did not comply with one or more
    continued listing standards or for other reasons, such as a merger with or
    acquisition by another company. On December 23, 2003, SEC approved, also
    as a pilot program, a NASDAQ rule that, subject to requirements intended
    to protect investors, further extended the SCM and NNM bid-price
    compliance periods for up to 2 years and almost 1 year, respectively.

    The collapse of several major U.S. corporations beginning in 2001
    motivated efforts to strengthen the oversight of boards of directors
    through revisions to the markets' corporate governance listing standards.
    In response to a 2002 SEC request as well as rules implementing the
    Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley), the three largest SROs
    adopted rules intended to significantly strengthen these standards. Among
    other things, the new standards increase the role and authority of
    independent directors and corporate governance disclosures. However,
    unlike NASDAQ and NYSE's standards, Amex's standards do not currently
    require issuers to disclose the names of the directors they have
    designated as independent, hampering regulators and investors' ability to
    assess the independence of boards. Market participants told us that they
    support the SROs' new standards, although they held differing views on the
    need for further enhancements. Consistent with the position of some market
    participants, we have expressed the view in prior work that SEC, in
    conjunction with the SROs, should consider using listing standards to
    further strengthen board independence by requiring a supermajority of
    independent directors and separating the positions of chief executive
    officer (CEO) and board chairman.21 SRO officials told us that they are
    taking steps to enhance their ability to assess compliance with their new
    corporate governance standards, and OCIE officials told us that they will
    work with the SROs to

    20We determined the listing status of the 509 issuers as of February 28,
    2003, approximately 1 year after NASDAQ implemented its postmoratorium
    rule change-because by this date issuers that were affected by the
    moratorium would have had an opportunity to go through NASDAQ's deficiency
    process. Examining this period also allowed us to determine the listing
    status of issuers affected by the first postmoratorium bid-price rule
    change.

    21U.S. General Accounting Office, Protecting the Public's Interest:
    Considerations for Addressing Selected Regulatory Oversight, Auditing,
    Corporate Governance, and Financial Reporting Issues, GAO-02-601T
    (Washington, D.C.: Apr. 9, 2002); and Financial Statement Restatements:
    Trends, Market Impacts, Regulatory Responses, and Remaining Challenges,
    GAO-03-138 (Washington, D.C.: Oct. 4, 2002).

    ensure effective processes are in place to more thoroughly assess
    compliance with these standards. Complementing the SROs' enhancements to
    listing standards, SEC has proposed rule changes that address longstanding
    investor interest in gaining greater access to the director nomination
    process and approved rules increasing disclosures of that process. Also,
    Corporation Finance officials told us that in response to a market
    participant's request, they plan to review SEC requirements governing
    disclosures of potential director and director nominees' conflicts of
    interest. Further, to better ensure that the SROs hold themselves to
    standards of governance that are consistent with those imposed on issuers,
    SEC has asked the SROs to evaluate their own governance, including board
    structures, policies, and practices. Although SEC's Division of Market
    Regulation (Market Regulation) has not completed its review of the SROs'
    self-evaluations, as a result of this process, both NASDAQ and NYSE have
    separated the positions of CEO and chairman, and NYSE has made other
    significant changes to its governance structure.

    This report makes 12 recommendations to the SEC Chairman that should help
    restore investor confidence in the markets, further strengthen the listing
    standards of the SROs, and improve SEC listing program oversight. We
    recommend, among other things, that the Chairman take actions, working
    with the SROs as necessary, to ensure that the public receives early and
    ongoing notification of issuers' noncompliance with the markets' continued
    listing standards; SRO internal review reports are used in planning and
    conducting OCIE inspections of SROs; Amex issuers are required to disclose
    the names of their independent directors; serious consideration is given
    to requiring issuers to establish a supermajority of independent directors
    and separate the positions of CEO and chairman through revisions to
    listing standards; OCIE conducts timely inspections to assess SRO
    oversight of issuers' compliance with new corporate governance listing
    standards; and Market Regulation places a high priority on completing
    reviews of the SROs' self-evaluations of their governance practices.

    We received comments on a draft of this report from SEC, Amex, NASDAQ, and
    NYSE, which are included in appendixes V-VIII. SEC generally agreed with
    our findings and recommendations and is taking or plans to take actions to
    address them. The SROs expressed concerns about the recommendations
    related to notifying the public of noncompliance with listing standards,
    giving serious consideration to requiring a supermajority of independent
    directors, and separating the positions of CEO and chairman. Recognizing
    their concerns, we nonetheless continue to believe

    that further SEC and SRO actions are needed to address our
    recommendations. The comments are discussed in greater detail at the end
    of this letter.

    Background 	The Exchange Act established the regulatory structure of the
    U.S. securities markets. These markets are regulated under a combination
    of self-regulation (subject to SEC oversight) and direct SEC regulation.
    This regulatory structure was intended to give SROs responsibility for
    administering their own operations, including most of the daily oversight
    of the securities markets and their participants. One of the SROs-the
    National Association of Securities Dealers, Inc. (NASD)-is a national
    securities association that regulates registered securities firms,
    professionals, and NASDAQ.22 Other SROs include national securities
    exchanges that operate the markets where securities are traded.23 These
    SROs are primarily responsible for establishing the standards under which
    their members conduct business; monitoring the way that business is
    conducted; and bringing disciplinary actions against their members for
    violating applicable federal statutes, SEC's rules, and their own rules.
    SEC oversees the SROs by inspecting their operations and reviewing their
    rule proposals and appeals of final disciplinary proceedings.

    Each SRO proposes the rules that establish its listing standards. To be
    eligible for listing, issuers must comply with initial quantitative and

    22NASD is registered as a national securities association under section
    15A, 15 U.S.C. S: 78o-3 and is considered an SRO pursuant to section
    3(a)(26), 15 U.S.C. S: 78c(a)(26). NASD develops rules and regulations
    governing the business and sales practices of NASD members, conducts
    regulatory reviews of members' business activities, and disciplines those
    members that fail to comply with its rules and regulations. NASDAQ and
    Amex are subsidiaries of NASD. NASD has delegated to NASDAQ the
    responsibility for operating NASDAQ as well as for developing, adopting,
    and administering rules governing listing standards for NASDAQ issuers. In
    April 2000, NASD members voted to restructure NASD and sell a substantial
    part of NASD's ownership in NASDAQ in part to minimize the potential for
    conflicts of interest associated with NASD's responsibility for both the
    business operations and regulation of NASDAQ. Unlike NASDAQ, Amex is a
    registered SRO. On November 3, 2003, NASD and Amex announced an agreement
    to make Amex an independent entity and transfer control of Amex to the
    Amex Membership Corporation. The agreement is subject to approval by Amex,
    Amex Membership Corporation, Amex and NASD's Boards of Governors, Amex
    seat holders, and SEC.

    23The national securities exchanges are Amex, the Boston Stock Exchange,
    the Chicago Board Options Exchange, the Chicago Stock Exchange, the
    International Securities Exchange, the National Stock Exchange, NYSE,
    NQLX, OneChicago, the Pacific Exchange, and the Philadelphia Stock
    Exchange.

    qualitative listing standards. Quantitative listing standards are minimum
    financial requirements addressing such areas as the issuer's total
    revenues, distribution, and market capitalization.24 Qualitative listing
    standards, which include corporate governance standards, are nonfinancial
    requirements addressing such matters as the definition of director
    independence, the number of independent directors on the board of
    directors and audit committee, and provisions for annual stockholder
    meetings and shareholder approval of certain corporate actions. In
    addition, to remain listed, issuers must maintain compliance with the
    market's continued listing requirements. For quantitative listing
    standards, these are generally lower than initial listing standards, while
    for qualitative standards they are the same.

    In general, a company applies to have its securities listed for trading on
    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, and relevant share
    distribution information. The market's equity listing department reviews
    these submissions for compliance with its initial listing standards and
    conducts background checks of company officers and other insiders. This
    department or a committee of the exchange makes the listing decision. The
    equity listing department also monitors listed companies for compliance
    with the market's continued listing standards and, in accordance with the
    market's rules, is expected to take action when these standards are not
    met.

    Amex, NASDAQ, and NYSE are the three largest U.S. securities markets for
    equities trading based on the number of listed U.S. companies. According
    to Amex, as of the end of the third quarter 2003, it listed 735 issuers
    with a total market capitalization of approximately $282 billion.25 For
    this same period, NASDAQ said it listed 3,367 issuers with a total market
    capitalization of approximately $2.99 trillion for the SCM and the NNM

    24Market capitalization is the price of a stock multiplied by the total
    number of shares outstanding and represents the market's total valuation
    of a public company.

    25According to Amex and NASDAQ, their total market capitalization includes
    the value of shares and American Depository Receipts in the United States.
    The receipts are issued by a U.S. depository bank and represent shares of
    a foreign corporation held by the bank.

    combined. Finally, for this period, NYSE told us that it listed
    approximately 2,800 issuers with a total market capitalization of
    approximately $14.8 trillion.26

    The Exchange Act created SEC as an independent agency to oversee the
    securities markets and their participants. SEC has a five-member
    Commission headed by a chairman who is appointed by the President of the
    United States for a 5-year term. In overseeing the SROs' implementation
    and enforcement of rules, SEC may use its statutory authority to, among
    other things, review and approve SRO-proposed rule changes and abrogate
    (annul) SRO rules. Section 19(b) of the Exchange Act governs the process
    by which SROs can change their rules. Section 19(b)(1) requires an SRO to
    file a proposed rule or amendment to an existing rule with SEC for
    publication and solicitation of comments. Under section 19(b)(2), SEC may
    approve the rule change by order or conduct proceedings to determine
    whether it must be disapproved. SEC must approve a proposal if it finds
    that it is consistent with Exchange Act requirements; otherwise, it must
    institute disapproval proceedings. However, if the rule change proposed by
    the SRO does not comply with the filing requirements promulgated under
    section 19(b) of the Exchange Act, SEC may deem the submission as not
    properly filed and reject it.

    In addition, section 19(c) gives SEC power by rule to abrogate, add to, or
    delete from the rules of an SRO, subject to specified procedures. SEC
    officials said that SEC rarely uses this authority to amend SRO rules,
    because, among other things, a number of procedural steps must be
    satisfied, potentially making a section 19(c) ruling time-consuming. SEC
    officials said that, in view of the procedural steps that would need to be
    followed under section 19(c) to amend rules related to listing standards
    and the need to consider any such proceeding in light of Business
    Roundtable v. SEC, in which the D.C. Court of Appeals vacated a listing
    standard that SEC had adopted using section 19(c) authority, SEC prefers
    to rely on its powers of persuasion to convince the SROs to enhance their
    corporate governance listing standards.27

    26According to NYSE, its total market capitalization includes the global
    market value of all listed companies.

    27Business Roundtable v. SEC, 905 F. 2d 406 (D.C. Cir. 1990).

    SEC's Market Regulation division is responsible for the administration and
    execution of SEC's programs under the Exchange Act relating to the
    structure and operation of the securities markets, which includes
    oversight of the SROs and review of their proposed rule changes. SEC has
    delegated authority to Market Regulation with respect to other aspects of
    SRO rulemaking as well, including the authority to publish notices of
    proposed rule changes and to approve such proposed rule changes.

    In addition to granting authority to approve SRO-proposed rules, the
    Exchange Act authorizes SEC to conduct reasonable, periodic, special, or
    other examinations of all records that the SROs are required to
    maintain.28 Under the Exchange Act, the national securities exchanges,
    national securities associations, members of these exchanges and
    associations, brokers, and dealers are required by SEC to preserve certain
    books and records and keep them available for inspection.29 The Exchange
    Act, in conjunction with relevant rules, gives SEC the authority to
    request and review such records as part of its inspections and
    examinations. These examinations may be conducted at any time, or from
    time to time, as SEC deems necessary or appropriate in the public
    interest, for the protection of investors or otherwise in furtherance of
    the purposes of the Exchange Act.

    OCIE, the SEC office responsible for conducting inspections and
    examinations, is divided into three primary units-the Office of
    Broker-Dealer and SRO Examinations, the Office of Market Oversight, and
    the Office of Investment Advisor/Investment Company Examinations.30 The
    Office of Broker-Dealer and SRO Examinations and the Office of Market
    Oversight are responsible for conducting examinations of broker-dealers
    and inspections of SROs pursuant to the Exchange Act. According to OCIE
    officials, the inspections conducted by the Office of Broker-Dealer and
    SRO Examinations generally focus on a program area such as the listing
    program, with the objective of evaluating whether the SROs' programs and
    procedures are adequate and whether these programs and procedures as well
    as recommendations from previous inspections are effectively implemented.
    OCIE officials also told us that Office of Market Oversight inspections
    primarily focus on issues related to trading securities and that

    28Section 17(b) of the Exchange Act; 15 U.S.C. S: 78q(b).

    29Section 17(a) of the Exchange Act; 15 U.S.C. S: 78q(a).

    30SEC generally refers to its reviews of SROs as "inspections" and its
    reviews of brokerdealers, investment companies, and investment advisers as
    "examinations."

    the Office of Investment Advisor/Investment Company Examinations is
    responsible for examinations conducted pursuant to the Investment Company
    and Investment Advisers Acts of 1940.

    Under the Securities Act of 1933 and the Exchange Act, publicly traded
    companies are required to file disclosures with SEC concerning their
    business and financial affairs, both when securities are initially offered
    and sold and on a periodic basis thereafter. Corporation Finance reviews
    these disclosures, which include annual reports to shareholders and proxy
    statements.31 Corporation Finance also provides companies with assistance
    in interpreting SEC rules and recommends to the Commission new rules for
    its approval.

    The SROs Have Addressed All OCIE Recommendations, Except One to Use Stock
    Symbol Modifiers

    OCIE has concluded that the three largest SROs have addressed the
    recommendations that were unique to their markets from its inspections of
    their listing programs. OCIE officials said that the only significant,
    open recommendation was for the three SROs to use stock symbol modifiers
    to provide the public early and ongoing notification of issuers that do
    not meet their continued listing standards.

    31A proxy statement contains material information that SEC regulations
    require issuers to provide their shareholders as a prerequisite to
    soliciting votes, including biographical information on directors and
    director nominees and information on their financial and business
    relationships with the issuer and its executive officers.

    The SROs Have Addressed OCIE Recommendations That Were Unique to Their
    Markets

    According to OCIE officials, Amex, NASDAQ, and NYSE have addressed the
    recommendations that were unique to these markets' listing programs from
    OCIE's recent inspection reports and have improved the structure and
    operations of their programs in doing so. OCIE officials told us that
    Amex's recent listing standards revisions met the intent of OCIE's 2001
    inspection report recommendations.32 For example, in response to these
    recommendations, Amex converted its discretionary listing guidelines into
    mandatory listing standards to provide more certainty to investors about
    the eligibility of issuers to trade on Amex. In addition, Amex set firm
    time limits within which issuers that are not compliant with its continued
    listing standards must regain compliance.

    According to OCIE's June 2002 inspection report on NASDAQ's listing
    program, the SRO had addressed the recommendations from prior reports,
    issued in 1997 and 1999, and the listing program was operating according
    to NASDAQ's policies and procedures. OCIE found that the SRO was generally
    thorough in its financial and regulatory reviews of companies and complied
    with its obligation to compile periodic management reports containing
    statistical data on issuers. While the 2002 report identified some new
    areas where the SRO could enhance listing program operations, according to
    OCIE officials, NASDAQ addressed the related recommendations.

    OCIE's March 2003 inspection report on NYSE's listing program concluded
    that the SRO had substantially improved its listing program since OCIE's
    initial report, issued in 1998, and was generally adhering to SRO listing
    rules and procedures. For example, OCIE found that NYSE had enhanced its
    systems for detecting issuers that were out of compliance with its
    continued listing standards and prepared quarterly management reports to
    assist in monitoring the status of listed companies. The 2003 report made
    some new recommendations that OCIE officials said NYSE addressed.

    32We also addressed the need for Amex to improve its listing standards in
    a November 2001 report. See U.S. General Accounting Office, Securities
    Regulation: Improvements Needed in the Amex Listing Program, GAO-02-18
    (Washington, D.C.: Nov. 27, 2001).

    The Intent of the Recommendation to Use Stock Symbol Modifiers Has Not
    Been Fully Addressed

    OCIE and Market Regulation Recommended the Use of Symbol Modifiers to
    Provide Early and Ongoing Notification of Issuers' Noncompliance

    OCIE recommended that the SROs append a modifier to the stock symbols of
    issuers that do not meet their continued listing standards to provide the
    public early and ongoing notification of issuers' noncompliance with these
    standards-a recommendation that Market Regulation also made. NYSE has
    begun transmitting an indicator over the consolidated tape to information
    vendors, which OCIE officials said could address the intent of OCIE's
    recommendation as it relates to NYSE's quantitative listing standards, if
    concerns about vendor distribution of the information transmitted by the
    indicator are addressed. NASDAQ and Amex have reservations about modifiers
    and their proposals for implementing them would not provide early public
    notification. Complementing OCIE's efforts, Corporation Finance proposed
    changes to SEC's Form 8-K, which, if finalized, would provide investors
    with early notification of an issuer's noncompliance with qualitative and
    quantitative listing standards and additional information on the issuer's
    noncompliant status. OCIE officials told us that further use could be made
    of modifiers or indicators to identify issuers that do not meet the
    markets' qualitative listings standards. OCIE plans to report to the
    Commission on the SROs' progress in implementing its recommendation, and
    the Commission has authority to resolve implementation issues or to take
    alternative actions to ensure that the public receives early and ongoing
    notification of issuers' noncompliance with the SROs' continued listing
    standards.

    In its most recent reports on Amex, NASDAQ, and NYSE's listing programs,
    OCIE recommended that the three largest SROs use stock symbol modifiers to
    provide the public early and ongoing notification of issuers'
    noncompliance with their continued listing standards. 33 OCIE's
    recommendation would have extended NASDAQ's practice of modifying the
    stock symbols of certain noncompliant SCM issuers. Market Regulation
    concurred with the recommendation and also requested that the three
    largest SROs append the modifier.34 The recommendation addressed OCIE's
    concern, which surfaced during its listing program inspections, that the
    SROs were allowing deficient issuers to remain listed for significant

    33In our November 2001 report on Amex's listing program, we also addressed
    the need for ongoing notification of issuers' listing status and
    recommended that the SEC Chairman direct Amex to implement mandatory
    equity listing requirements or provide ongoing public disclosure of the
    noncompliant status of companies.

    34Market Regulation asked the three SROs in a May 1, 2002, letter to
    consider whether it would be feasible and advisable to use symbol
    modifiers to disclose issuers' noncompliance with continued listing
    standards.

    periods of time without adequately notifying investors. For example, an
    OCIE report on the listing program of one SRO identified several instances
    in which the SRO granted issuers excessive delisting deferrals or did not
    commence delisting proceedings in a timely manner. The report cited one
    instance of an issuer being allowed to remain listed for approximately 2
    years while out of compliance with the market's continued listing
    standards. An OCIE report on another SRO found that two issuers had been
    listed for at least 3 years without meeting the SRO's continued listing
    standards.35

    According to OCIE and Market Regulation officials, modifiers would make
    the listing status of an issuer more transparent to investors and reduce
    the misleading perception that because an issuer is listed it meets a
    market's continued listing standards. Investors currently receive
    information on an issuer's noncompliance with these standards through
    issuer press releases that are required by Amex, NASDAQ, and NYSE rules.
    However, these rules do not provide for early public investor notification
    of an issuer's noncompliance. For example, while Amex's rules require it
    to send an issuer a deficiency notice within 10 business days of
    identifying the issuer's noncompliance with continued listing standards,
    by applying the various rules in Amex's deficiency process, the issuer
    would not have to issue a press release for up to 80 days after receiving
    the notice.36 NASDAQ's rules require it to send a similar deficiency
    notice within 5 days, but an issuer is not required to issue a press
    release for approximately 35-97 days (up to 730 days in the case of
    bid-price deficiencies) after receiving the notice, depending on the
    listing standard. Under NYSE's rules, the SRO also sends its deficiency
    notice within 10 business days after detecting the noncompliance, but
    issuers are not required to issue a press release until 45 days after
    receiving a deficiency notice. Further, OCIE and Market Regulation
    officials said that symbol modifiers provide continuous disclosure that an
    issuer is not meeting continued listing standards, unlike a press release,
    which is a one-time event. Also, according to OCIE and Market Regulation
    officials, information vendors may not distribute the press releases of
    smaller companies, and vendors may not be consistent in

    35In response to the OCIE report, the SRO said that under its policy,
    these issuers were considered compliant with its continued listing
    standards. OCIE responded that the SRO's application of such a policy was
    improper and that such issuers should be considered to be noncompliant.

    36See appendix III for a description of the deficiency and hearing
    processes of the three largest SROs.

    the amount of time that they make the press releases available to the
    public-factors that could affect the usefulness of the releases for making
    investment decisions.

    Theeffect of implementing OCIE and MarketRegulation'srecommendation on
    issuers that were noncompliant with quantitative listing standards in 2003
    is illustrated by table 1.37 The table shows that a low of 1 percent of
    issuers (NASDAQ and NYSE) were trading noncompliant with the market's
    quantitative continued listing standards during calendar year 2003,
    meaning that as few as 1 percent of the issuers on these markets would
    have been identified with a symbol modifier or comparable identifier had
    OCIE's recommendation been implemented. Similarly, a high of 10 percent of
    issuers (NASDAQ) traded noncompliant with their market's quantitative
    continued listing standards, meaning that at most 10 percent of the
    issuers on any of the markets would have been identified with a modifier
    or comparable identifier during that year.

    37We did not provide data on the number of qualitative deficiencies at
    each SRO because differences exist in how they address these deficiencies.
    While officials from all three SROs told us they send deficiency notices
    to issuers upon detecting noncompliance with quantitative listing
    standards, they do not use similar notices in all instances of
    noncompliance with qualitative listing standards. Officials of two SROs
    told us that because some qualitative deficiencies were more serious than
    others and because it was not always possible to make an objective
    assessment of compliance with these standards, they use their discretion
    in determining whether to send an issuer a deficiency notice, which would
    trigger the deficiency and delisting process, or whether to work
    informally with an issuer to address the deficiency.

    Table 1: Lowest and Highest Numbers of Issuers Trading Noncompliant with
    Quantitative Continued Listing Standards in Calendar Year 2003, by SRO

                                     Lowest number of           Highest number of
                                 noncompliant issuers        noncompliant issuers
                      SRO           trading (percent)           trading (percent)
                     Amex                    32 (4%)a                    51 (7%)a
                   NASDAQ                    45 (1%)b                   351(10%)b
                     NYSE                    15 (1%)c                    48 (2%)c

    Sources: Amex, NASDAQ, and NYSE.

    Notes:

    aFor Amex, the percentages for the lowest and highest number of
    noncompliant issuers are based on the month-end numbers and the 738 listed
    issuers trading on both December 31, 2003, and June 30, 2003.

    bFor NASDAQ, the percentages for the lowest and highest number of
    noncompliant issuers are based on the month-end numbers and the 3,333
    listed issuers trading on December 31, 2003, and the 3,620 listed issuers
    trading on January 31, 2003, respectively.

    cFor NYSE, the percentages for the lowest and highest number of
    noncompliant issuers are based on the month-end numbers and the 2,938
    listed issuers trading on December 31, 2003, and the 2,959 listed issuers
    trading on December 31, 2002, respectively.

    The total numbers of issuers identified with a symbol modifier or its
    equivalent would have been greater for each market than the numbers shown
    in the table, because not all issuers were noncompliant with the
    quantitative listing standards at the same time. As shown in table 2, the
    total number of issuers that traded while noncompliant with their markets'
    quantitative standards at any time during calendar year 2003 ranged from
    68 (NYSE) to 617 (NASDAQ). Of these issuers, some regained compliance with
    continued listing standards by December 31, 2003, while others continued
    to trade noncompliant or were delisted as of that date.

    Table 2: Total Number of Issuers Trading Noncompliant with Quantitative
    Continued Listing Standards in Calendar Year 2003 and Their Listing Status
    on December 31, 2003, by SRO

                       Their Listing status on December 31, 2003

                Total number of            Number      Number              Number
                  noncompliant          compliant   noncompliant         delisted
        SRO        issuers in 2003      (percent)         (percent)     (percent)
                         (percent)
        Amex             94 (100%)       22 (23%)          32 (34%)      40 (43%)
    NASDAQ         617 a (100%)      381 (62%)           45 (7%)     191 (31%)
        NYSE             68 (100%)       13 (19%)          15 (22%)      40 (59%)

    Sources: Amex, NASDAQ, and NYSE.

    Note:

    aAccording to NASDAQ, 486 of the 617 noncompliant issuers (79 percent)
    were noncompliant with standards related to bid price.

    NYSE's Transmittal of Indicators To avoid investor confusion caused by
    temporary changes to stock

    Could Address the Intent of OCIE's Recommendation If Vendor Distribution
    Concerns Are Addressed

    symbols, on July 1, 2003, NYSE began transmitting an indicator that
    reflects an issuer's noncompliance with its quantitative continued listing
    standards.38 Under its procedures, NYSE transmits the indicator over the
    consolidated tape with the issuer's quotation data beginning 5 business
    days after it notifies an issuer of its noncompliant status and continuing
    until the issuer regains compliance with the listing standard or is
    delisted. According to NYSE officials, the 5-business-day period provides
    the issuer an opportunity to bring to NYSE's attention any inaccuracy in
    NYSE's noncompliance determination, as well as an opportunity to release a
    statement to the public. Further distribution of the information
    transmitted by NYSE's indicator from the consolidated tape to investors is
    at the discretion of information vendors. NYSE officials told us that NYSE
    has notified all vendors by e-mail of the availability of the indicator
    and followed up with some of the major vendors to further discuss its
    distribution, but NYSE has not formally notified the public of the
    indicator's availability. However, NYSE displays the indicator and a list
    of companies that do not meet its continued listing standards on its Web
    site.

    38In May 2000, Market Regulation approved an amendment to NYSE's
    procedures for delisting securities, which, if implemented, would have
    required that a modifier be attached to the stock symbol of an issuer that
    no longer met the quantitative continued listing standards of the
    exchange. Upon further analysis, NYSE determined that because attaching
    the modifier would change the stock symbol of an issuer, investors would
    be required to know the modified stock symbol, for example, to retrieve
    information on a noncompliant issuer through the Internet. As a result,
    NYSE filed a rule in December 2000 withdrawing its May 2000 rule. Unlike
    the modifier, NYSE's indicator does not change an issuer's stock symbol.

    According to NYSE officials, the list included 15 issuers on December 31,
    2003.

    The Associated Press, which according to a company representative,
    provides quotation information to all major U.S. daily newspapers except
    The Wall Street Journal, began distributing the information transmitted by
    the NYSE indicator in September 2003.39 It does so by appending an "h" to
    an issuer's stock symbol to identify NYSE-listed securities that do not
    meet the market's continued listing standards. A representative of Dow
    Jones & Company told us that the organization plans to distribute the
    information transmitted by NYSE's indicator to investors through print
    media such as The Wall Street Journal and over the Internet through
    www.WSJ.com, and that it would begin doing so when technical difficulties
    are resolved.40 A representative of Ameritrade Holding Company told us
    that the brokerdealer is considering publicizing the information
    transmitted by NYSE's symbol indicator during calendar year 2004.41

    Of the five other information vendors we contacted that provide quotation
    information to investors over the Internet, none planned to distribute the
    information transmitted by NYSE's symbol indicator. These vendors,
    including two broker-dealers, provide market data on their own Web sites
    or to third-party vendors, including many financial Web sites such as
    www.cbs.marketwatch.com, www.cnnfn.com, www.finance.yahoo.com,
    www.moneycentral.msn.com, and www.smartmoney.com.42 In addition, none of
    three additional broker-dealers whose Web sites we visited were
    distributing the information transmitted by the indicator. Among the
    reasons vendors gave for not distributing this information were a lack of
    client demand and reluctance to divert resources from more important
    initiatives.

    39For example, The Associated Press provides quotation information to such
    newspapers as The Boston Globe, The Chicago Tribune, The Los Angeles
    Times, The New York Times, USA Today, and The Washington Post.

    40Dow Jones & Company provides quotation information to the public through
    The Wall Street Journal and Barron's-financial print media-and through
    www.WSJ.com.

    41Ameritrade Holding Corporation provides electronic brokerage services to
    investors, primarily through the Internet.

    42Third-party vendors, such as Yahoo, have a contract to receive
    consolidated tape information from another information vendor, rather than
    the Consolidated Tape Association.

    OCIE and Market Regulation officials said that NYSE can and should do more
    to actively encourage information vendors to implement and distribute the
    information transmitted by its indicator. For example, OCIE officials said
    that NYSE could consider adding provisions to its contracts with
    information vendors requiring them to distribute and display the
    indicator. NYSE officials said that this option is not practical, in part
    because information vendors are NYSE customers. NYSE officials said that
    SEC has the authority to implement rules requiring information vendors to
    distribute and display indicators, and it would be appropriate for them to
    do so. Officials of all three SROs stressed the desirability of having a
    marketwide solution to the information distribution issue.

    OCIE officials also said that although NYSE displays the indicator with
    the stock symbol of issuers and a list of companies that do not meet its
    continued listing standards on its Web site, NYSE could do more to make
    this information readily accessible to investors. To determine whether a
    Web site visitor could locate the indicator and the list of noncompliant
    NYSE issuers, we visited the NYSE Web site and inputted the stock symbol
    of a noncompliant issuer in the "Quick Quote" search box located on the
    top right corner of NYSE's home page. In response, we received quotation
    information that included the indicator with a footnote explaining that
    the issuer did not meet NYSE's continued listing standards. However, the
    indicator was not readily identifiable because it did not visually stand
    out from all of the other information presented on the page. Also, the
    information explaining the meaning of the indicator was located at the
    very bottom of the page, separate from the indicator itself and mingled
    with press releases and information vendor logos. In addition, NYSE did
    not provide a link to its list of noncompliant issuers on its home page,
    limiting its accessibility to investors who do not already know of its
    existence. OCIE officials told us that NYSE's approach to implementing
    symbol modifiers could meet the intent of its recommendation to provide
    early and ongoing notification to investors as it relates to quantitative
    listing standards, provided that issues related to the distribution of the
    indicator from vendors to investors were resolved.

    NASDAQ and Amex Have NASDAQ and Amex have both expressed reservations to
    OCIE and Market

    Reservations about Symbol Regulation about the effectiveness and fairness
    of using symbol modifiers

    Modifiers, and Their Proposals  to communicate information about issuers'
    noncompliance with continued

    Would Not Provide Early Public  listing standards to the public. In
    commenting on the value of modifiers,

    Notification 	they both stated that investors would view a modifier as a
    warning not to invest in a company, which could have other negative
    consequences for the

    issuer, including impeding its ability to raise capital and regain
    compliance with the market's continued listing standards.

    A NASDAQ official told us that since before 1980 NASDAQ has appended a
    modifier-the character "C"-to the stock symbol of an SCM issuer if the
    NASDAQ Hearing Panel determined that the issuer was noncompliant with
    quantitative continued listing standards and granted the issuer a
    conditional listing, termed an "exception." According to NASDAQ, 32
    noncompliant SCM issuers received a NASDAQ Hearing Panel exception in 2003
    and had the modifier appended to their stock symbol. NASDAQ has not
    appended the modifier to the stock symbols of NNM issuers because,
    according to market officials, doing so would have put the NNM at a
    competitive disadvantage to NYSE, which until 2003 did not identify
    noncompliant issuers with either a symbol modifier or indicator. NASDAQ
    said that its use of modifiers to identify SCM issuers that are listed
    under an exception to its listing standards has raised concerns among
    these issuers. NASDAQ officials told us that issuers have complained that
    the modifier has a depressive effect on their stock price, frustrating
    their efforts to regain compliance with listing standards related to bid
    price. In addition, they said that issuers have indicated that a modifier
    may make it more difficult to attract investors for a private placement or
    complete other transactions that may address a deficiency with a listing
    standard, such as the shareholder equity requirement. In contrast, NYSE
    officials told us that while the few affected companies have not been
    pleased by the presence of the indicator, these companies have generally
    not found it to have an adverse affect on their ability to raise capital.
    However, NYSE's experience with the indicator has been limited, due to the
    small number of companies that have been out of compliance with its
    quantitative listing standards since the implementation of the indicator.
    Amex said it does not believe that anyone has attempted to evaluate the
    collateral consequences of symbol modifiers, especially for small and
    middle market companies-the types of companies that are generally listed
    on Amex.

    NASDAQ and Amex also said that symbol modifiers oversimplify each issuer's
    unique situation by lumping together dissimilar deficiencies under one
    type of notification, regardless of the seriousness of the deficiency and
    the likelihood that it will be corrected. They also said that other issues
    that might affect the continued listing status of an issuer would not be
    disclosed to the public with a symbol modifier-for example, a going
    concern opinion from an issuer's auditors, major litigation, the
    initiation of a regulatory investigation, or notice that security holders
    should no longer rely on previously issued financial statements or a
    related audit report.

    Nonetheless, the use of a modifier or indicator to alert the public to an
    issuer's noncompliance with continued listing standards would not preclude
    using different modifiers or indicators to identify different types of
    deficiencies or significant events that are unrelated to listing
    standards. For example, while NASDAQ uses the symbol modifier "C" for SCM
    issuers that receive an exception to the certain continued quantitative
    listing standards of that market, it uses the symbol modifiers "Q" and "E"
    for both SCM and NNM issuers that have filed for bankruptcy or have not
    filed required SEC reports, respectively.43 Also, these required reports
    would generally contain the information affecting the continued listing
    status of issuers that is cited in NASDAQ and Amex's example above.

    Additionally, Amex and NASDAQ stated that a significant number of issuers
    are able to regain compliance with continued listing standards within the
    time frames allowed under SRO rules. According to Amex officials, during
    calendar year 2003, 26 (25 percent) of 104 issuers deficient with both
    quantitative and qualitative listing standards regained compliance with
    the standards before the expiration of the compliance period, 31 (30
    percent) were still trading within their compliance period, and 47 (45
    percent) had been delisted or were in the delisting process by the end of
    the year.44  According to NASDAQ officials, during calendar year 2003, 150
    (75 percent) of 200 issuers deficient in those quantitative NASDAQ listing
    standards that specify compliance periods regained compliance before the
    compliance periods expired.45 The remaining 50 (25 percent) were either
    delisted, achieved compliance after the compliance period expired, or were
    in the hearings process as of December 31, 2003.

    43NYSE also uses an indicator to identify issuers that file for
    bankruptcy.

    44For purposes of this discussion, Amex provided us with data on the
    number of issuers that were noncompliant with both qualitative and
    quantitative standards in 2003. In contrast, the data in tables 1 and 2
    reflect issuers with only quantitative deficiencies. Also, the 47 issuers
    that Amex identified as either in the delisting process or already
    delisted by December 31, 2003, could include some of those Amex issuers
    identified in table 2 as remaining noncompliant at the end of the year,
    because that category comprises both issuers that were trading within
    their compliance period and issuers that were in the delisting process.

    45The 200 deficient issuers include only those issuers that NASDAQ
    identified in 2003 as noncompliant with quantitative listing standards for
    which NASDAQ's rules specify a compliance period. These include NASDAQ's
    bid price, market value of publicly held securities, market
    capitalization, and market maker standards. In contrast, the data NASDAQ
    provided in tables 1 and 2 reflect deficiencies with all of NASDAQ's
    quantitative standards and include issuers that were identified as
    noncompliant in 2002, but continued to trade noncompliant into 2003, and
    issuers that were identified as noncompliant in 2003.

    Further, the two SROs said that investors have access to timely and
    comprehensive notice of an issuer's listing status through press releases,
    thus obviating the need for symbol modifiers. Also, they both stated that
    the information on listed companies available to investors through the
    Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system-a
    searchable database on SEC's Web site-and media such as the Internet are
    sufficient for investors to make informed investment decisions. However,
    as previously discussed, issuers are not required to issue press releases
    early in the deficiency process, and press releases do not provide ongoing
    public notification of an issuer's listing status.

    OCIE did not formally respond to the markets' individual concerns.
    However, according to OCIE and Market Regulation officials, using the
    symbol modifier to provide investors early and ongoing notification of
    noncompliance with continued listing standards would strike an appropriate
    balance between investor and issuer needs. These officials said that
    modifiers would provide investors with adequate, timely, and continuous
    notice of the listing status of affected issuers and also allow these
    issuers to remain listed on the markets as they address deficiencies.

    OCIE officials told us that NASDAQ's proposal for addressing OCIE's
    recommendation does not provide for early notification of issuer's
    noncompliance. In an April 22, 2003, letter to OCIE, NASDAQ tentatively
    proposed replacing all its symbol modifiers with indicators, which would
    be used in a manner similar to the NYSE indicator. NASDAQ said that one
    advantage of using an indicator is that it would minimize the potential
    for investor confusion that may result from symbol modifications.46 As
    part of its proposal, NASDAQ would discontinue use of the "C" modifier on
    the SCM and instead transmit an indicator to the consolidated tape
    whenever the NASDAQ Hearing Panel determined that an SCM or NNM issuer was
    noncompliant with NASDAQ's quantitative continued listing standards and
    received an exception, just as it does now with the "C" modifier. Under
    NASDAQ's tentative proposal, an issuer that is deficient with applicable
    listing standards could be listed on NASDAQ for up to 145 days before the
    indicator would be transmitted. However, NASDAQ would not initially
    transmit an indicator with the symbols of issuers that were deficient with
    standards for which its rules specify a time period to regain compliance,

    46NASDAQ said that when a symbol is changed by appending a symbol
    modifier, an investor that is trying to get a quote using the original
    symbol will sometimes receive a message that says "security not in NASDAQ"
    or "security not found."

    such as its bid-price standard. Instead, NASDAQ said it would transmit an
    indicator for these issuers, if, after the expiration of the compliance
    period, the issuer requested a hearing and the NASDAQ Hearing Panel
    allowed the issuer to remain listed pursuant to an exception. NASDAQ
    officials said that they do not consider it appropriate to transmit the
    indicator earlier in the deficiency process, because doing so would deny
    deficient issuers their due process. OCIE officials said that NASDAQ
    should transmit the indicator early in the deficiency process so that
    investors are fully informed that an issuer is not in compliance with
    listing standards. Further, they said NASDAQ should more fully address
    instances of noncompliance with listing standards.

    OCIE officials also told us that Amex has not addressed the intent of
    OCIE's recommendation and that its proposals would not meet the goal of
    providing early notification of issuers' noncompliance with continued
    listing standards. In a May 21, 2003, letter to OCIE, Amex proposed
    transmitting an indicator over the consolidated tape in a manner similar
    to that used by NYSE. However, unlike at NYSE, under this Amex proposal,
    an indicator would not be transmitted until the issuer received notice
    that Amex was initiating delisting proceedings. As a result, a
    noncompliant issuer could be listed for up to 18 months before the
    indicator was transmitted.47 Amex officials told us that they expected the
    SRO to begin using indicators during the third quarter of 2004. They also
    said that they plan to discuss a second proposal with the Amex Board of
    Governors at its April 2004 meeting. Under this proposal, an indicator
    would be transmitted when a noncompliant issuer was granted an extension
    pursuant to an accepted compliance plan, which would reduce the time that
    a noncompliant issuer could be listed without an indicator from 18 months
    to up to 75 days.48 According to OCIE officials, Amex should transmit its
    indicator when it first notifies an issuer that it is deficient with one
    or more of its standards.

    47Amex does not have a minimum bid-price listing standard, but instead
    uses its discretion in delisting issuers with a low bid price by
    evaluating bid price in the context of an issuer's trading, financial, and
    operational circumstances. As a result, Amex officials said that Amex
    would not use an indicator in association with a low bid price. They also
    noted that low price is readily apparent to investors.

    48A compliance plan describes the steps the issuer has committed to taking
    in order to return to compliance with the market's listing standards.

    Proposed Changes to SEC's Form 8-K Would Provide Early Notification of
    Noncompliance

    OCIE Said that Modifiers or Indicators Could Be Used to Further Identify
    Noncompliance with Qualitative Listing Standards

    In June 2002, Corporation Finance proposed a rule that would require,
    among other things, that issuers report on SEC's Form 8-K the receipt of
    either a notice of noncompliance with quantitative and qualitative
    continued listing standards or a notice of delisting within 2 business
    days of receiving either notice.49 The proposed changes would also require
    the issuer to discuss its planned response to either notice and give an
    explanation of the facts surrounding the issuer's noncompliance. OCIE
    officials said that the Form 8-K revisions, if finalized, would complement
    the symbol modifier or its equivalent; that is, the symbol modifier or
    indicator could be a trigger for investors to do further research on an
    issuer, for example, by retrieving an issuer's Form 8-K from the EDGAR
    system to learn more about the nature of an issuer's noncompliance with
    listing standards and the issuer's plans to take corrective action.

    According to OCIE officials, public disclosure through the Form 8-K is
    preferable to existing disclosures provided through press releases because
    issuers will be required to file the form earlier in the deficiency
    process. In addition, unlike press releases, Form 8-K filings would be
    available to investors through the EDGAR system. However, agency officials
    said that the filings would not provide the ongoing notification OCIE
    seeks through the modifier because they reflect the company's status at
    the time the Form 8-K is filed and, as a result, would not provide
    information about the ongoing listing status of issuers. OCIE officials
    also said that investors would have to know that they could search for an
    issuer's Form 8-K. Corporation Finance officials said they expect the
    Commission to consider whether to approve the final Form 8-K revisions in
    March 2004.

    OCIE officials told us that their discussions with the SROs have focused
    on using modifiers or indicators when issuers do not meet their market's
    quantitative listings standards but that they could also be useful in
    further alerting the public to issuers' noncompliance with qualitative
    listing standards, which include corporate governance standards. The three
    largest SROs have already taken a step in this direction. For example,
    Amex and NASDAQ have qualitative standards addressing the timely filing of
    required SEC reports. According to a NASDAQ official, since before 1984,
    NASDAQ has appended a modifier to the stock symbols of all issuers within
    2 business days of detecting that they have not met time frames for filing
    required SEC quarterly and annual financial reports and in doing so

    49As previously discussed, Corporation Finance officials said that they
    are considering alternatives to the proposed 2-business-day filing
    requirement based on public comments.

    has provided investors early and ongoing notification that significant
    corporate information has not been made available. The required reports
    contain financial statements and other information that NASDAQ officials
    described as being critical for investors' decision making and for
    regulators' assessment of issuers' compliance with listing standards.
    According to Amex officials, the SRO expects to begin transmitting an
    indicator identifying listed companies that have not filed required
    reports during the third quarter of 2004, although it has not yet
    determined if it will use the indicator for nonfiling of annual reports
    alone or for both quarterly and annual reports. NYSE officials told us
    that the SRO will also begin transmitting indicators for issuers that have
    not filed required annual reports at the end of the first quarter of
    2004.50

    OCIE officials said that they are exploring the feasibility of requiring
    the SROs to implement symbol modifiers to disclose issuers' noncompliance
    with other qualitative standards, such as corporate governance standards.
    For example, all three SROs require a majority of directors on issuer
    boards to meet their respective definition of director independence. A
    modifier could potentially be used to indicate when an issuer does not
    have the requisite number of independent directors.

    OCIE Plans to Report SRO OCIE officials told us that they are in the
    process of drafting a report to the

    Progress to the Commission,  Commission that details the progress the SROs
    have made in addressing its

    Which Has Authority to Ensure  symbol modifier recommendation. According
    to OCIE officials, the report

    Early and Ongoing Notification will discuss the implementation issues that
    OCIE has encountered-

    of Noncompliant Issuers	including early public notification and
    information distribution. The report will also recommend how these
    problems could be resolved. OCIE officials told us that their goal was for
    the public to get the same type of information from each of the SROs on
    issuers' noncompliance with continued listing standards, even if small
    differences existed in how each SRO provides the information. The
    Commission has authority under the Exchange Act to address obstacles to
    implementing symbol modifiers or indicators, or to take alternative
    actions to meet the goal of early and ongoing public notification. For
    example, the Commission could approve Corporation Finance's proposed
    revisions to the Form 8-K to address early notification issues. Also,
    according to an OCIE official, SEC could require the SROs to implement
    symbol modifiers or indicators and prohibit the SROs through

    50Instead of requiring timely filing of SEC reports, NYSE's rules require
    issuers to notify NYSE if they do not file the required reports on time.

    rulemaking from entering into a contract with an information vendor that
    refuses to display a modifier or indicator.51

    OCIE Does Not Routinely Use SRO Internal Review Reports in Planning and
    Conducting Inspections

    OCIE officials told us that they do not routinely use SROs' internal
    review reports in planning and conducting inspections designed to assess
    the quality of SROs' oversight, nor does the guidance on which they rely
    specifically address the use of these reports in SRO inspections.
    Nonetheless, professional standards recommend that internal review staff
    use the reports prepared by or on behalf of the organizations they are
    reviewing for these purposes, and other organizations that have an
    oversight role similar to OCIE's told us that they do so. Our work showed
    that many of the topics and findings in the SROs' internal review reports
    were similar to those covered in OCIE's listing program inspections, and
    the reports could be useful to OCIE in planning and conducting
    inspections.

    OCIE Does Not Routinely Use SRO Internal Review Reports, Nor Does the
    Guidance Upon Which It Relies Specifically Address Their Use

    OCIE officials said that they do not routinely use SROs' internal review
    reports in planning and conducting inspections designed to assess the
    quality of SRO oversight. Although OCIE does not have a written policy
    that specifically addresses the routine use of internal review reports in
    SRO inspections, OCIE officials said that they rely on guidance provided
    in a policy memorandum that addresses the use of these reports in
    examinations of broker-dealers, investment advisers, and investment
    companies. The policy directs OCIE staff to request internal review
    reports when they believe specific problems exist at an SRO.52  OCIE
    officials said that, using their discretion, they might review a sample of
    internal review reports to determine whether a broker-dealer, investment
    adviser, investment company, or SRO had identified problems being reviewed
    by OCIE and, if so, how the problems were addressed. For example, OCIE

    51In order to require the SROs to take actions to resolve implementation
    issues associated with symbol modifiers, the Commission would have to use
    its section 19(c) rule-making authority, subject to specified procedures.
    As previously discussed, SEC rarely uses this authority.

    52The policy also directs OCIE staff to request internal review reports as
    part of a review of internal controls or supervisory systems of
    broker-dealers, investment advisers, and investment companies. OCIE
    officials said that they have not conducted these types of reviews at the
    SROs; therefore, the use of internal audit reports would not be applicable
    in this context.

    officials told us that they requested copies of NYSE's internal review
    reports when investigating alleged violations by floor brokers at NYSE
    that resulted in a 1999 report, which concluded that NYSE failed to
    dedicate sufficient resources to allow regulatory staff to perform
    required random and for-cause examinations of floor-broker activity. 53
    OCIE officials said that, to the best of their knowledge, they have never
    requested an SRO internal review report as part of a listing program
    inspection.

    OCIE officials told us that routine use of SRO internal review reports
    would have a "chilling effect" on the flow of information between SRO
    internal review staff and other SRO employees. They said that routine use
    would make employees less forthcoming in disclosing information to SRO
    internal review staff for fear that the information would be provided to
    government regulators and through them be made public. They concluded that
    the consequences might outweigh the benefit of reviewing the reports.
    Officials at one SRO said that they believe OCIE would attempt to keep the
    SRO's internal review reports confidential, but that there was no
    assurance that OCIE could do so. Officials at each of the three largest
    SROs told us that they have provided and would continue to provide OCIE
    with copies of their internal review reports if OCIE requested them.

    Professional Standards Recommend Using Internal Review Reports and Other
    Organizations with an Oversight Function Said That They Do So

    The Government Auditing Standards, also called the Yellow Book, recommend
    the use of internal review reports in conducting performance and other
    types of reviews.54  The Yellow Book defines performance reviews to
    include reviews that assess the extent to which legislative, regulatory,
    or organizational goals and objectives are being achieved. OCIE's SRO
    inspections share many of the attributes of performance reviews, including
    their objectives. Although OCIE is not required to follow the Yellow Book
    standards in inspecting SROs, OCIE inspections may benefit from adopting

    53Order Instituting Public Proceedings Pursuant to Section 19(h)(1) of the
    Securities Exchange Act of 1934, Making Findings and Ordering Compliance
    with Undertakings, SEC Release No. 34-41574 (June 29, 1999); and
    Inspection of the New York Stock Exchange's Undertakings Regarding the
    Surveillance, Examination, Investigatory, and Disciplinary Programs for
    Independent Floor Brokers, (Aug. 23, 2001). The 2001 report followed up on
    actions NYSE took to improve its regulation of independent floor brokers
    as a result of the 1999 findings.

    54The Yellow Book refers to reviews as "audits."

    some of the standards applicable to performance reviews.55 The Yellow Book
    standards recognize that previous reports can be a useful source of
    information for planning and conducting reviews and can impact the areas
    on which subsequent reviewers focus. The Yellow Book states that those
    conducting reviews should determine if internal review staff have
    previously done, or are doing, reviews of the program or the entity being
    examined. It suggests that these staff review previous internal review
    reports or other studies to consider how areas identified as warranting
    further study might affect the selection of their review objectives and
    that internal review staff follow up to assess the actions taken to
    address significant report findings and recommendations related to the
    objectives of the current review.

    CFTC and Treasury IG officials told us that, consistent with Yellow Book
    requirements, they routinely request internal review reports in doing
    their work. According to CFTC IG officials, the agency's policy is to
    request copies of all relevant audits, management reviews, consultant
    reports, and other related materials so that they can familiarize
    themselves with the program they are reviewing. They said that this
    information provides them with useful background on the program under
    review and helps them to determine the objectives and scope of the current
    review.56 They also said that they use internal review reports to follow
    up on the agency's implementation of prior IG recommendations. Finally,
    Treasury IG guidance requires the review of prior IG reports, GAO reports,
    management reviews, studies, and consulting reports on the function or
    activity that is being reviewed as a means of understanding the agency and
    its operations. Treasury IG officials also told us that they refer to
    these reports in establishing the objectives and scope of reviews and in
    following up on actions to address previous recommendations.

    55Generally accepted government auditing standards (also known as "GAGAS"
    and outlined in the Yellow Book) apply to audits and attestation
    engagements of government entities, programs, activities, and functions.

    56Bank examiners may request the internal review reports of the banks they
    are reviewing. However, while Treasury and CFTC IG officials use internal
    review reports in determining the objectives and scope of their reviews,
    bank examiners use them in testing the bank's internal audit or loan
    review function. An OCIE official told us that in reviews of
    brokerdealers, investment companies, and investment advisors, OCIE also
    uses the internal review reports of these entities in testing internal
    controls.

    Topics and Findings in SRO Internal Reviews and OCIE Listing Program
    Inspections Were Similar, and the Reports Could be Useful to OCIE in
    Planning and Conducting Inspections

    Our review of selected internal review reports of two SROs and
    conversations with one other about its reports revealed that the SROs'
    internal review functions have examined or were in the process of
    examining aspects of their listing programs that OCIE covered in its most
    recent inspections.57 Consistent with OCIE's inspection objective related
    to evaluating the effectiveness of the SROs in implementing rules and
    procedures applicable to listing issuers, all three SROs conducted
    internal reviews of their initial and continued listing programs and
    hearings and appeals processes for issuers that received delisting
    notices. Also, one SRO addressed policies, procedures, and systems for
    reviewing issuer information as part of the initial listing process.
    Consistent with OCIE's inspection objective related to determining whether
    the SROs have implemented recommendations from previous OCIE inspections,
    officials of one SRO told us that as part of their internal reviews, they
    follow up on OCIE's recommendations to ensure that the corrective actions
    taken were consistent with the intent of OCIE's recommendations. Finally,
    all three SROs told us that they follow up on all recommendations made as
    a part of their own internal reviews.

    Moreover, SEC has recognized that a strong internal review function is
    important to the effectiveness of the SROs in fulfilling their regulatory
    responsibilities by recommending on at least two occasions that the SROs
    strengthen this function to improve their oversight. First, an
    investigation SEC began in 1994 into the operations and activities of NASD
    and the market making activities of NASDAQ found that NASD failed over a
    period of time to conduct an appropriate inquiry into anticompetitive
    actions among NASDAQ market makers.58 In responding to SEC's resulting
    recommendations, NASD agreed to, among other things, ensure the existence
    of a "substantial," independent internal review staff reporting directly
    to NASDAQ's Board of Governors.59 Second, as discussed, SEC reported in
    1999 that its investigation of the activity of NYSE floor brokers

    57NASD is responsible for conducting oversight inspections of Amex.

    58Report Pursuant to Section 21(a) of the Securities Exchange Act of 1934
    Regarding the NASD and NASDAQ Market, SEC Release No. 34-37542 (Aug. 8,
    1996).

    59More recently, NASDAQ has taken steps to further bolster the
    independence of its internal review function by providing that its
    internal review department report directly to the audit committee, which
    consists solely of independent directors, and mandating that its internal
    review department have free and open access to information deemed
    necessary by the department to perform its reviews.

    found that NYSE failed to dedicate sufficient resources to allow
    regulatory staff to perform certain required examinations of floor-broker
    activity. To address SEC's resulting recommendation, NYSE agreed to
    maintain its Regulatory Quality Review Department as a "substantial,"
    independent internal review staff with adequate resources to regularly
    review all aspects of NYSE.

    The NASDAQ Moratorium and Subsequent Rule Changes Allowed Issuers to
    Remain Listed Longer

    Following September 11, 2001, SEC allowed a NASDAQ rule to remain in
    effect that implemented a moratorium on enforcing its continued listing
    standards for bid price and market value of publicly held shares. After
    the moratorium ended, SEC allowed a separate NASDAQ rule to remain in
    effect that established a pilot program extending the bid-price compliance
    period for SCM issuers from 90 days to almost 1 year and allowing NNM
    issuers that were noncompliant with the bid-price standard to transfer to
    the SCM at the end of the compliance period, rather than enter the
    delisting process. On December 23, 2003, SEC approved another NASDAQ rule
    proposal that further extended the time noncompliant issuers could remain
    listed, also under a pilot program.

    SEC Allowed NASDAQ's Rule Implementing a Moratorium on Enforcing Bid-Price
    and Market Value of Publicly Held Shares Continued Listing Standards to
    Remain in Effect

    In response to market conditions after September 11, SEC allowed a NASDAQ
    rule to remain in effect that implemented a 3-month moratorium on
    enforcing its continued listing standards for bid price and market value
    of publicly held shares. According to NASDAQ officials, NASDAQ's Listing
    and Hearing Review Council began to study the possible effects of
    modifications to the bid-price standard about 1 year before the
    moratorium. These officials said that as the market was already
    experiencing a downturn in the months before September 11, 2001, many
    NASDAQ-listed companies saw their stock price fall below the minimum
    bid-price standard. According to NASDAQ officials, after this date, market
    conditions worsened considerably and the bid price of more issuers fell
    below the standard. NASDAQ expressed concern that, in the absence of the
    moratorium, a large number of otherwise financially sound companies would
    have to be delisted. According to NASDAQ officials, delisting these
    issuers would, among other things, disadvantage investors who would be
    limited to trading the related securities in markets that were not subject
    to the same level of regulation and transparency as NASDAQ. To give the
    markets time to stabilize and to provide issuers that were noncompliant
    with only these standards time to return to compliance, NASDAQ proposed

    the rule that implemented the moratorium. The rule became operative on
    September 27, 2001, and the moratorium expired on January 2, 2002.60

    NASDAQ filed its proposal with SEC in accordance with a procedure set
    forth in the Exchange Act and SEC regulations that allows a rule proposed
    by an SRO to take effect upon filing without any action being taken by
    SEC. A proposed rule change can become immediately effective without SEC
    action if it is properly designated by the SRO as effecting a change that
    (1) does not significantly affect the protection of investors or the
    public interest; (2) does not impose any significant burden on
    competition; and (3) by its terms does not become operative for 30 days
    after the date of the filing, or such shorter time as SEC may designate if
    consistent with the protection of investors and the public interest.61
    SEC, within 60 days of the date of filing, may summarily abrogate the rule
    change if it appears to SEC that such action is necessary or appropriate
    in the public interest, for the protection of investors, or otherwise in
    furtherance of the purposes of the Exchange Act.62

    60Self-Regulatory Organizations: Notice of Filing and Immediate
    Effectiveness of Proposed Rule Change by the National Association of
    Securities Dealers, Inc. to Provide Nasdaq Issuers Temporary Relief from
    Listing Requirements Relating to the Bid Price for Continued Inclusion and
    the Market Value of the Public Float, SEC Release No. 34-44857 (Sept. 27,
    2001). After the date of this release, NASDAQ changed the name of the
    market value of public float listing standard to market value of publicly
    held shares.

    61These criteria are found in SEC Rule 19b-4(f)(6), 17 C.F.R.
    240.19b-4(f)(6), which implements section 19(b)(3)(A) of the Exchange Act,
    15 U.S.C. S: 78s(b)(3)(A). SEC Rule 19b-4(f)(6) also requires that, for a
    rule change to take effect immediately upon filing with SEC, the SRO must
    give SEC written notice of its intent to file the proposed rule change,
    along with a brief description and text of the proposed rule change, at
    least 5 business days before the date of filing of the proposed rule
    change, or such shorter time as designated by SEC. This 5-day period
    allows SEC staff to offer its opinion to the SRO regarding whether the
    proposal meets the criteria for filing under Rule 19b-4(f)(6).

    62Section 19(b)(3)(C) of the Exchange Act, 15 U.S.C. S: 78s(b)(3)(C).

    SEC did not abrogate NASDAQ's proposed rule change implementing the
    moratorium. Moreover, to provide issuers immediate relief, SEC waived the
    30-day waiting period and allowed the rule to become operative
    immediately.63 In the notice of this proposal, SEC stated that the rule's
    potential benefits could have been lost without accelerating the operative
    date, because NASDAQ might otherwise have been required to begin delisting
    proceedings against issuers that did not meet the bid-price and market
    value of publicly held shares standards.

    The moratorium provided relief to at least 50964 issuers that were
    noncompliant or approaching noncompliance with the bid-price or market
    value of publicly held shares continued listing standards.65 During the
    moratorium, NASDAQ stopped enforcing these standards, which meant that
    noncompliant issuers were no longer subject to NASDAQ's deficiency
    process, thereby relieving those that were in the process from potential
    delisting. NASDAQ also stopped tracking individual issuers' compliance
    with these standards so that issuers approaching noncompliance that might
    otherwise have entered the deficiency process did not do so. Because
    NASDAQ stopped tracking individual issuers' compliance with the bid-price
    and market value of publicly held shares standards during the moratorium,
    it could not determine the total number of issuers that might have become
    noncompliant in the absence of the moratorium and, therefore, benefited
    from it. Neither could NASDAQ determine the number of noncompliant issuers
    that would have returned to compliance in the absence of the moratorium.

    63Without SEC action, a rule filed under this procedure would become
    "effective" immediately but not "operative" until 30 days later. The net
    result would be a 30-day delay before the SRO could enforce the proposed
    rule. However, if SEC waives the 30-day period, the proposed rule can
    become "effective" and "operative" at the same time. According to SEC
    staff, the 30-day "preoperative" waiting period gives affected parties,
    such as issuers and investors, time to adjust to the new rule. The period
    also serves to give SEC time during which it can evaluate the rule and, if
    warranted, abrogate it without significantly disrupting SRO operations. In
    waiving the 30-day waiting period, SEC is to consider the proposed rule's
    impact on efficiency, competition, and capital formation, as required by
    15 U.S.C. S: 78c(f).

    64Of these 509 issuers-about 11 percent of the issuers listed on
    NASDAQ-152 traded on the SCM and 357 traded on the NNM.

    65Before the moratorium, if bid price or market value of publicly held
    shares fell below the continued listing standards for 30 consecutive
    trading days, the issuer was classified as noncompliant and had 90 days to
    return to compliance.

    At the end of the moratorium, 447 of the 509 issuers that could be
    identified as having received temporary relief remained listed. The
    remaining 62 were no longer listed at the time the moratorium expired on
    January 2, 2002. Of these, 47 were delisted for deficiencies in listing
    standards not related to bid price and 15 were delisted for other reasons,
    such as merger with or acquisition by another company.

    SEC Subsequently Allowed a NASDAQ Rule to Remain in Effect That Allowed
    Noncompliant SCM Issuers Almost 1 Year to Comply with the Bid-Price
    Standard and NNM Issuers to Transfer to the SCM

    In February 2002, shortly after the moratorium ended, SEC allowed a NASDAQ
    rule to remain in effect that extended the bid-price compliance period
    from 90 days to almost 1 year for SCM issuers and allowed noncompliant NNM
    issuers to transfer to the SCM at the end of the NNM bid-price compliance
    period, rather than enter the delisting process.66 The rule implemented
    these changes on a 2-year pilot basis, and NASDAQ agreed to evaluate the
    rule's impact on the market at the end of the 2-year period. First, the
    new rule extended the initial SCM bid-price compliance period from 90 days
    to 180 days. Second, at the expiration of the 180 days, SCM issuers that
    had not regained compliance with the bid-price standard were allowed an
    additional 180 days to regain compliance if they met one of three initial
    SCM listing standards.67 The net result was that noncompliant SCM issuers
    that met these higher initial listing standards had almost 1 year to
    regain compliance before entering the delisting process. The rule also
    established procedures for noncompliant NNM issuers to transfer to the SCM
    at the end of the 90-day NNM bid-price compliance period. Under these
    procedures, NNM issuers that did not comply with the bid-price standard at
    the end of the 90-day NNM compliance period could, in lieu of entering the
    delisting process, elect to transfer to the SCM, if they (1) met all but
    the SCM's bid-price continued listing standards, (2) filed an application,
    and (3) paid the applicable listing fee. Under rules applicable to SCM
    issuers, noncompliant NNM issuers that transferred to the SCM could trade
    for as much as an additional 270 days

    66Self-Regulatory Organizations; Notice of Filing and Immediate
    Effectiveness of a Proposed Rule Change by the National Association of
    Securities Dealers, Inc., Relating to the Bid Price Criteria of Nasdaq
    Listing Standards, 67 Fed. Reg. 6306 (Feb. 11, 2002).

    67The three SCM initial listing standards were a minimum of (1) $5,000,000
    in shareholders' equity, (2) $50,000,000 in market capitalization, or (3)
    $750,000 in net income from continued operations in the most recent fiscal
    year or in 2 of the last 3 most recent fiscal years. Issuers are required
    to meet at least one of these three standards to be eligible for initial
    listing. SCM initial listing standards for shareholders' equity, market
    capitalization, and net income are higher than for continued listing.

    (the remaining 90 days of the first 180-day SCM compliance period and the
    entire second 180-day compliance period).

    According to NASDAQ, the rule was proposed in order to provide
    noncompliant NNM issuers more time to develop and implement strategies for
    regaining compliance with the bid-price standard. Until the rule change,
    the bid-price continued listing standards for the SCM and NNM were the
    same. As a result, NNM issuers failing to meet the bid-price standard
    after the expiration of the compliance period were not eligible to trade
    on the SCM and, if delisted by NASDAQ, would be forced to trade in another
    overthe-counter market. NASDAQ filed this rule change under the same
    procedure as the rule change implementing the moratorium. As with the
    moratorium rule, SEC took no action to abrogate the proposed rule and also
    waived the 30-day waiting period, allowing NASDAQ to enforce it
    immediately. In waiving the 30-day waiting period, SEC stated that no
    purpose would be served by having 30 days pass before the rule became
    operative because, during the intervening period, issuers and investors
    could become confused about which compliance period applied.68

    The February 2002 rule change affected the listing status of issuers that
    were provided relief from pending or potential delisting by the moratorium
    (moratorium issuers) and other issuers that were not identified as
    receiving such relief (nonmoratorium issuers). As previously discussed,
    447 (88 percent) of the 509 moratorium issuers continued to trade when the
    moratorium expired on January 2, 2002. By February 28, 2003, approximately
    1 year after NASDAQ implemented its February 2002 rule change, the number
    of issuers trading had dropped to 246 (48 percent of the 509 moratorium
    issuers).69 This drop reflects 201 additional delistings, increasing the
    total number of moratorium issuers delisted from 62 to 263 (52 percent of
    the 509 moratorium issuers).70

    68According to a Market Regulation official, if SEC had not granted
    NASDAQ's request to waive the 30-day waiting period, different SCM issuers
    could have been subject to different compliance periods, depending on
    which rule applied at the time they became deficient.

    69The 246 moratorium issuers trading on February 28, 2003, included
    issuers that were in full compliance with the continued listing standards
    as well as issuers that were noncompliant with bid-price or other
    continued listing standards.

    70Of the 201 moratorium issuers that were delisted between January 2,
    2002, the day the moratorium expired, and February 28, 2003, 70 were
    delisted for noncompliance with the bid-price standard alone or
    noncompliance with the bid-price and other listing standards; 95 were
    delisted for noncompliance with listing standards not related to bid
    price; and 36 were delisted for other reasons, such as merger with or
    acquisition by another company.

    Of the 246 issuers that continued to trade as of February 28, 2003, 132
    issuers were listed on the SCM and were trading under the extended
    compliance period or had traded in an extended compliance period and
    regained compliance with the bid-price standard, including 87 that had
    transferred from the NNM. Under the premoratorium bid-price rule, all of
    the 132 issuers would have entered the delisting process. Also, as of
    February 28, 2003, 150 nonmoratorium issuers had traded or were trading on
    the SCM under the extended bid-price compliance period, including 89
    issuers that transferred from the NNM. These 150 issuers also would have
    entered the delisting process under the premoratorium bid-price rule.

    SEC Approved a Rule That Further Extended the Bid-Price Compliance Periods

    In January 2003, the NASDAQ and NASD boards of directors approved NASDAQ's
    plans to propose to SEC a rule change that would further extend the SCM
    and NNM bid-price compliance periods up to 2 years and almost 1 year,
    respectively, under a pilot program. Market Regulation subsequently asked
    NASDAQ to modify its request to submit the proposal under provisions that
    would allow the rule to be applied immediately upon filing. Market
    Regulation officials said that they wanted to assess whether the public
    perceived any negative consequences for investors in allowing SCM issuers
    to trade while noncompliant for up to 2 years. After ongoing discussions
    with Market Regulation officials, NASDAQ divided its proposal into two
    rule filings-one that would partially implement the extended compliance
    periods and become immediately effective upon filing, and the other that
    would subject the remainder of the proposal to public notice and comment
    before final SEC action.

    Accordingly, in March 2003, NASDAQ submitted to SEC a proposal to extend
    the bid-price compliance periods on both the SCM and NNM by 90 days.71 SEC
    took no action to abrogate the rule and waived the 30-day waiting period,
    allowing NASDAQ to enforce the rule immediately. The rule allowed
    noncompliant SCM issuers that met one of three initial SCM listing
    standards another 90-day compliance period extension, increasing the SCM

    71Self-Regulatory Organizations: Notice of Filing and Immediate
    Effectiveness of Proposed Rule Change by the National Association of
    Securities Dealers, Inc. Relating to the Bid Price Test in Nasdaq Listing
    Standards, 68 Fed. Reg. 12729 (Mar. 17, 2003).

    compliance period to a potential total of 450 days.72 The rule also
    extended the NNM's initial bid-price compliance period from 90 days to 180
    days. At the end of the 180-day compliance period an NNM issuer could
    apply to transfer to the SCM, provided it (1) met all but the SCM
    bid-price continued listing standards, (2) filed an application, and (3)
    paid the applicable listing fee. In addition, the rule extended the pilot
    program established under the February 2002 rule change until December 31,
    2004, by which time NASDAQ is expected to evaluate the rule's impact on
    the market.

    NASDAQ proposed the remainder of its plan to extend the SCM bid-price
    compliance period up to 2 years and the NNM bid-price compliance period to
    almost 1 year, using a different procedure that requires affirmative SEC
    approval of the proposed rule change. This procedure allows SEC to review
    comments submitted by the public before the rule becomes effective.
    However, no public comments were submitted. SEC approved the rule on
    December 23, 2003.73 The new rule amended the March 2003 rule to extend
    the SCM bid-price compliance period up to 2 years and the NNM bid-price
    compliance period to almost 1 year under the pilot program. The new rule
    allows NASDAQ to continue to grant a noncompliant SCM issuer a second
    180-day compliance period extension; however, NASDAQ now requires the
    issuer to meet all SCM initial listing standards, except for bid price,
    rather than only one of three initial listing standards as specified in
    the February 2002 and March 2003 rule changes.74 NASDAQ officials told us
    that this new requirement was intended to protect investors by preventing
    financially weak companies from taking advantage of the compliance period
    extensions.

    72The three SCM initial listing standards were a minimum of (1) $5,000,000
    in shareholders' equity, (2) $50,000,000 in market value of listed
    securities, or (3) $750,000 in net income from continued operations in the
    most recent fiscal year or in 2 of the last 3 most recent fiscal years.

    73Self-Regulatory Organizations; Order Granting Approval to Proposed Rule
    Change and Amendment Nos. 1 and 2 Thereto and Notice of Filing and Order
    Granting Accelerated Approval to Amendment No. 3 Thereto by the National
    Association of Securities Dealers, Inc. to Modify an Existing Pilot
    Program Relating to the Bid Price Test of the Nasdaq Maintenance Listing
    Standards, 68 Fed. Reg. 75677 (Dec. 31, 2003). Also, see SEC's correction
    to the text of the rule: Self-Regulatory Organizations; Order Granting
    Approval to Proposed Rule Change and Amendment Nos. 1 and 2 Thereto and
    Notice of Filing and Order Granting Accelerated Approval to Amendment No.
    3 Thereto by the National Association of Securities Dealers, Inc. to
    Modify an Existing Pilot Program Relating to the Bid Price Test of the
    Nasdaq Maintenance Listing Standards, 69 Fed. Reg. 6707 (Feb. 11, 2004).

    74See appendix III, figure 7, for NASDAQ's current bid-price deficiency
    process.

    An SCM issuer that is still noncompliant with the bid-price standard at
    the end of the 180-day extension but that meets all other SCM initial
    listing standards can receive a further compliance period extension, up to
    the time of its next scheduled shareholders' meeting, if the issuer agrees
    to seek shareholder approval for a reverse stock split at that meeting and
    implement it promptly afterward.75  The new rule allows NASDAQ to grant
    this compliance period only if the next shareholders' meeting is scheduled
    to occur within 2 years of the date on which NASDAQ initially notified the
    issuer of its noncompliance, thus limiting the time a noncompliant issuer
    can remain trading to 2 years. Under the new rule, NASDAQ must immediately
    begin delisting proceedings if the issuer does not propose, obtain
    approval for, or promptly execute the reverse stock split.

    The new rule also permits NASDAQ to grant a noncompliant NNM issuer a
    second 180-day compliance period extension, if the issuer meets all NNM
    initial listing standards except bid price. An issuer may elect to
    transfer to the SCM at the end of either the first or second compliance
    period, provided it (1) meets all of the SCM continued listing standards
    except bid price, (2) files an application, and (3) pays the applicable
    listing fee. Thus, under the new rule, noncompliant NNM issuers can remain
    listed for almost 1 year on the NNM and for up to 2 years if they transfer
    to the SCM instead of entering the delisting process. Figure 1 shows how
    NASDAQ has lengthened the SCM and NNM bid-price compliance periods from
    the premoratorium standards through the December 2003 rule.

    75A reverse stock split is the reduction of the total number of shares
    outstanding. The total number of shares will have the same market value
    immediately after the reverse split as before it, but each share will be
    worth more. For example, if a firm with 10 million outstanding shares
    selling at $10 a share executes a reverse 1 for 10 split, the firm will
    end up with 1 million shares selling for $100 each.

    Figure 1: Maximum Number of Calendar Days in NASDAQ Bid-Price Compliance
    Periods from August 1991 (Premoratorium) through December 2003 (Latest
    Rule Change)

    Source: NASDAQ.

    In its approval order, SEC said that the length of the extended compliance
    periods under the new rule raises investor protection concerns. According
    to SEC, if a listing standard is suspended for too long, the standard is
    not transparent and the investor protection principles underlying the
    premise of listing standards could be compromised. SEC said that the
    heightened requirements that NASDAQ issuers must meet under the rule to be
    eligible for the extended compliance periods should offer reassurance to
    investors that the issuer remains a viable business despite its low bid
    price. SEC further noted that if NASDAQ seeks permanent approval for the
    new rule, the results of NASDAQ's study on the effects of the rule under
    the pilot program would be essential in analyzing whether the length of
    the extended compliance periods undermines investor protection.

    Listing Standards Have Been Used as a Vehicle for Improving Corporate
    Governance

    Responding to the unexpected collapse of several major corporations, SEC
    requested in 2002 that the SROs strengthen their corporate governance
    standards. In addition, Congress passed Sarbanes-Oxley, which mandated
    that the SROs adopt rules governing audit committees of listed issuers.
    The three largest SROs responded by adopting rules that amended their
    corporate governance standards for listed companies, by among other
    things, increasing the role and authority of independent directors.
    Additionally, in response to an SEC request in 2003, the three largest
    SROs

    began evaluating their own governance against the standards proposed for
    their issuers. Finally, we reviewed the actions taken by public and
    private institutions in four other countries related to the role and
    authority of independent directors of issuers in those markets.

    Corporate Collapses Led to SEC and Congressional Efforts to Strengthen
    Corporate Governance through Listing Standards

    The collapse of major U.S. corporations, such as the Enron Corporation,
    Inc., and WorldCom, Inc., beginning in 2001 raised congressional, SEC, and
    market participant concerns about the quality of corporate governance at
    publicly traded companies. One area of concern focused on the ability of
    directors to provide active and independent oversight of management. For
    example, various congressional committees, including the Senate Permanent
    Subcommittee on Investigations, held hearings as part of their examination
    of the collapse of Enron.76 The subcommittee's final report on the role of
    the board of directors in Enron's collapse raised concerns about the
    failure of the Enron board to safeguard the interests of shareholders by
    allegedly allowing management to engage in, among other things,
    inappropriate conflict-of-interest transactions.77  The report alleged
    that financial ties existed between the company and certain board members
    that likely compromised their independence. Also, at companies such as
    Enron and WorldCom, allegedly conflicted boards approved excessive
    compensation for their chief executives. Similarly, hearings by Congress
    as well as an investigation mandated by a U.S. district court into the
    2002 collapse of WorldCom questioned the effectiveness of the board's
    oversight of the CEO. According to the court-mandated report, the CEO
    appeared to have dominated the course of the company's growth, as well as
    the agenda, discussions, and decisions of the board.78

    Consistent with the court's decision in Business Roundtable v. SEC, SEC
    did not mandate changes to the SROs' listing standards to address these

    76Other congressional committees holding hearings on the collapse of Enron
    included the Senate Committee on Banking, Housing, and Urban Affairs; the
    Senate Committee on Commerce, Science, and Transportation; the House
    Committee on Energy and Commerce, Subcommittee on Oversight and
    Investigations; and the House Committee on Financial Services and its
    Subcommitee on Capital Markets, Insurance, and Government Sponsored
    Enterprises.

    77U.S. Senate Permanent Subcommittee on Investigations, The Role of the
    Board of Directors in Enron's Collapse, 107th Cong., 2nd sess., 2002, S.
    Rept. 107-70.

    78Dick Thornburgh, First Interim Report of Dick Thornburgh, Bankruptcy
    Court Examiner (November 2002).

    lapses in corporate governance. Instead, the former SEC Chairman asked
    NASDAQ and NYSE in a February 2002 letter to review ways in which they
    could strengthen corporate governance through their listing standards.79
    He suggested several issues for the SROs to consider, including whether
    public companies should be required to adopt codes of conduct for their
    officers and directors, take steps to ensure directors are qualified for
    board service, and further strengthen audit committee requirements. SEC
    staff sent Amex a similar letter in June 2002.80

    Also, responding to the corporate collapses, Congress mandated, with the
    passage of Sarbanes-Oxley in July 2002, that listing standards be used as
    a vehicle for improving corporate governance. Section 301 of
    Sarbanes-Oxley sought to improve the effectiveness of issuer audit
    committees by imposing requirements designed to enhance their
    independence, authority, and responsibility. Sarbanes-Oxley required SEC
    to direct the SROs through rulemaking to prohibit the listing of issuers
    that do not meet these requirements. SEC issued its final rules in April
    2003.81

    79SEC's 2002 request was preceded by a 1998 request that resulted in NASD
    and NYSE convening the Blue Ribbon Committee on Improving the
    Effectiveness of Corporate Audit Committees (Blue Ribbon Committee) to
    make recommendations for strengthening audit committee oversight. Amex,
    NASDAQ, and NYSE adopted many of the resulting recommendations in 1999 as
    listing standards. Among other things, they required issuers to establish
    audit committees comprising directors that meet specific independence and
    financial literacy requirements and required audit committees to adopt
    written charters detailing their responsibilities. SEC also followed a
    Blue Ribbon Committee recommendation by requiring issuers to disclose
    these charters as an appendix to the proxy statement at least once every 3
    years.

    80SEC also sent letters to other securities exchanges requesting that they
    review their corporate governance listing standards.

    81Standards Relating to Listed Company Audit Committees, 68 Fed. Reg.
    18788 (Apr. 16, 2003). SEC's final rules require most issuers to comply
    with the new audit committee requirements by their first annual
    shareholders' meeting after January 15, 2004, or by October 31, 2004,
    whichever is earlier.

    The SROs Adopted Rules That, Among Other Things, Increase the Role and
    Authority of Independent Directors

    SEC Stated That the SROs' Rules Should Foster Board Accountability

    Addressing the SEC request and Sarbanes-Oxley mandates, the three largest
    SROs adopted rules that, according to SEC, should foster greater board
    accountability to shareholders.82  Market participants supported the rules
    but held differing views on the need for further enhancements to board
    independence. OCIE officials said that they will work with the SROs to
    ensure processes are developed to more thoroughly assess compliance with
    the new standards. SEC has also taken steps to further strengthen director
    accountability to shareholders, including addressing longstanding investor
    interest in gaining increased access to the director nomination process
    and planning a review of SEC requirements governing disclosures of
    qualitative corporate information.

    The SROs submitted rules that SEC stated should foster greater
    accountability, transparency, and objectivity in board oversight.83 Among
    other things, these rules increase the role of independent directors,
    extend corporate governance disclosures, and expand shareholder oversight
    of equity compensation plans.84 SEC completed its review and approval of
    these rules for Amex, NASDAQ, and NYSE between June 2002 and December
    2003.85 According to Corporation Finance and Market Regulation officials,
    although they worked with the markets to harmonize their listing standards
    in some key areas, they did not push the SROs to have identical standards
    because some differences were warranted, such as those related to the size
    of issuers.

    82NASDAQ officials said that NASDAQ's Listing and Hearing Review Council,
    a standing independent advisory committee on listing and corporate
    governance issues, began an evaluation of potential actions to strengthen
    corporate governance listing standards before NASDAQ received the SEC
    Chairman's February 2002 letter.

    83Amex submitted its initial rule proposals in separate filings to SEC on
    May 6 and June 23, 2003. NASDAQ submitted its initial rule proposals in
    separate filings on June 11 and October 9, 2002. NYSE submitted its
    initial rule proposals on August 16, 2002.

    84An equity compensation plan is a plan or other arrangement under which
    the equity securities of the issuer are used to compensate such persons as
    officers, directors, or employees for services rendered.

    85The SROs submitted revised rule filings during this period in response
    to ongoing discussions with SEC officials and SEC's April 2003 rules
    implementing Sarbanes-Oxley audit committee requirements.

    New Rules Increased the Role of Independent Directors

    Amex, NASDAQ, and NYSE's new rules increase the role of independent
    directors by (1) requiring that in most circumstances issuers have a
    majority of independent directors on their boards and that they meet
    regularly in executive sessions,86 (2) tightening the definition of
    independence that applies to directors, (3) strengthening independent
    directors' oversight of financial reporting, and (4) increasing
    independent directors' authority over CEO compensation and director
    nominations.87  First, according to Amex and NYSE, requiring that a
    majority of directors be independent, with limited exceptions, and free
    from relationships with the issuer or its management that might compromise
    their independence, will promote board decision making that is aligned
    with shareholders' interests and thereby enhance board accountability.
    NASDAQ similarly stated that such a requirement empowers independent
    directors to more effectively carry out their oversight responsibilities.
    Further, according to Amex and NASDAQ, requiring that independent
    directors regularly meet without management present, as specified in these
    SROs' rules, is designed to encourage open discussion among independent
    directors. NYSE's rules include a similar requirement for independent
    directors and other directors who are not company officers. NYSE's rules
    further require issuers to disclose either the name of the director chosen
    to preside at the executive sessions or the procedure by which a presiding
    director is selected for each executive session. The issuers must also
    disclose a method interested parties can use to communicate any concerns
    directly to the presiding director or nonmanagement directors as a group.

    86Amex, NASDAQ, and NYSE's new rules apply in full to all domestic issuers
    listing common equity securities, with limited exceptions. For example,
    all three SROs exempt from the "majority of independent directors"
    standard those issuers for which an individual, a group, or another
    company holds more than 50 percent of the voting power. In addition, Amex
    exempts small business issuers from this standard, requiring instead that
    their boards of directors consist of at least 50 percent independent
    directors. Small business issuers, based on SEC's definition, are those
    issuers that, among other things, have less than $25 million in revenues
    and market capitalization.

    87Self Regulatory Organizations; New York Stock Exchange, Inc. and
    National Association of Securities Dealers, Inc.; Order Approving Proposed
    Rule Changes Relating to Corporate Governance, 68 Fed. Reg. 64154 (Nov.
    12, 2003); Self-Regulatory Organizations; Order Granting Approval of
    Proposed Rule Change by the American Stock Exchange LLC and Notice of
    Filing and Order Granting Accelerated Approval of Amendment No. 2 Relating
    to Enhanced Corporate Governance Requirements Applicable to Listed
    Companies, 68 Fed. Reg. 68432 (Dec. 8, 2003).

    Second, the three SROs' new rules tighten the definition of director
    independence by specifying additional bright-line criteria that boards
    must apply when making independence determinations. The three SROs
    specify, among other things, additional financial and employment
    relationships for directors and immediate family members that would
    preclude an independence determination. For example, Amex and NASDAQ's new
    rules maintain a test of financial independence that prohibits independent
    directors from receiving compensation from the issuer in excess of
    $60,000, subject to limited exceptions such as compensation for board
    service, but expand the specific types of compensation prohibited to
    include other types of payments and apply this financial test to the
    directors' immediate family. For example, NASDAQ's new rules would
    prohibit payments such as political contributions. NYSE's new definition
    of director independence also includes a test of financial independence
    similar to that of Amex and NASDAQ with a compensation ceiling of
    $100,000, unless this compensation is related to board service.

    In addition to providing bright-line criteria to aid boards in making
    these independence determinations, NYSE's rules also recommend that boards
    broadly consider other material relationships that might impair a
    director's independence.88 Boards must disclose any additional standards
    they adopt and explain to investors any determination of independence for
    a director who does not meet these standards.

    Of the three SROs, NASDAQ and NYSE currently require issuers to disclose
    which directors they have designated as independent. Some market
    participants expressed concern that without this information they would
    have difficulty assessing the independence of issuers' boards. Likewise,
    regulators might face the same difficulty. Amex officials said that they
    would consider providing this added disclosure.

    88According to NYSE, material relationships can include commercial,
    industrial, banking, consulting, legal, accounting, charitable, and
    familial relationships.

    Third, the three SROs' new rules strengthen the role of independent
    directors on audit committees and audit committee oversight of the
    financial reporting process.89 Implementing SEC's final rules related to
    Sarbanes-Oxley section 301 requirements, the SROs further tightened the
    definition of independence that will apply to audit committee members by
    prohibiting them from accepting any consulting, advisory, or other
    compensatory fees, unless this compensation is related to board service.
    Also, responding to SEC's final rules, the SROs new rules mandate that
    audit committee charters require the committees to have direct
    responsibility for the retention, oversight, and compensation of the
    independent auditor, have access to and funding for any other independent
    advisers they need to complete their work, and establish procedures for
    treating accounting-related complaints and the anonymous submission of
    these complaints by employees.90 In addition to addressing the
    Sarbanes-Oxley requirements, Amex, NASDAQ, and NYSE adopted other listing
    standards for audit committees. For example, NASDAQ's rules require audit
    committees to approve all related-party transactions.91 Amex's rules
    require that the audit committee exercise appropriate review and oversight

    89Amex, NASDAQ, and NYSE's new rules retain a previous requirement that
    issuers have audit committees of at least three members and consist solely
    of independent directors. The new rules also continue to require that each
    audit committee member be "financially literate" and that at least one
    have "financial expertise," although Amex uses the term "financial
    sophistication." Amex and NASDAQ define financial literacy as the ability
    to read and understand financial statements. NASDAQ defines financial
    expertise as having past employment experience in finance or accounting,
    requisite professional certification in accounting, or other comparable
    experience. Amex defines financial sophistication in a similar manner.
    NYSE delegates the responsibility for defining financial literacy to
    issuers' boards. NYSE specifies that the financial expert must have
    accounting or related financial management expertise, although it
    delegates the responsibility to boards to further define this expertise.
    Pursuant to Sarbanes-Oxley section 407, issuers are required to disclose
    whether their audit committees have at least one financial expert meeting
    the definition of financial expert provided in SEC's rulemaking that
    implements section 407. Although none of the SROs' definitions of
    financial expert meet SEC's stricter definition, Corporation Finance
    officials stated that they expect most issuers will seek audit committee
    experts that meet SEC's definition, rather than disclose to investors that
    they do not have such an expert. Issuers other than small business issuers
    must comply with this disclosure requirement in their annual reports for
    fiscal years ending on or after July 15, 2003, and for small business
    issuers, December 15, 2003.

    90Amex, NASDAQ, and NYSE's new rules retain the requirement that audit
    committees have charters that include descriptions of the committee's
    scope of responsibilities and the way in which the committee will carry
    them out.

    91Related-party transactions refer to financial transactions between the
    issuer and a director, director nominee, officer, significant
    shareholders, or the immediate family members of any of these.

    of these transactions. NYSE's rules include a requirement that the audit
    committee meet separately with management, internal auditors, and outside
    auditors.

    Finally, the three SROs' new rules increase independent directors'
    authority over CEO compensation and the selection of new director
    nominees. Amex and NASDAQ's rules allow boards to establish independent
    compensation and nominating committees or require that a majority of their
    independent directors fulfill these responsibilities.92 In contrast,
    NYSE's rules require boards to establish independent compensation and
    nominating committees.93  According to Amex and NYSE, requiring
    independent directors to set CEO compensation will promote an objective
    evaluation of CEO performance and the design of a compensation package
    that fairly reflects that performance and includes appropriate incentives.
    NASDAQ stated that such a requirement helps to ensure that appropriate
    incentives are in place, consistent with the board's responsibility to
    maximize shareholder value. Similarly, the three SROs stated that giving
    independent directors responsibility for nominating new directors will
    help ensure the quality and independence of nominees.

    Amex issuers must comply with the new rules increasing the role of
    independent directors by their first annual shareholders' meeting after
    March 15, 2004, or by October 31, 2004, whichever is earlier.94 NASDAQ and
    NYSE issuers have until their first annual shareholders' meeting after
    January 15, 2004, or October 31, 2004, whichever is earlier.95 However,

    92Amex's rules require the independent compensation committee or a
    majority of independent directors to determine, or recommend to the board
    for determination, the compensation of the CEO. NASDAQ has a similar
    requirement for determining the compensation of the CEO and all other
    executives.

    93NYSE's rules require the independent compensation committee to determine
    and approve the CEO's compensation either alone or with the rest of the
    independent directors.

    94Certain types of Amex issuers have different implementation schedules
    for the new listing standards. For example, Amex foreign private issuers
    and small business issuers have until July 31, 2005, to comply with the
    rules increasing the role of independent directors.

    95As with Amex issuers, certain types of NASDAQ and NYSE issuers also have
    different implementation schedules for the new listing standards. For
    example, NASDAQ foreign private issuers and small business issuers
    (issuers that, among other things, generate less than $25,000,000 in
    revenues) have until July 31, 2005, to comply with the rules increasing
    the role of independent directors. NYSE foreign private issuers have until
    July 31, 2005, to comply with Sarbanes-Oxley-related audit committee
    listing standards.

    NASDAQ issuers had until January 15, 2004, to comply with NASDAQ's new
    rule related to audit committee approval of related-party transactions.

    New Rules Extended Corporate Governance Disclosures

    Amex, NASDAQ, and NYSE's new rules require issuers to adopt a code of
    conduct and ethics that is applicable to all directors, officers, and
    employees.96 Amex and NASDAQ require that these codes address conflicts of
    interest, compliance with laws and regulations, and enforcement of the
    codes. NYSE's rules recommend that the codes address these and other
    topics. All three SROs require issuers to disclose their codes and any
    waivers granted to officers and directors.97 NYSE's rules further require
    boards to adopt and disclose corporate governance guidelines addressing
    such topics as director qualifications and responsibilities, management
    succession, and annual performance evaluations. According to NYSE,
    increased corporate governance disclosures should enhance investors'
    understanding of issuers' corporate governance policies and procedures and
    promote adherence to them by directors and management. In addition, NYSE's
    rules require audit committees to disclose their charters and nominating
    and compensation committees to adopt and disclose charters that address
    their purpose and responsibilities, among other things. The three SROs
    also adopted rules implementing disclosure requirements for foreign
    private issuers (foreign issuers) listed on their markets.98 Amex and
    NYSE's rules require that foreign issuers disclose significant differences
    between their corporate governance practices and those required by the

    96NASDAQ uses the term "code of conduct" instead of "code of conduct and
    ethics."

    97SEC enacted a rule pursuant to Sarbanes-Oxley section 406 that requires
    disclosure of (1) whether issuers have adopted a code of ethics that
    applies to the company's principal executive, financial, and accounting
    officers or other persons performing such functions and, if not, the
    reasons why not; (2) any code that is adopted; and (3) waivers from the
    code granted to any of the aforementioned officers. Issuers must comply
    with the code of ethics disclosure requirements in their annual reports
    for fiscal years ending on or after July 15, 2003.

    98While Sarbanes-Oxley applies generally to both U.S. and foreign issuers,
    SEC's section 301 rules are flexible and include various exemptions. In
    particular, foreign issuers may, in specified circumstances, be exempt
    from section 301's independence requirements for, and specified duties of,
    audit committees.

    SROs.99 NASDAQ requires foreign issuers to disclose any exemptions granted
    by NASDAQ to its corporate governance rules and describe any alternative
    measures taken by the issuer.100

    Amex issuers have until June 1, 2004, to adopt and disclose a code of
    conduct and ethics, and NASDAQ issuers have until May 4, 2004, to do so.
    Foreign issuers listed on Amex or NASDAQ must begin disclosing any
    differences between their corporate governance practices and those
    required by the SRO beginning on or after January 1, 2004, respectively.
    NYSE issuers must comply with the new disclosure requirements by their
    first annual meeting after January 15, 2004, or by October 31, 2004,
    whichever is earlier.

    New Rules Expand Shareholder Oversight of Equity Compensation Plans

    Finally, the three SROs have implemented rules expanding requirements that
    issuers obtain shareholder approval of certain equity compensation
    plans.101 In addition to maintaining previous requirements that
    shareholders approve equity compensation plans involving directors and

    99Amex's new rules state that foreign issuers seeking relief from its
    corporate governance rules should provide written certification from
    independent counsel of the issuer's home country stating that the issuer's
    corporate governance practices are not prohibited by home country law.
    NYSE requires a written certification stating that the issuer's corporate
    governance practices comply with home country law and the rules of the
    principal securities market for the issuer's stock.

    100NASDAQ's rules permit foreign issuers to request an exemption from
    NASDAQ's corporate governance rules if the NASDAQ rule is contrary to a
    law, rule, or regulation in their home country or is contrary to generally
    accepted business practices in that country.

    101SEC approved NASDAQ and NYSE's proposals related to shareholder
    approval of equitybased compensation plans on June 30, 2003.
    (Self-Regulatory Organizations; New York Stock Exchange, Inc. and National
    Association of Securities Dealers, Inc.; Order Approving NYSE and NASDAQ
    Proposed Rule Changes and NASDAQ Amendment No. 1 and Notice of Filing and
    Order Granting Accelerated Approval to NYSE Amendments Nos. 1 and 2 and
    NASDAQ Amendments Nos. 2 and 3 Thereto Relating to Equity Compensation
    Plans, 68 Fed. Reg. 39995 (July 3, 2003).) SEC approved Amex's related
    proposals on October 9, 2003. (Self-Regulatory Organizations; Notice of
    Filing and Order Granting Accelerated Approval of a Proposed Rule Change
    Amendment Nos. 1, 2, and 3 Thereto by the American Stock Exchange LLC
    Relating to Shareholder Approval of Stock Option Plans and Other Equity
    Compensation Arrangements, 68 Fed. Reg. 59650, (Oct. 16, 2003).) SEC
    approved an amendment to Amex's new rules on December 3, 2003.
    (Self-Regulatory Organizations; Notice of Filing and Order Granting
    Accelerated Approval to a Proposed Rule Change and Amendment No. 1.
    Thereto by the American Stock Exchange LLC Relating to Broker Voting on
    Equity Compensation Plans, 68 Fed. Reg. 69092 (Dec. 11, 2003).)

    officers, the new rules include requirements that shareholders approve
    plans offered to employees and material modifications to all plans subject
    to shareholder approval.102 According to NASDAQ, while the use of equity
    compensation plans can align director, officer, and employee interests
    with those of shareholders and assist in recruiting and retaining
    employees, they can also dilute the value of existing shares. For example,
    many equity compensation plans award an employee (or director or officer)
    stock options, or the rights to purchase a certain number of shares of the
    issuer's stock at a predetermined price for a fixed period. If the market
    value of the stock rises above the predetermined price, the option holders
    can profit by exercising their options to buy the stock at the
    predetermined price and then selling the stock at the higher market
    price.103 As option holders exercise their options, the issuers would
    deliver to them newly issued stock or previously issued treasury stock,
    thus increasing the supply of outstanding shares.104  Any company earnings
    would then be spread among the existing and the new shareholders, thereby
    reducing the earnings of existing shareholders. According to NYSE,
    broadening the approval requirements for equity compensation plans
    provides shareholders a means of protecting their economic interests.
    NASDAQ stated that the new rules provide shareholders a greater voice in
    the use of equity compensation.

    Amex and NYSE's new rules also preclude their broker-dealer members from
    voting on behalf of shareholders when the issuers seek shareholder
    approval of equity compensation plans, unless the shareholders have first
    given the broker-dealer voting instructions. Amex required issuers to seek
    shareholder approval in accordance with these rules after October 9, 2003,
    and NASDAQ and NYSE began doing so after June 30, 2003.

    102The three SROs do not require shareholder approval of inducement awards
    to new employees; certain grants, plans, and amendments related to mergers
    and acquisitions; and certain specific types of plans, such as those that
    are already regulated under Internal Revenue Code and Treasury
    regulations. All three SROs require that the independent compensation
    committee or a majority of the independent directors approve the use of an
    inducement exemption and promptly disclose it thereafter. Amex and NASDAQ
    further exempt warrants or rights issued generally to all shareholders or
    stock purchase plans available on equal terms to all shareholders.

    103If the market value of the stock falls below the predetermined price
    specified in the equity compensation plan, the stock options could expire
    worthless.

    104Treasury stock is stock that has been bought back by the issuer and is
    available for retirement or resale; the stock is issued but not
    outstanding.

    Market Participants Supported the SROs' Efforts but Had Differing Views on
    Whether Board Independence Should Be Further Enhanced

    Market participants expressed support for Amex, NASDAQ, and NYSE's efforts
    to improve corporate governance through listing standards. However, some
    said that more could be done to further enhance corporate governance,
    particularly board independence. Of these market participants, several
    told us that boards should be required through listing standards to adhere
    to higher standards of independence; others said that boards should be
    encouraged to voluntarily adopt stricter standards. According to one
    market participant, more time was needed to fully implement and assess the
    impact of the SROs' many new corporate governance standards before
    determining whether further changes were warranted.

    First, several market participants said that stricter standards of
    independence should be applied to independent directors than are included
    in Amex, NASDAQ, and NYSE's new rules. For example, these rules leave in
    place standards that preclude an independence finding when a board
    interlock involves the compensation committee.105 Some market participants
    would go further and preclude an independence finding when any
    interlocking board relationship exists, reasoning that any relationship
    directors have with the CEO on another board could impair their
    independence. Others said that the definitions adopted by the three SROs
    do not sufficiently address financial conflicts of interest for
    independent directors who are not audit committee members. They said that,
    similar to the Sarbanes-Oxley requirements for audit committee members,
    boards should not be able to designate directors as independent if they
    receive any compensation from the issuer that is not related to board
    service. One market participant told us that the definition of director
    independence should also prohibit financial relationships between the
    director and any executive officer.106 However, others noted limitations
    to defining director independence through bright-line criteria. Three
    market participants said that bright-line criteria may impede
    independently minded individuals from serving on boards. For example, one
    market participant said that an independently minded person who has a
    financial relationship valued at

    105Board interlocks occur when an issuer's director is employed as an
    executive officer of another company and that second company's board
    employs as a director any of the issuer's current executive officers. For
    example, a compensation committee interlock occurs when an issuer's
    director is employed as an executive officer of another company and that
    company's compensation committee employs any of the issuer's current
    executive officers.

    106For example, under this approach, a director that provided legal
    services to the CEO for personal matters would not be considered
    independent.

    $61,000-$1,000 over the compensation limit NASDAQ has established- would
    not be able to serve as an independent director. Another market
    participant told us that no independence definition could be structured to
    control all possible conflict-of-interest scenarios, particularly indirect
    relationships. This market participant said that indirect relationships,
    which include social relationships, can compromise a director's
    independence as much as direct financial relationships with issuers. Amex,
    NASDAQ, and NYSE officials told us that it was difficult to establish
    brightline criteria that might signal conflicts of interest for all
    directors. NYSE officials said that for this reason, they decided to
    require issuers to disclose more information on their independence
    determinations and thus allow investors to make their own assessments of a
    board's independence.

    Second, some market participants stated that boards should comprise a
    supermajority (two-thirds or three-fourths) of independent directors,
    rather than the simple majority that the three SROs' new rules require.
    According to one market participant, having a supermajority of independent
    directors would reassure investors that the board was independent and
    represented their interests. Several market participants said, however,
    that smaller issuers are having a harder time recruiting enough qualified
    independent directors to meet the majority independent director
    requirement because of the costs involved in searching for and retaining
    them. Amex officials said that for this reason, their SRO did not propose
    requiring a supermajority of independent directors. Two market
    participants told us that many boards continued to look for independent
    directors among CEOs. According to them, many qualified, willing, and less
    costly candidates are available for independent director positions among
    the ranks of professionals just below CEO, such as chief financial
    officers and chief operating officers. Officials from the American
    Institute of Certified Public Accountants told us that they have compiled
    a database with contact information on financial and other business
    professionals who are interested in serving as independent directors.
    NASDAQ officials said that they have not seen any evidence that supports
    requiring a supermajority of independent directors through a listing
    standard and that their goal of independent board decision making is
    achieved through their standard requiring a majority of independent
    directors. NYSE officials told us that they debated a supermajority of
    independent directors requirement, but said that a consensus did not exist
    in its favor. According to these officials, time is needed to first
    implement and evaluate the effect of the majority independent director
    requirement before assessing whether a supermajority of independent
    directors is needed.

    Finally, several market participants recommended separating the positions
    of CEO and chairman. In the United States, many companies are under the
    leadership of a combined CEO/chairman, in contrast to companies in other
    countries where these roles tend to be separated, such as in the United
    Kingdom.107 However, market participants expressed concern that this
    combined role can provide the potential for conflict, because CEOs are
    part of the management team that the board oversees. According to a
    January 2003 report by The Commission on Public Trust and Private
    Enterprise, a 12-member body sponsored by The Conference Board and
    comprising leaders from business, finance, and academia, in many of the
    corporate scandals of the recent past strong CEOs appeared to have exerted
    a dominant influence over their boards, often stifling the efforts of
    directors to perform the oversight needed to ensure a healthy system of
    corporate governance. The report further stated that boards have often
    lacked the structure and information needed to perform their roles
    properly or have abdicated their responsibility to provide the oversight
    required of them, and that, in such circumstances, boards cannot properly
    oversee the CEO's performance. Several market participants agreed with the
    Commission's recommendation for strengthening board independence and
    leadership by separating the role of CEO and chairman and providing that
    the chairman be independent or, as an alternative, providing for
    leadership of the independent directors by establishing an independent
    lead or presiding director.108 According to one market participant, it is
    important that an independent director, whether an independent chairman,
    lead director, or presiding director, lead board meetings and have control
    over meeting agendas, meetings schedules, and the flow of information

    107UK issuers listed on the London Stock Exchange are required to disclose
    the extent to which they comply with the Combined Code on Corporate
    Governance, the United Kingdom's official corporate governance code, and
    the reasons for any noncompliance. The code recommends separating the
    roles of CEO and chairman. According to a 2002 study commissioned by the
    UK Department of Trade and Industry, over 90 percent of UK issuers
    disclosed compliance with this provision. See Derek Higgs, Review of the
    Role and Effectiveness of Non-executive Directors, January 2003.

    108The report discussed three alternative structures from which boards
    could choose to balance the powers of the CEO and independent directors.
    Under the first alternative, the CEO and chairman positions are separated,
    with the chairman position filled by an independent director. Under the
    second alternative, the CEO and chairman positions are separated, but if
    the chairman is not an independent director, the position of lead
    independent director is established. Under the third alternative, if the
    CEO and chairman positions are combined, a presiding director is
    established. See The Conference Board Commission on Public Trust and
    Private Enterprise, Findings and Recommendations Part

    2: Corporate Governance and Part 3: Audit and Accounting, January 2003.

    from management to the other independent directors. Two market
    participants said that NYSE's new rule requiring boards to disclose the
    name of or process for selecting a director to preside over executive
    sessions was a step toward encouraging this independent leadership,
    although the new rule did not assign this individual specific
    responsibilities.

    Other market participants opposed separating the positions of CEO and
    chairman of the board. One market participant said that the SROs' rules
    requiring that independent directors meet regularly in executive session
    is adequate to ensure board independence. According to this market
    participant, CEOs are very responsive to directors because they view the
    board as their boss. Others said CEOs may lose authority if the position
    is too weakened. Amex, NASDAQ, and NYSE officials told us that they had
    considered requiring the separation of CEO and chairman in developing
    their corporate governance rule proposals, but that they determined it was
    not appropriate to require all issuers to have this particular leadership
    structure at all times. According to NASDAQ and NYSE officials, an issuer
    may benefit from having a combined CEO and chairman under some
    circumstances, such as when the company is undergoing a merger. These
    officials said that in the case of a merger, the combined CEO and chairman
    position could provide the company the strong, unified leadership needed
    to guide the company through a difficult transition period.

    In prior work, we expressed the view that SEC, in conjunction with the
    SROs, should consider using listing standards to further strengthen board
    independence by requiring a supermajority of independent directors and
    separating the positions of CEO and chairman. Although such practices do
    not guarantee that boards will be well managed, greater board independence
    could promote board decision making that is aligned with shareholders'
    interests, thereby enhancing board accountability. While board
    independence does not require eliminating all nonindependent directors, we
    have taken the position in previous work that it should call for a
    supermajority of independent directors.109 Our prior work also recognized
    that independent leadership of the board is preferable to ensure some
    degree of control over the flow of information from management to

    109U.S. Comptroller General David M. Walker, Integrity: Restoring Trust in
    American Business and the Accounting Profession, (document based on
    author's speech to the American Institute of Certified Public
    Accountants), November 2002. See also U.S. General Accounting Office,
    Mutual Funds: Assessment of Regulatory Reforms to Improve the Management
    and Sale of Mutual Funds, GAO-04-533T (Washington, D.C.: Mar. 10, 2004).

    the board, scheduling of meetings, setting of board agendas, and holding
    top management accountable. The board has a clear responsibility to hold
    the CEO accountable for results. However, this system of checks and
    balances can be undermined when the positions of CEO and chairman are
    combined. A chairman who is also the CEO can have a significant impact on
    the direction of the company as well as on the role and composition of the
    board. For example, such individuals can have undue influence over who is
    asked to join or leave the board. For these reasons, we have supported the
    separation of the positions of CEO and chairman.

    OCIE Plans to  Work with the SRO officials told us that they are revising
    the processes they use for

    SROs to Ensure That Processes  assessing issuers' compliance with
    corporate governance listing standards,

    Are Developed to More including issuers' self-certifications and reviews
    of public information.

    Thoroughly Assess Compliance According to SRO officials,
    self-certifications are a means of holding

    with the New Standards	issuers accountable for complying with their
    corporate governance standards, recognizing that the SRO cannot
    independently verify compliance with each individual standard. For
    example, these officials said that it would be difficult to independently
    determine compliance with some standards, such as those requiring
    independent directors to meet in executive sessions, nominate other
    independent directors, and determine CEO compensation, unless they were
    actually in the boardroom.

    SRO officials said that as part of their efforts to ensure compliance with
    corporate governance listing standards, they have extended their
    historical use of issuer self-certifications of compliance with audit
    committee requirements to many of the new standards.110 NASDAQ, for
    example, has updated its self-certification form and now requires issuers
    to certify compliance with its new audit committee composition, audit
    committee charter, executive sessions, and code of conduct standards.
    According to NASDAQ officials, issuers are not required to certify
    compliance with standards for which NASDAQ can independently determine
    compliance, such as the standard requiring a majority of independent
    directors. Amex and NYSE's new self-certification forms address their new
    rules relating to the composition and responsibilities of the board and
    audit, nominating, and compensation committees and their new disclosure
    requirements. As part of its new rules, NYSE further requires that CEOs
    annually certify that they are not aware of any violations of NYSE's
    corporate governance standards and that issuers disclose these CEO
    certifications in their annual reports. According to NYSE, requiring CEO
    certifications will focus the

    110NYSE calls its self-certification form a "written affirmation."

    CEO and senior management's attention on the issuer's compliance with
    corporate governance listing standards. Amex and NASDAQ officials said
    that they did not consider requiring CEO certifications necessary to
    ensuring compliance with corporate governance listing standards.

    In addition to requiring self-certifications of compliance with corporate
    governance standards, the three SROs require their issuers to notify them
    upon becoming noncompliant with corporate governance standards. Amex,
    NASDAQ, and NYSE have each used their corporate governance listing
    standards to implement SEC's new rule directing the SROs to require their
    issuers to promptly notify them when an executive officer becomes aware of
    any material noncompliance with the Sarbanes-Oxley-mandated audit
    committee requirements. All three SROs apply the notification requirement
    to all of their corporate governance listing standards, not just the
    Sarbanes-Oxley-related listing standards. NYSE designated the CEO
    responsible for this notification.

    Officials from the three SROs said that they have expanded their current
    process of reviewing periodic SEC filings, such as proxy statements, to
    include information that might indicate an issuer is noncompliant with the
    new corporate governance standards. For example, NASDAQ officials said
    that they review the financial disclosures in proxy statements to
    determine whether directors designated as independent have prohibited
    relationships with the issuer. Also, NYSE officials said that they review
    proxy statements to determine whether members of the management team are
    listed as members of the audit committee, which would be a violation of
    NYSE's listing standards. Officials of all three SROs said that they
    conduct manual reviews of required SEC filings, including proxy
    statements. They also said that they have automated systems that flag
    potential corporate governance issues for review and that they are
    enhancing these systems to allow them to better assess compliance with
    their new corporate governance requirements. Additionally, they said that
    they will continue to monitor other public disclosures, such as press
    releases, and the financial press for information that could indicate
    noncompliance with corporate governance standards. For example, NASDAQ
    officials said that news that an audit committee member had retired would
    lead to an inquiry about whether the issuer had filled the position, if
    the retirement would cause the audit committee to become noncompliant with
    NASDAQ's rules, and whether the person filling the position met the SRO's
    independence standards.

    OCIE officials said that they will work with the SROs to ensure that
    effective processes are in place to more thoroughly assess compliance with

    the new standards. These officials told us that while the SROs can use
    information available in public disclosures to assess whether issuers
    comply with some of the new standards, such as whether directors satisfy
    the definition of independence, these disclosures do not contain
    information that would help assess compliance with other standards. For
    example, the new rules require that audit committee charters address the
    audit committees' responsibility to hire, compensate, and oversee outside
    auditors. OCIE officials said that while the SROs are able to determine
    whether the audit committee members satisfied the new audit committee
    independence standards by reviewing public disclosures, they would not be
    able to determine whether audit committees were actually providing
    independent oversight of the outside auditors using the same information.
    They said that a similar challenge exists with respect to rules requiring
    that independent directors determine executive compensation and nominate
    new directors. According to OCIE officials, sources of information are
    available that the SROs could use in helping to assess compliance with
    their new standards. For example, they said that the SROs could consider
    reviewing board and committee meeting agendas and minutes to assess
    whether independent directors may have discussed matters pertaining to the
    outside auditor without management present. They said that while it would
    not be practical for SROs to conduct such detailed compliance reviews for
    all issuers, conducting them on a sample basis could further promote
    compliance with the listing standards.

    In addition to issues related to assessing compliance with corporate
    governance standards, the SROs have considered what sanctions should be
    imposed on issuers that do not comply with these standards. Concerned
    about the range of options available, in December 2003 and November 2003,
    respectively, Amex and NYSE each adopted a rule under which they reserve
    the right to issue public reprimand letters to issuers that do not comply
    with their corporate governance standards.111 Amex and NYSE officials said
    that the only sanction otherwise available is delisting the issuer, a step
    that they said could, in certain circumstances, be perceived as more
    harmful to investors than the issuer's noncompliance. NYSE officials said
    that their experience to date has been that companies genuinely wish to
    comply with corporate governance standards; however, some of the standards
    have subjective elements, and a company may dispute a view by NYSE that it
    failed to comply with the standards and extend negotiations longer than
    acceptable. According to these officials, potential public

    111Amex calls its public reprimand letter a "public warning" letter.

    announcement of noncompliance might be a useful tool in such
    circumstances. According to Amex and NYSE officials, the SROs would, if
    necessary, delist an issuer that did not, after receiving the public
    reprimand letter, return to compliance with the market's listing
    standards. In contrast, NASDAQ officials opposed the lesser sanction,
    stating that they did not want issuers to knowingly violate corporate
    governance rules with the expectation that the only consequence would be a
    letter of reprimand. They said that part of ensuring a fair and
    transparent marketplace is to consistently apply and enforce listing
    standards and that if a requirement is significant enough to be a listing
    standard, then issuers that do not comply with the standard should be
    subject to delisting. According to these officials, the penalty of
    delisting is a more effective means of achieving issuer compliance, and
    thereby protecting investors, than a lesser sanction.

    SEC Has Taken Steps to Further  SEC has taken steps to revise regulations
    that have allowed issuers to

    Increase Director Accountability	exclude disclosures regarding shareholder
    director nominees in the issuer's proxy statement. For at least 60 years,
    shareholders have sought greater access to the issuer's proxy as a means
    of replacing ineffective or unresponsive directors and improving board
    accountability to shareholders.112 In April 2003, the Commission directed
    Corporation Finance to formulate possible changes in the rules and
    regulations governing director elections, including SEC's Rule 14a-8,
    which addresses shareholder access to the proxy statement.113  Responding
    to Corporation Finance's recommendations,114 SEC proposed a rule in
    October 2003 that creates a mechanism for including, in issuer proxy
    material, disclosures of

    112For example, SEC held hearings on shareholders' access to the director
    nominating process in 1943. See Securities and Exchange Commission Proxy
    Rules: Hearings on H.R. 1493, H.R. 1821, and H.R. 2019 Before the House
    Committee on Interstate and Foreign Commerce, 78th Cong., 1st Sess., at
    17-19 (1943); testimony of Chairman Ganson Purcell.

    113SEC's Rule 14a-8 governs shareholder access to the issuer's proxy
    statement for the inclusion of shareholder proposals. Shareholders can
    conduct their own proxy contest, sending out proxy materials to other
    shareholders in accordance with applicable rules and regulations.
    According to market participants, proxy contests are prohibitively
    expensive for shareholders as they must prepare and pay for the
    dissemination of proxy materials at a potential cost of hundreds of
    thousands or even millions of dollars. Shareholders can nominate directors
    at the annual shareholder meeting, but because most shareholders vote
    through a proxy before the meeting, such nominees have little chance of
    being elected. According to market participants, other alternatives
    available to shareholders seeking to replace directors, such as
    shareholder litigation, are also costly and conflict-intensive.

    114SEC Division of Corporation Finance, Staff Report: Review of the Proxy
    Process Regarding the Nomination and Election of Directors (July 2003).

    director nominees made by long-term shareholders, or groups of long-term
    shareholders, with significant holdings.115 Specifically, the proposed
    rule includes triggers that, when activated, require disclosure in an
    issuer's proxy materials of shareholder director nominees. For example,
    under one proposed trigger, this disclosure would be required when more
    than 35 percent of the shareholders who cast votes at the annual
    shareholders' meeting oppose at least one of the issuer's director
    nominees. The issuer is then required to include disclosure regarding
    shareholder director nominees in the proxy materials within the next two
    annual shareholders' meetings provided, among other things, that the
    nominees meet all applicable independence and eligibility requirements.
    Also, in response to the staff report, SEC adopted rules that strengthen
    disclosure requirements related to an issuer's nomination of directors and
    to shareholders' communication with directors.116 According to SEC, the
    enhanced disclosures are intended in part to provide shareholders with
    additional information for use in evaluating the board of directors and
    nominating committees of the companies in which they invest.

    SEC officials told us that they plan to review disclosure requirements
    regarding potential director and director nominees' conflicts of interest.
    Items 401 and 404 of SEC's Regulation S-K describe certain background
    information that an issuer must disclose in its proxy statement about its
    executive officers, directors, and director nominees, as well as certain
    relationships and transactions between the issuers and these individuals.
    These disclosure requirements focus on employment, family, and business
    relationships between the director or director nominees and the issuer or
    executive officers. In December 2001, the American Federation of Labor and
    Congress of Industrial Organizations (AFL-CIO) filed a petition with SEC
    requesting that it consider a rulemaking to amend Regulation S-K to
    require additional conflict-of-interest disclosures. In its rule-making
    petition, the AFL-CIO stated that it discovered after Enron's collapse
    that several directors considered independent by the Enron board,
    including two who served on the audit committee, had relationships with
    Enron or its senior executives that could have interfered with their
    ability to exercise independent judgment. One, for example, was president
    of a not-for-profit

    115Proposed Rule: Security Holder Director Nominations, SEC Release Nos.
    34-48626 and IC26206, File No. S7-19-03 (Oct. 14, 2003).

    116Final Rule: Disclosure Regarding Nominating Committee Functions and
    Communications Between Security Holders and Boards of Directors, SEC
    Release Nos. 33-8340 and IC-26262, File No. S7-14-03 (Nov. 24, 2003).

    organization that received contributions from Enron. Regulation S-K does
    not currently require disclosure of this relationship. The AFL-CIO and
    other market participants who shared its views said that increased
    disclosure of conflicts of interest would allow investors to better assess
    the independence of a board. Other market participants, however, told us
    that the current disclosure requirements in Regulation S-K were adequate
    for investors and that further requirements would only make the proxy
    statement bulkier and harder to read. Corporation Finance officials told
    us that they plan to review Regulation S-K disclosure requirements under
    items 401 and 404.

    At SEC's Request, the Three Largest SROs Began Evaluating Their Own
    Corporate Governance

    In a March 2003 letter, the SEC Chairman asked Amex, NASDAQ, and NYSE to
    review their governance, including board structures, policies, and
    practices, to ensure that it serves the public well. In these letters, the
    Chairman asked the SROs to discuss how their governance practices compare
    with the standards for issuers they proposed in the rules submitted to
    SEC. According to the Chairman, the SROs should serve as models of good
    governance. As such, he said they should adhere to the same high standards
    of governance they were requiring of the issuers listed on their markets.
    The three SROs provided reports to SEC in May 2003 that include varying
    amounts of information.

    Amex reported that its board's governance structure and practices were
    consistent with the listing standards in effect before its new standards
    were implemented. The report did not discuss the extent to which Amex's
    governance conformed with its new listing standards, such as those
    requiring a majority of independent directors, or whether Amex would
    consider imposing higher standards on itself than it had on issuers, for
    example, by separating the positions of CEO and chairman as NASDAQ and
    NYSE have done (discussed below). The report stated that as Amex's
    corporate governance listing standards for issuers evolve, Amex would
    assess whether changes to its governance structure and practices were
    warranted. Amex officials told us that because NASD and Amex have recently
    agreed that Amex would become an independent entity, Amex planned to delay
    assessing and making changes to its governance structure until its
    separation from NASD was complete.

    NASDAQ's May 2003 report stated that its board met NASDAQ's new corporate
    governance listing standards to the fullest extent permissible

    under NASDAQ's by laws.117 Although NASDAQ's new listing standards require
    issuers to establish either a nominating committee composed entirely of
    independent directors to nominate new directors or provide that a majority
    of the independent directors carry out this function, NASDAQ's by laws
    prevent it from complying with this listing standard. That is, NASDAQ's by
    laws require its nominating committee to include individuals who are not
    NASDAQ directors. As a result, NASDAQ's nominating committee currently
    consists entirely of individuals who are not serving on the board,
    although they meet NASDAQ's definition of director independence. NASDAQ
    reported that it could revise its by laws so that a new committee of the
    board consisting of independent directors nominates directors and that it
    will discuss this change with SEC. Under NASDAQ's by laws, the board can
    choose whether to combine or separate the positions of CEO and chairman.
    NASDAQ reported that it was in the process of separating these positions-a
    separation that was completed later that month. NASDAQ officials said that
    this action complimented larger structural changes to NASDAQ's governance
    that took place in April 2000, when NASD members voted to sell a
    substantial part of NASD's ownership in NASDAQ. One of the goals of this
    restructuring was to minimize the potential for conflicts of interest
    associated with NASD's responsibility for both the business operations and
    regulation of NASDAQ.

    Concurrent with the submission of its May 2003 report to SEC describing
    its governance structure, NYSE announced that its board had appointed a
    committee, called the Special Committee on Governance, to review and
    develop recommendations for improving NYSE's governance. On June 5, 2003,
    the NYSE board adopted the initial recommendations of the committee,
    including those allowing only nonindustry directors to serve as audit
    committee and compensation committee members and requiring, to the extent
    feasible, that the NYSE audit committee comply with applicable standards
    prescribed by NYSE for issuer audit committees.118 NYSE also implemented a
    recommendation prohibiting all its employees from serving on the boards of
    business corporations. According to NYSE, following the adoption of the
    recommendation, the NYSE chairman and other senior executives agreed to
    resign from directorships on issuers' boards, effective

    117By laws are the rules and practices governing the management of an
    organization. Pursuant to section 19(b)(1) of the Exchange Act, SROs must
    file a proposed rule change with SEC for any changes to their by laws.

    118Nonindustry directors, as defined in the NYSE constitution, represented
    listed companies or the investing public. Industry directors represented
    NYSE members.

    at the respective companies' next annual shareholder meeting, unless the
    companies could find directors to replace them sooner.

    The NYSE board also adopted recommendations that would result in
    disclosures consistent with those included in NYSE's new corporate
    governance listing standards, including disclosures of compensation for
    the chairman, directors, and executive officers. In August 2003, the NYSE
    board disclosed that the compensation package of the CEO, also chairman of
    the board, was worth $139.5 million, including accrued savings and
    incentives. In a September letter to the chairman of NYSE's governance and
    compensation committees, the SEC Chairman stated that approval of the CEO
    compensation package raised serious questions regarding the effectiveness
    of NYSE's governance structure and called for further information about
    the procedures and considerations that governed the award of the pay
    package. The controversy prompted the September 2003 resignation of the
    CEO/chairman. According to NYSE, shortly thereafter, two directors who
    served on the committee that approved the compensation package resigned.

    In December 2003, SEC approved a NYSE rule proposal that is intended to
    enhance NYSE's governance structure.119 The new rule amends NYSE's
    constitution, creating an independent board of directors and a board of
    executives as an advisory body. The new board of directors consists of
    individuals who are independent from NYSE management, members, member
    organizations, and listed companies (with the exception of the CEO); and
    the board has responsibility for corporate governance, executive
    compensation, internal controls, and regulatory supervision.120 Although
    the board of directors can choose whether to combine or separate the
    positions of CEO and chairman, NYSE decided to separate them after
    consultations with SEC.121 The board of executives includes
    representatives of broker-dealers, institutional investors, large public
    funds, and listed companies. Although SEC has approved NYSE's proposal,
    public debate has continued as to the adequacy of its governance reforms.

    119NYSE Rulemaking: Order Approving Proposed Rule Change Relating to the
    Amendment and Restatement of the Constitution of the Exchange to Reform
    the Governance and Management Architecture of the Exchange, 68 Fed. Reg.
    74678 (Dec. 24, 2003).

    120NYSE's revised constitution also created the position of chief
    regulatory officer, who is responsible for the management and
    administration of regulatory functions and reports directly to the board's
    Regulatory and Oversight Committee.

    121In December 2003, NYSE's board of directors announced the appointment
    of a new CEO.

    The SEC Chairman and Market Regulation also sent letters to other SROs
    requesting that they review their governance, and, according to Market
    Regulation officials, they have received written responses from each
    SRO.122 Market Regulation officials said that the Chairman's letters to
    the SROs and their written responses were the first steps of a
    comprehensive review by SEC of SRO governance. These officials said that
    the recently approved changes to NYSE's governance structure could be
    instructive as they continue their review of Amex, NASDAQ, and the other
    SROs' governance. Further, these officials said that the new governance
    standards in place at Amex, NASDAQ, and NYSE for listed issuers could
    serve as a benchmark for SRO governance.

    Other Countries Also Have Taken Steps to Enhance Board Independence

    The United Kingdom

    Private or public institutions in the United Kingdom, France, Germany, and
    Japan reviewed the corporate governance practices of issuers in 2002 and
    2003. Although differences exist between the roles, responsibilities, and
    characteristics of managers, directors, and shareholders and the
    regulation of corporate governance in these countries, their issuers were
    encouraged to increase the role and authority of independent directors on
    their boards of directors. The United Kingdom, Germany, and France have
    promoted sound corporate governance by encouraging issuers to disclose in
    their annual reports the extent of their compliance with codes of
    corporate governance, explaining to investors the reasons for any areas of
    noncompliance. These codes include provisions encouraging greater board
    independence. Recent changes to Japan's corporate law allows issuers to
    choose a governance structure similar to that found in the United States
    by placing independent directors in key roles on boards.

    UK issuers are required by the listing rules of the Financial Services
    Authority to describe in a narrative statement in their annual reports how
    they apply the principles set out in the Combined Code on Corporate

    122The SEC Chairman sent letters to the other eight securities exchanges
    in March 2003 asking them to review their governance. Market Regulation
    officials told us that in May 2003 they sent a similar letter to the
    following eight securities industry SROs that operate clearinghouses: the
    Boston Stock Exchange Clearing Corporation, Depository Trust Company,
    Emerging Market Clearing Corporation, Fixed Income Clearing Corporation,
    National Securities Clearing Corporation, Options Clearing Corporation,
    Pacific Clearing Corporation/Pacific Stock Exchange, and the Stock
    Clearing Corporation/Philadelphia Stock Exchange. A clearinghouse is an
    organization that handles the clearance and settlement of transactions.
    Clearance and settlement in the securities markets involves comparing the
    details of the transaction between buyer and seller (or their brokers) and
    exchanging the securities for cash payment.

    Governance (Combined Code) and explain any deviations from them. According
    to the Secretary of State for Trade and Industry, the merit of the "comply
    or explain" approach is that it recognizes that circumstances exist in
    which it is not sensible or appropriate for a company, especially a
    smaller one, to meet every Combined Code principle, but it requires
    issuers to explain the reason for any noncompliance to shareholders.

    In 2002, the Secretary of State for Trade and Industry and the Chancellor
    of the Exchequer commissioned a review of the role and effectiveness of
    nonexecutive directors,123 and the Coordinating Group on Accounting and
    Audit commissioned a simliar review of audit committees.124 As a result of
    these reviews, the Combined Code was revised to include provisions
    recommending, among other things, that half of the issuer's board-
    including the chairman, all of the members of the audit and compensation
    committees, and a majority of the members of the nominating committee-
    meet a tightened definition of independence. In addition, the Combined
    Code's new provisions address the qualifications of audit committee
    members and the committee's authority over the outside auditor. Before
    these revisions, the code generally called for fewer independent directors
    on these committees and the board.

    Germany	In September 2001, the German Federal Minister of Justice
    appointed the Government Commission on the German Corporate Governance
    Code to develop an official corporate governance code for Germany, which
    it completed in February 2002. The German code includes corporate
    governance-related statutes that were already in effect at the time the
    code was published and with which issuers must comply as well as corporate
    governance practices that are recommended but not required. A requirement
    that issuers annually disclose their reasons for deviating from the code's
    recommendations was enacted in July 2002.

    According to the commission, unlike boards in the United Kingdom and
    United States, German issuers have a two-tier board structure, consisting
    of a management board that is responsible for managing the issuer and a
    supervisory board that appoints, supervises, and advises the members of
    the management board. The new German code recommends, among other

    123Derek Higgs, Review of the Role and Effectiveness of Non-executive
    Directors, January 2003.

    124Sir Robert Smith, Audit Commitees Combined Code Guidance, January 2003.

    things, that the supervisory board establish an audit committee and that
    the committee chairman not be a former member of the management board.
    Further, the code recommends charging the audit committee with hiring and
    compensating the outside auditor as well as ensuring the auditor's
    independence.

    France 	In 2002, the Association of French Private Sector Companies and
    Association of Major French Corporations (in French, AFEP-AGREF) and the
    French Business Confederation,125 convened a private working group to
    produce a code of corporate governance known as the Bouton report.126
    French issuers are not required by law to disclose compliance with the
    corporate governance principles outlined in this report; however, the
    report recommends that issuers include a discussion of the extent to which
    they have complied with the report's recommendations in their annual
    reports. Among other things, the Bouton report recommends that at least
    half of the issuer's board consist of independent directors, an increase
    from the one-third recommended by a similar report previously published by
    AFEP-AGREF and the French Business Confederation. Further, the Bouton
    report recommends that two-thirds of the audit committee consist of
    independent directors, also an increase from the one-third previously
    recommended.

    Japan	According to the Japanese Association of Corporate Directors, in
    Japan, corporate governance structures more closely resembling those of
    the United States were introduced in May 2002 under laws that made
    sweeping revisions to the country's Commercial Code. Before these
    revisions, boards of directors managed issuers through a member vested
    with the authority to carry out the board's directives, and shareholders
    were required to elect outside auditors to monitor the boards' management.
    Revisions to the Commercial Code in 2001 strengthened the statutory
    auditor system by, among other things, requiring outside auditors to be
    independent.

    According to the Japanese association, under the 2002 revisions to the
    Commercial Code, large Japanese issuers can choose from among three
    corporate governance structures-the traditional structure described

    125AFEP-AGREF and the French Business Confederation are two leading French
    business associations.

    126Daniel Bouton, Promoting Better Corporate Governance in Listed
    Companies, September 2002.

    above and two other structures under which independent directors are
    involved in overseeing management. Under one of the two new options,
    boards would appoint a CEO who, similar to CEOs in the United States,
    would be responsible for managing the company's business operations, and a
    separate board of directors that would oversee the CEO and hold the CEO
    accountable to shareholders. Issuers that choose this structure must
    establish audit, nominating, and compensation committees consisting of a
    majority of independent directors. Under the other new option, an asset
    committee would be established within the board. This committee would have
    the authority to make decisions related to the transfer and disposal of
    major company assets and to make other management decisions. The board
    would oversee the asset committee and would have at least one independent
    director.

    Conclusions	Investors need timely and ongoing information on the listing
    status of issuers for use in making investment decisions. In the absence
    of such information, they might logically but incorrectly assume that all
    issuers comply with the listing standards of their markets. Although NYSE
    has taken steps to address OCIE's recommendation to provide early and
    ongoing public notification of issuers' noncompliance with quantitative
    continued listing standards by introducing symbol indicators, investors
    may be unaware of the availability of the information transmitted by the
    indicators. Existing plans for distributing the information to the print
    media have not been fully implemented and distribution to investors
    through the Internet is limited. Further, although the indicator is
    displayed on NYSE's Web site with the stock symbol, the indicator is not
    sufficiently visible to investors. As a result, investors that do not
    independently learn of the indicator's availability may not become aware
    of its existence when they visit the Web site.

    Although NASDAQ and Amex have discussed transmitting an indicator in a
    manner similar to NYSE for noncompliance with their quantitative continued
    listing standards, we are concerned about the hesitancy of both SROs to
    voluntarily provide the public early notification of an issuer's
    noncompliant status. We are also concerned that the distribution issues
    affecting the NYSE indicator would be applicable to the NASDAQ and Amex
    indicators. Corporation Finance's proposed revisions to SEC's Form 8-K
    would, if approved, ensure that investors receive early notification of
    issuers' noncompliance with quantitative and qualitative continued listing
    standards. Also, finalizing the revised filing requirement would
    complement OCIE and Market Regulation's efforts by providing investors a

    source of information on the facts surrounding an issuer's noncompliant
    status. Further extension of OCIE's recommendation to qualitative listing
    standards, including corporate governance standards, could be valuable to
    investors and is an objective worthy of further OCIE and Market Regulation
    exploration with the SROs. In the absence of voluntary action by the SROs,
    further SEC action is warranted to ensure that the public receives early
    and ongoing notice of an issuer's noncompliance with its market's listing
    standards.

    OCIE's reluctance to routinely use SROs' internal review reports in
    planning and conducting inspections is inconsistent with the standards of
    organizations with functions similar to OCIE's. The development of a
    comprehensive policy regarding the use of SROs' internal review reports as
    part of SRO inspections would be valuable because these reports could aid
    OCIE in determining the objectives and scope of inspections designed to
    assess the SROs' effectiveness in fulfilling their oversight
    responsibilities. SEC recognized the importance of the internal review
    function to the quality of SRO oversight when it recommended that NASDAQ
    and NYSE strengthen this function to address weaknesses SEC identified.
    Reviewing, among other things, internal review objectives, scope,
    findings, recommendations, and resulting corrective actions would provide
    SEC insights into the quality of the function and at least one indicator
    of the effectiveness of the SROs.

    SEC acted within its authority and followed its applicable regulations in
    allowing rules to remain in effect that implemented a 3-month enforcement
    moratorium on NASDAQ's continued listing standards for bid-price and
    market value of publicly held shares as well as subsequent changes to
    NASDAQ's bid-price standard. While data are not available from which to
    determine the full effect of the moratorium and subsequent rule changes on
    the listing status of NASDAQ issuers, the rules met their objective of
    allowing noncompliant issuers more time to trade. SEC also acted within
    its authority and followed applicable regulations in approving another
    NASDAQ rule that allowed SCM issuers to continue trading up to 2 years
    while noncompliant with the bid-price standard as part of a pilot program.
    NASDAQ's study on the effects of the pilot program will provide essential
    information to the Commission for use in evaluating whether the rule
    should be allowed to become permanent. However, 2 years is a long time to
    allow a noncompliant issuer to continue trading in the absence of a means
    of providing the public early and ongoing notification of the issuer's
    listing status.

    Amex, NASDAQ, and NYSE have adopted changes to their corporate governance
    standards that when implemented should promote stronger board oversight
    and greater accountability. Independent directors play a key role in these
    governance reforms; however, of the three largest SROs only Amex does not
    require that issuers disclose the names of all their independent
    directors, hampering the ability of investors and regulators to assess the
    independence of these directors. While the SROs have strengthened their
    corporate governance listing standards, opportunities exist to further
    strengthen board independence by revising listing standards to require a
    supermajority of independent directors and the separation of the positions
    of CEO and chairman. We recognize that issuers would require a reasonable
    amount of time to implement any such reforms; for example, a 2-year
    implementation period would not be unrealistic.

    OCIE's plans to work with the SROs to ensure that they have effective
    processes in place for evaluating issuers' compliance with their new
    corporate governance standards could be central to ensuring compliance
    with the standards and merit prompt action. Also, through its inspection
    process, OCIE could assess the SROs' oversight of issuers' compliance with
    the new standards and ensure that the standards are meeting their intended
    purpose. Corporation Finance's proposed changes to rules governing
    shareholders' access to the director nomination process and its plans to
    review issuers' disclosures of conflicts of interest in the proxy
    statement complement the SROs' efforts to improve their corporate
    governance standards and could result in further enhancements to board
    accountability to shareholders. As a result, they deserve timely
    attention.

    Finally, given the SROs' role as standard setters for corporate issuers,
    the public has the right to expect the SROs to serve as models of strong
    governance. Market Regulation continues to assess the self-evaluations of
    corporate governance that the three largest SROs prepared, as well as the
    practices of 16 other SROs, including 8 securities exchanges and 8
    clearinghouses. These reviews have resulted in actions by NASDAQ and NYSE
    to improve board independence and transparency of decision making and
    could result in additional changes when Market Regulation completes its
    assessment. Although SEC will need to consider the applicability of the
    changes made at NASDAQ and NYSE to the other SROs, action by NASDAQ and
    NYSE to split the position of CEO and chairman is one that could, where
    appropriate, enhance the governance of other SROs. Further, once any
    changes are in effect, OCIE, through its inspection process, could also
    ensure that the SROs have implemented proposed

    changes to their own corporate governance, determine that these changes
    are having their intended effect, and identify other appropriate changes.

    Recommendations for Executive Action

    To restore investor confidence in the markets, further strengthen the
    listing standards of the SROs, and improve SEC listing program oversight,
    we recommend that the Chairman, SEC, take the following 12 actions:

    o 	work with NYSE to ensure the distribution of NYSE's indicator through
    the print media and the Internet and improve the visibility of the
    indicator on the NYSE Web site;

    o 	work with NASDAQ and Amex to ensure that the public receives early and
    ongoing notification of issuers' noncompliance with their markets'
    quantitative continued listing standards-using issuer's receipt of the
    initial deficiency notice as the reference point for determining when
    public notification should begin or, if approved in a manner consistent
    with our following recommendation, the filing of the revised Form 8-K;

    o 	ensure that the Commission expeditiously finalizes the rule requiring
    that issuers file the Form 8-K after receiving notice of being deficient
    with their market's listing standards and include a time frame for doing
    so that, consistent with its initial proposal, ensures early public
    notification of issuers' noncompliant status;

    o 	work with Amex, NASDAQ, and NYSE to assess the feasibility of providing
    early and ongoing public notification of issuers' noncompliance with
    qualitative listing standards;

    o 	ensure the development and implementation of a policy requiring OCIE
    staff to routinely use SRO internal review reports in planning and
    conducting SRO inspections;

    o 	work with Amex to ensure that issuers disclose the names of those
    directors that they have designated as independent;

    o 	work with the SROs to further enhance board independence by giving
    serious consideration to requiring issuers, through listing standards, to
    establish a supermajority of independent directors and to separate the
    positions of CEO and chairman, recognizing that a reasonable period of
    time would be needed to make such changes effective;

    o 	work with the SROs to ensure that they have established effective
    processes for ensuring issuers' compliance with corporate governance
    listing standards;

    o 	ensure that OCIE conducts timely inspections of the three largest SROs
    to assess their oversight of issuers' compliance with corporate governance
    standards;

    o 	ensure that Corporation Finance places a high priority on establishing
    and meeting time frames for completing its rulemaking related to
    shareholder access to the director nomination process and reviewing
    issuers' qualitative disclosure requirements related to potential director
    and director nominee conflicts of interest;

    o 	ensure that Market Regulation places a high priority on establishing
    and meeting time frames for completing its reviews of the SROs'
    selfevaluations of their governance, and works with Amex and, as
    appropriate, the other 16 SROs under review, to further enhance their own
    board independence by giving serious consideration to separating the
    positions of CEO and chairman; and

    o 	ensure that OCIE conducts timely inspections of the three largest SROs
    to ensure that steps are taken to address any weaknesses identified in
    their self-evaluations and that new requirements governing SRO boards are
    effectively implemented.

    Agency Comments and Our Evaluation

    We received written comments on a draft of this report from SEC, Amex,
    NASDAQ, and NYSE that are reprinted in appendixes V-VIII, respectively. As
    discussed below, SEC generally agreed with our recommendations and is
    taking or plans to take actions to address them. Also as discussed below,
    Amex and NYSE expressed concerns about our recommendations related to
    providing the public early and ongoing notification of issuers'
    noncompliance with their markets' listing standards, and Amex and NASDAQ
    discussed their concerns about our recommendation related to enhancing
    board independence by giving serious consideration to requiring issuers,
    through listing standards, to establish a supermajority of independent
    directors and to separate the positions of CEO and chairman. SEC and the
    three SROs also provided technical comments that have been incorporated
    into the report where appropriate.

    SEC commented that it will continue working with the SROs to ensure that
    the goal of providing investors early and ongoing notice of issuers'
    noncompliance with their markets' listing standards is met. NYSE responded
    that it has fully addressed OCIE's related recommendation as is pertains
    to quantitative listing standards and that SEC would need to impose any
    additional requirements related to the dissemination of indicators on
    information vendors. Our view, consistent with OCIE's, continues to be
    that until the dissemination issue is resolved, NYSE's use of indicators
    does not meet the intent of OCIE's recommendation. For this reason and
    because the satisfactory resolution of the distribution issue is pivotal
    to the acceptability of using indicators to address OCIE's recommendation,
    SEC and NYSE have a mutual interest in working together and with
    information vendors to resolve the issue. Also, a joint SEC and NYSE
    effort could enhance the likelihood of voluntary action by information
    vendors. Finally, if Amex and NASDAQ should provide OCIE with proposals
    for using indicators that are otherwise acceptable, SEC may wish to
    involve them in resolving the information distribution issue.

    NASDAQ expressed a willingness to change its procedures for notifying the
    public of issuers' noncompliance with the market's listing standards and
    to work with OCIE to implement its recommendation. Amex affirmed that
    transparency with respect to an issuer's compliance with listing standards
    is important but reiterated reservations expressed in the report that
    neither the indicator nor the symbol modifier is an appropriate or
    necessary method for providing such transparency. Amex also said that,
    notwithstanding its views, issues related to the use of indicators will be
    reexamined by the Amex Board of Governors at its April 2004 meeting.
    Consistent with SEC's view, we continue to believe that achieving early
    and ongoing public notification of issuers' noncompliance with listing
    standards is important to investors' decision making. Accordingly, we
    support SEC's commitment to working with the SROs to achieve this goal,
    whether through implementation of modifiers, indicators, or another
    alternative.

    Although SEC, NASDAQ, and Amex did not specifically comment on how early
    notification of noncompliance with issuers' listing standards would be
    achieved in conjunction with symbol modifiers or indicators, SEC said that
    Corporation Finance's proposed revisions to the Form 8-K were to ensure
    early public notice of an issuer's noncompliant status. Consistent with
    our recommendation, the Commission has approved Corporation Finance's
    proposed revisions, as modified based on public comment. The final rule,
    approved on March 11, 2004, requires issuers to file the Form 8-K

    within 4 business days of being notified by the SRO of their noncompliance
    with either a quantitative or qualitative listing standard. Because the
    approved rule addresses our recommendation that the Form 8-K filing
    provide for early public notification, we believe that using the filing as
    the trigger for transmitting the indicator is warranted. Doing so would
    provide consistency across the markets and enhance the complementary
    relationship between the indicator as a mechanism for providing ongoing
    public notification and the Form 8-K as a source of more detailed
    information on the nature of the issuer's deficient status.

    SEC also commented that the SROs should provide investors timely
    notification not only when issuers are noncompliant with financial listing
    standards, but also when they are noncompliant with corporate governance
    standards. Accordingly, SEC said that it would discuss with the SROs the
    feasibility of appending a modifier to or transmitting an indicator with
    the symbol of an issuer that is noncompliant with corporate governance
    standards. NYSE expressed concern about extending the use of indicators to
    qualitative listing standards, such as corporate governance standards,
    elaborating that the indicator is not an appropriate or effective method
    of conveying more complex, "less binary" information. NYSE explained that
    a large number of qualitative standards exist, with some situations of
    noncompliance being more serious than others and some matters being
    potentially easier to correct than others. NYSE said that using an
    indicator for all the standards would "homogenize" the information, which
    could lead the public to ignore the indicator as a conveyor of useful
    information. NYSE also noted that the present dissemination mechanism is
    limited as to the number of different indicators that can be used, so that
    the cost of employing additional indicators would likely be significant.
    Amex also expressed concern about the feasibility of addressing all
    "significant factors" with an indicator, stating that many are inherently
    subjective and not susceptible to an objective determination of whether
    the "triggering event" has occurred. Amex also said that using many
    different types of indicators would be confusing to investors and the
    marketplace. Nonetheless, the use of indicators for noncompliance with
    qualitative standards is among the topics that Amex expects to address at
    its April 2004 Board of Governors meeting. We agree that use of modifiers
    or indicators may not be appropriate for noncompliance with all
    qualitative listings standards. However, as NASDAQ has demonstrated
    through its use of a symbol modifier for issuers that have not filed
    required SEC reports and as we have recommended, early and ongoing public
    notification of noncompliance

    with additional qualitative standards may be appropriate and should be
    explored further.

    SEC commented that it recognizes that SRO internal audit reports may be a
    useful tool in the inspection process. In response to our recommendation,
    SEC said that it will implement a formal written policy concerning the
    selection and review of SRO internal audit reports during inspections.

    Regarding our recommendation that Amex ensure that issuers disclose the
    names of those directors that they have designated as independent, SEC
    noted that Amex responded on February 23, 2004, by filing a rule change
    that requires this disclosure and that the rule change became effective on
    filing. Amex also cited the rule change in its comments.

    Amex said that while our recommendation related to requiring issuers,
    through listing standards, to establish a supermajority of independent
    directors and separate the positions of CEO and chairman, warrants further
    consideration, issuers, the markets, and SEC need more time to adjust to
    the various new requirements that have already been imposed on the markets
    and assess their impact. NASDAQ similarly commented that time is needed
    for the numerous new governance changes to take effect and their results
    assessed. NASDAQ said that mandating a supermajority of independent
    directors might prove unduly burdensome, particularly for smaller issuers,
    and that insufficient information is available to determine if it would
    provide greater benefits than a simple majority. NASDAQ also said that
    separating the positions of CEO and chairman might enhance the governance
    of some companies but that concerns exist that mandating the separation
    could make boards more inefficient and lead to unnecessary conflict.
    NASDAQ also said that insufficient information is available to justify
    taking the step at this time and that other steps it has taken, such as
    requiring a majority of independent directors, will significantly reduce
    the concerns associated with a combined CEO/chairman. NYSE commented that
    it is not opposed to companies adopting requirements for a separate CEO
    and chairman or a supermajority of independent directors, if they choose
    to do so.

    Recognizing that a reasonable amount of time would need to be allowed for
    issuers to establish a supermajority of independent directors and separate
    the positions of CEO and chairman, we continue to believe that in the
    absence of voluntary action by issuers, SEC should, working with the SROs,
    seriously consider mandating such requirements through listing standards.
    SEC's January 2004 proposals that would require boards of

    mutual funds to comprise 75 percent (a supermajority) independent
    directors and have an independent board chairman are consistent with our
    recommendation. Although the conflicts of interest between the boards of
    directors and management of mutual funds may be more apparent than such
    conflicts at other publicly traded companies, we believe that the
    rationale behind SEC's proposals is equally applicable to publicly traded
    companies, regardless of whether they manage financial or physical assets.
    As SEC has noted, and we agree, with a supermajority of independent
    directors and an independent board chairman, independent directors will
    set the board agenda as well as have the power to control the outcome of
    board votes. Although SEC and we recognize that such actions do not
    guarantee effective management, we both agree that greater board
    independence could promote board decision making that is aligned with
    shareholders' interests, thereby enhancing board accountability. As SEC
    has stated, these proposals, along with others in its January 2004
    rulemaking package, would bolster the effectiveness of independent
    directors and enhance the role of the board as the primary advocate for
    shareholders. We acknowledge, however, that some issuers would not be in a
    position to immediately implement these best practices and that any
    improvements, therefore, would likely be best accomplished on an
    incremental basis. In this regard, we encourage SEC and the SROs, as
    industry leaders, to reach out to issuers and use their leverage to assist
    in the process of transitioning issuers' governance structures into models
    of corporate responsibility.

    Regarding our recommendation related to ensuring that OCIE conducts timely
    inspections of the three SROs to assess their oversight of issuers'
    compliance with corporate governance standards, SEC said that it expects
    to continue to conduct timely inspections of the SROs' programs and
    procedures for ensuring that issuers comply with corporate governance
    requirements and to enhance its review to include the new corporate
    governance standards. We believe that OCIE's efforts will be important to
    ensuring the successful implementation of the new standards and enhancing
    SRO oversight of the markets, particularly if OCIE shares any best
    practices that it identifies with the SROs.

    Regarding our recommendations related to reviewing the SROs'
    selfevaluations of their own corporate governance and following up with
    inspections of the SROs, SEC commented that it is currently conducting a
    comprehensive review of SRO governance that will take into consideration
    the new corporate governance standards. SEC also said that when
    appropriate and after any changes or new requirements are implemented at

    the SROs, it will inspect the SROs to determine whether they have
    effectively implemented their own enhanced governance standards. SEC's
    ongoing and proposed actions are consistent with our recommendations and
    should enhance the quality of SRO governance, particularly if, as noted
    above, the best practices identified are shared with all the SROs.

    In response to our recommendation that Market Regulation work with Amex to
    further enhance its board independence by giving serious consideration to
    separating the position of CEO and chairman, Amex commented that draft
    changes to the Amex constitution are being considered in connection with
    NASD's proposed sale of its interest in Amex to the Amex Membership
    Corporation. Amex said that the proposed changes provide that if Amex's
    CEO is also the chairman of the Amex Board of Governors, a "lead
    governor"-designated by the Board of Governors from among the independent
    governors-would preside over executive sessions. Amex noted that the
    proposed changes are subject to various approvals, including by SEC and
    Amex members. Amex's proposals are consistent with NASDAQ's by laws and
    NYSE's constitution, which also retain the option of having the same
    person serve as CEO and chairman. However, we believe that the unique role
    of the SROs as standard setters suggests that absent compelling reasons to
    the contrary, SEC should ensure that Amex opts for separating these
    positions as NASDAQ and NYSE have done.

    As agreed with your offices, unless you publicly announce the contents of
    this report earlier, we plan no further distribution until 30 days from
    the report date. At that time, we will send copies of this report to the
    Chairmen and Ranking Minority Members of the Senate Committee on Banking,
    Housing, and Urban Affairs and its Subcommittee on Securities and
    Investment; the Chairman, House Committee on Energy and Commerce; the
    Chairmen of the House Committee on Financial Services and its Subcommittee
    on Capital Markets, Insurance, and Government Sponsored Enterprises; and
    other interested congressional committees. We will send copies to the
    Chairmen of SEC, Amex, NASDAQ, and NYSE and to other interested parties.
    We also will make copies available to others upon request. In addition,
    the report will be available at no charge on the GAO Web site
    http://www.gao.gov.

    If you have any further questions, please contact me at (202) 512-8678,
    hillmanr@gao.gov, or Cecile Trop at (312) 220-7600, tropc@gao.gov.
    Additional GAO contacts and staff acknowledgments are listed in appendix

    IX.

    Richard J. Hillman Director, Financial Markets and Community Investment

    Appendix I

    Scope and Methodology

    To report on the status of the Securities and Exchange Commission's (SEC)
    Office of Compliance Inspections and Examinations' (OCIE) recommendations
    to the three largest self-regulatory organizations (SRO) for improving
    their markets' equity listing programs, we reviewed OCIE's inspection
    reports on the American Stock Exchange (Amex), Nasdaq Stock Market, Inc.
    (NASDAQ), and the New York Stock Exchange (NYSE) listing programs and
    related workpapers and correspondence. We also obtained information from
    OCIE, Amex, NASDAQ, and NYSE on OCIE's listing program inspection report
    findings and recommendations, and the SROs' efforts to address the
    recommendations. Further, we obtained data, in documentary form, from the
    three SROs on the number of noncompliant issuers trading during 2003 and
    their trading status as of December 31, 2003. In addition to these steps,
    in reviewing the effectiveness of NYSE's actions to address OCIE's
    recommendation intended to ensure early and ongoing notification of
    issuers' noncompliance with continued listing standards, we contacted a
    nonprobability (nonrandom) sample of 11 vendors. This sample included
    broker-dealers, vendors that supply information to the print media, and
    vendors that supply information through the Internet, either on their own
    Web sites or through third-party vendors, to determine whether they were
    distributing the information on issuers' noncompliance with NYSE's
    quantitative continued listing standards that NYSE transmits by its
    indicator. Our selection of the 11 vendors was based on a list from NYSE
    of the largest vendors of quotation data, a list from NYSE of recommended
    contacts, and our own research on vendors that supply quotation
    information over the Internet. Ultimately, we interviewed eight
    information vendors between August and November 2003 to determine whether
    they were publicizing the information and were successful in contacting
    six of these vendors in February and March 2004 for followup interviews.
    We also attempted to contact three additional vendors by telephone, but
    were unsuccessful. As a result, we visited their Web sites in September
    2003 and again in February 2004 to determine whether they were publicizing
    the information transmitted by NYSE's indicator. Because we did not
    conduct a random sample of all vendors that receive quotation data from
    NYSE, our findings regarding the use of NYSE's indicator cannot be
    generalized to the entire population of vendors. To determine whether a
    Web site visitor could locate the indicator and the list of noncompliant
    NYSE issuers, we visited the NYSE Web site and independently searched for
    this information.

    To report on the extent to which OCIE uses SROs' internal review reports
    in its inspection process, we obtained information from OCIE on its policy
    for reviewing internal review reports as part of its inspections and

    Appendix I Scope and Methodology

    examinations, and information from Amex, NASDAQ, the National Association
    of Securities Dealers, Inc., and NYSE on the purpose and scope of their
    respective internal review functions. We reviewed the Government Auditing
    Standards, also called the Yellow Book, to identify best practices for
    using internal review reports in oversight inspections such as those
    conducted by OCIE. We also reviewed the examination policies of the
    Federal Deposit Insurance Corporation, the Federal Reserve Board, the
    Office of the Comptroller of the Currency, and the Office of Thrift
    Supervision to determine the extent to which bank and thrift examiners are
    required to use internal review reports as part of their examinations. In
    addition, we obtained information from officials representing the
    Inspectors General of the Commodity Futures Trading Commission and the
    Department of the Treasury on the extent to which they use internal review
    reports as part of their inspections and examinations. Further, we
    reviewed selected SRO internal review reports on their listing programs
    and discussed the contents of other reports with SRO officials. We did not
    review OCIE's entire inspection process because SEC was doing a review of
    the agency's operations during the time we did our work.

    To report on SEC's oversight of NASDAQ's moratorium and subsequent
    bidprice rule changes and the listing status of the issuers directly
    affected by these changes, we reviewed relevant NASDAQ proposed and final
    rules and discussed their purposes with NASDAQ officials. We also obtained
    information from SEC officials on their review of these proposals. In
    addition to these steps, in reporting on the listing status of firms
    directly affected by the NASDAQ moratorium and subsequent rule changes, we
    analyzed data generated between September 26, 2001, and February 28, 2003,
    from NASDAQ's Web Issuer Support Services System, NASDAQ's primary source
    of data for monitoring compliance with NASDAQ's listing standards. Our
    data begin with September 26, 2001, rather than September 27, 2001, the
    date the moratorium was imposed, because NASDAQ stopped tracking
    compliance with the bid-price and market value of publicly held shares
    listing standards on the date the moratorium was imposed and, therefore,
    no data were available on September 27, 2001. Based on our analysis, we
    determined the listing status of the issuers NASDAQ identified as having
    received direct relief through the moratorium (moratorium issuers) as of
    January 2, 2002, the day the moratorium was lifted. We could not determine
    the number of issuers that might have received indirect relief, because,
    as previously discussed, NASDAQ stopped tracking individual issuers'
    compliance with the bid-price and market value of publicly held shares
    continued listing standards during the moratorium. As a result, we could
    not determine the total number of issuers that might

    Appendix I Scope and Methodology

    have become noncompliant with these standards in the absence of the
    moratorium, the number of noncompliant issuers that would have returned to
    compliance in the absence of the moratorium, or the number of issuers
    approaching noncompliance that actually became noncompliant. We determined
    the listing status of the moratorium issuers as of February 28, 2003,
    approximately 1 year after NASDAQ implemented its postmoratorium rule
    change, because by this date issuers that were affected by the moratorium
    would have had an opportunity to go through NASDAQ's deficiency process.
    Examining this period also allowed us to determine the listing status of
    issuers affected by the first postmoratorium bid-price rule change. We
    discussed the results of our data analysis with NASDAQ officials. Although
    we did not independently verify the accuracy of the NASDAQ data, we
    performed internal checks to assess the data's reliability and concluded
    that they were reliable for the purposes of this report.

    To report on the actions the three largest SROs have taken to strengthen
    corporate governance for issuers and themselves, we reviewed relevant
    legislation, GAO and other testimony to Congress, testimony to SROs,
    corporate governance studies, investigative reports on the collapse of
    major U.S. corporations, SEC's proposed and final rulemakings related to
    shareholder access to the director nomination process, and SEC's
    qualitative corporate disclosure requirements for issuers. We also
    reviewed the three SROs' proposed and final (new) corporate governance
    rules for issuers as well as the rules they have replaced. Additionally,
    we obtained information from SRO officials on the purpose of the new rules
    and the SROs' plans for ensuring compliance with them. We also obtained
    information from SEC on its review of these rules and its plans to review
    qualitative corporate disclosure requirements. Further, we obtained an
    assessment from a nonprobability sample of 14 market participants
    representing the investor, legal, business, and financial communities on
    the adequacy of the SROs' new rules and SEC's qualitative corporate
    disclosure requirements. Because we did not conduct a random sample of all
    market participants, the views expressed in this report on the corporate
    governance rules of the three SROs cannot be generalized to the entire
    population of market participants. In addition, we attended a forum that
    GAO sponsored on corporate governance and accountability issues and
    attended corporate governance conferences given by organizations in the
    public and private sectors. We also reviewed the three largest SROs'
    selfevaluations of their own corporate governance, including board
    structures, policies, and practices. Finally, we reviewed publicly
    available information to identify actions that private and public
    institutions took in the United

    Appendix I Scope and Methodology

    Kingdom, Germany, France, and Japan between January 2002 and June 2003 to
    strengthen corporate governance. This included a review of the new or
    revised corporate governance codes used in the United Kingdom, Germany,
    and France, and descriptions by Japanese corporate associations of recent
    revisions to Japanese corporate law. Due to limitations on the scope of
    our inquiry, we may not have identified all of the actions taken over this
    period. Also due to these limitations, we did not discuss in the report
    the corporate or regulatory structure of the countries or the respective
    roles, responsibilities, and characteristics of shareholders, corporate
    managers, and boards.

    We did our work in accordance with generally accepted government auditing
    standards between April 2002 and March 2004. We performed our work in
    Chicago, Ill.; New York City, N.Y.; and Washington, D.C.

    Appendix II

    Quantitative Listing Standards for Domestic Issuers of the Three Largest
    Markets

    Table 3: The American Stock Exchange's Quantitative Standards for Initial
    Listing of Domestic Issuers

                                 Minimum requirementsa

              Standard          Option 1    Option 2     Option 3        Option 4
        Stockholders' equityb  $4 million  $4 million   $4 million      N.A.c
    Market capitalizationd     N.A.        N.A.     $50 million   $75 millione
           Pretax incomef       $750,000      N.A.         N.A.         N.A.
          Operating history       N.A.       2 years       N.A.         N.A.

    Distribution   One of the      One of the      One of the     One of the
                      following:      following:      following:     following:
                     1. 800 public   1. 800 public  1. 800 public  1. 800 public
                     shareholders    shareholders    shareholders   shareholders
                          and             and            and            and
                            500,000 500,000         500,000               500,000
                      publicly held publicly held   publicly held   publicly held
                        shares,         shares,        shares,        shares,
                     2. 400 public   2. 400 public  2. 400 public  2. 400 public
                       shareholders  shareholders    shareholders   shareholders
                              and 1      and 1          and 1          and 1
                            million     million        million        million
                      publicly held  publicly held  publicly held  publicly held
                      shares, or      shares, or      shares, or     shares, or
                     3. 400 public   3. 400 public  3. 400 public  3. 400 public
                      shareholders,   shareholders,  shareholders,  shareholders,
                            500,000         500,000        500,000        500,000
                      publicly held  publicly held  publicly held  publicly held
                            shares,     shares,        shares,     shares,
                      and average     and average    and average    and average
                         daily           daily          daily          daily
                    trading volume  trading volume  trading volume trading volume
                          of              of              of             of
                    2,000 shares in 2,000 shares in  2,000 shares   2,000 shares
                                the       the           in the         in the
                         previous 6   previous 6      previous 6     previous 6
                            months.     months.        months.        months.

    Priceg $3 $3 N.A. $3

    Market value of publicly $3 million $15 million $15 million $20 million
    held sharesh

                          Source: The American Stock Exchange.

    Notes:

    While data provided in the table reflect information from the American
    Stock Exchange, the definitions provided in the following notes are from
    David L. Scott, Wall Street Words (1997).

    aA company must meet all of the minimum requirements under option 1, 2, 3,
    or 4.

    bStockholders' equity is the stockholders' interest in the assets of a
    business. It includes the amount invested by the stockholders in the
    enterprise plus the profits (or minus the losses).

    cNot applicable.

    dMarket capitalization is the total value of all of a firm's outstanding
    shares, calculated by multiplying the price of a stock by the total number
    of shares outstanding.

    eA company may also meet the total market capitalization standard with $75
    million each in total assets and total revenue in the most recent fiscal
    year or in 2 of the last 3 fiscal years.

    fCompanies can meet the pretax income requirement either in the last
    fiscal year or in 2 of the last 3 fiscal years.

    gPrice is the dollar amount at which a share of common stock trades.
    Amex's standards specify that a company must satisfy the share price
    requirement for a reasonable period of time but do not define
    "reasonable."

    Appendix II Quantitative Listing Standards for Domestic Issuers of the
    Three Largest Markets

    hAccording to the American Stock Exchange, market value of publicly held
    shares is the price of a stock multiplied by the number of outstanding
    shares held by investors that are not officers, directors, and 10 percent
    or greater shareholders.

    Table 4: The American Stock Exchange's Quantitative Standards for
    Continued Listing of Domestic Issuers

    Standard Minimum requirements

    Stockholders' equity $2 million, $4 million, or $6 milliona

    One of the following:

    1. publicly held shares, 1. 200,000,

    2. number of public shareholders, or 2. 300, or

    3. market value of publicly held shares. 3. $1 millionb

    Source: The American Stock Exchange.

    Notes:

    aThe stockholders' equity requirement is $2 million if the issuer has
    sustained losses from continuing operations or net losses in 2 of its 3
    most recent fiscal years, $4 million if the issuer has sustained losses
    from continuing operations or net losses in 3 of its 4 most recent fiscal
    years, and $6 million if the issuer has sustained losses from continuing
    operations or net losses in 4 of its 5 most recent fiscal years.

    bDelisting will be considered if the issuer does not meet the $1 million
    minimum requirement for market value of publicly held shares for more than
    90 consecutive calendar days.

    Appendix II Quantitative Listing Standards for Domestic Issuers of the
    Three Largest Markets

    Table 5: The NASDAQ National Market's Quantitative Standards for Initial
    Listing of Domestic Issuers

                                 Minimum requirementsa

    Standard Option 1 Option 2 Option 3

    Stockholders' equity $15 million $30 million N.A.

                   One of the following:     N.A.   N.A.
                      1. market value of                        1. $75 million or
                   listed securitiesb or
                     2. total assets and                       2. $75 million and
                          total revenue.                             $75 million.

                               Income from   $1 million         N.A.     N.A.
                     continuing operations
                      before income taxesc
                     Publicly held sharesd  1.1 million 1.1 million   1.1 million
                           Market value of   $8 million $18 million   $20 million
                      publicly held shares
                                Bid pricee           $5           $5      $5
                                 Round-lot          400          400     400
                             shareholdersf
                            Market makersg            3            3      4
                         Operating history         N.A.   2 years        N.A.

    Source: Nasdaq Stock Market, Inc.

    Notes:

    While data provided in the table reflect information from the Nasdaq Stock
    Market, Inc., the definitions provided in the following notes are from
    David L. Scott, Wall Street Words (1997), unless otherwise indicated.

    aA company must meet all of the requirements under option 1, 2, or 3.

    bAccording to the Nasdaq Stock Market, Inc., market value of listed
    securities is the price per share multiplied by the total number of shares
    outstanding held by the public, officers, directors, and beneficial
    owners.

    cA company can meet the income from continuing operations requirement in
    either the latest fiscal year or in 2 of the last 3 fiscal years.

    dAccording to the Nasdaq Stock Market, Inc., publicly held shares, also
    referred to as public float, are the total shares outstanding less any
    shares held by officers, directors, or beneficial owners of 10 percent or
    more.

    eAccording to the Nasdaq Stock Market, Inc., bid price is the price a
    buyer is willing to pay for a security.

    fRound-lot shareholders hold 100 shares or a multiple thereof.

    gAccording to the Nadsaq Stock Market, Inc., market makers are firms or
    individuals that maintain a firm bid and offer price in a given security
    by standing ready to buy or sell at publicly quoted prices.

    Appendix II Quantitative Listing Standards for Domestic Issuers of the
    Three Largest Markets

    Table 6: The NASDAQ National Market's Quantitative Standards for Continued
    Listing of Domestic Issuers

                                 Minimum requirementsa

    Standard Option 1 Option 2

    Stockholders' equity $10 million N.A.

                     One of the following:   N/A
                 1. market value of listed              1. $50 million or
                             securities or
                2. total assetsb and total        2. $50 million and $50 million.
                                 crevenue.

                    Publicly held shares      750,000      1.1 million
                  Market value of publicly   $5 million    $15 million
                        held shares
                         Bid price               $1           $1
                   Round-lot shareholders       400           400
                       Market makers             2             4

    Source: Nasdaq Stock Market, Inc.

    Notes:

    While data provided in the table reflect information from the Nasdaq Stock
    Market, Inc., the definitions provided in the following notes are from
    David L. Scott, Wall Street Words (1997).

    aAn issuer must meet the requirements under option 1 or 2.

    bTotal assets include all property and items of value owned by the
    company.

    cTotal revenue is the inflow of assets that results from the sales of
    goods and services and earnings from dividends, interest, and rent.

    Appendix II Quantitative Listing Standards for Domestic Issuers of the
    Three Largest Markets

    Table 7: The NASDAQ SmallCap Market's Quantitative Standards for Initial
    Listing of Domestic Issuers

    Standard Minimum requirements

    One of the following:

    1. stockholders' equity, 1. $5 million,

    2. market value of listed securities, or 2. $50 million, or

    3. net income from continuing operations. 3. $750,000.

    Publicly held shares 1 million

    Market value of publicly held shares $5 million

    Bid price $4

    Round-lot shareholders 300

    Market makers 3

    One of the following:

    1. operating history or 1. 1 year or

    2. market value of listed securities. 2. $50 million.

                           Source: Nasdaq Stock Market, Inc.

    Table 8: The NASDAQ SmallCap Market's Quantitative Standards for Continued
    Listing of Domestic Issuers

    Standard Minimum requirements

    One of the following:

    1. stockholders' equity, 1. $2.5 million,

    2. market value of listed securities, or 2. $35 million, or

    3. net income from continuing operations. 3. $500,000.

    Publicly held shares 500,000

    Market value of publicly held shares $1 million

    Bid price $1

    Round-lot shareholders 300

    Market makers 2

                           Source: Nasdaq Stock Market, Inc.

    Appendix II Quantitative Listing Standards for Domestic Issuers of the
    Three Largest Markets

    Table 9: The New York Stock Exchange's Quantitative Standards for Initial
    Listing of Domestic Issuers

    Standard Minimum requirements

    One of the following:

    1. round-lot shareholders, 2,000;

    2. total stockholders and average monthly 2,200 and 100,000 shares,
    respectively; trading volume,a, b

    3. total stockholders and average monthly 500 and 1 million shares,
    respectively; or trading volume,c or

    4. publicly held shares. 1.1 million.

    Market value of publicly held shares $60 million or $100 milliond

    One of the following:

    1. aggregate pretax earnings, 1. $10 million,e,f

    2. aggregate operating cash flowg and global 2. $25 million,h $500
    million, and $100 market capitalization and revenue, or million,
    respectively; or

    3. global market capitalizationi and revenue. 3. $750 millionf and $75
    million,f respectively.

    Source: The New York Stock Exchange.

    Notes:

    The New York Stock Exchange introduced a pilot program, effective January
    29, 2004, through July 29, 2004, that amends certain of its minimum
    quantitative standards for initial listing. While data provided in the
    table reflect information from the New York Stock Exchange, the
    definitions provided in the following notes are from David L. Scott, Wall
    Street Words (1997), unless otherwise indicated.

    aFor this alternative standard and related requirements, the average
    monthly trading volume is calculated over the most recent 6 months.

    bAccording to the New York Stock Exchange, volume is the number of shares
    or contracts traded in a security or an entire market during a given
    period and is normally considered on a daily basis, with a daily average
    being computed for longer periods.

    cFor this alternative standard and related requirement, the average
    monthly trading volume is calculated over the most recent 12 months.

    dThe $60 million minimum requirement applies to companies that listed
    through initial public offerings, as a result of spin-offs, or under the
    affiliated companies requirement. The minimum requirement is $100 million
    for other companies.

    eA company must achieve the $10 million aggregate pretax earnings
    requirement for the last 3 fiscal years, with at least $2 million in each
    of the most recent 2 fiscal years, and being profitable in all 3 years.

    fThe New York Stock Exchange has revised this standard under the pilot
    program.

    gAggregate operating cash flow is the cash generated from the operations
    of a company. Generally, it is defined as net income adjusted for noncash
    charges and income.

    hA company's 3-year total for aggregate operating cash flow must equal $25
    million and the company must report a positive amount each year.

    iAccording to NYSE, global market capitalization includes all domestic and
    foreign companies and all domestic and foreign shares.

    Appendix II Quantitative Listing Standards for Domestic Issuers of the
    Three Largest Markets

    Table 10: The New York Stock Exchange's Quantitative Standards for
    Continued Listing of Domestic Issuers

    Standard Minimum requirements

    Pricea $1

    Both of the following:

    1. total stockholders and 1. 400 and

    2. total stockholders and trading volume.b 2. 1,200 and 100,000,
    respectively.

    Publicly held shares 600,000

    For those companies that listed pursuant to the aggregate pretax earnings
    standard:

    1. global market capitalizationc and total 1. $75 milliond and $75
    million,d stockholders' equity or respectively, or

    2. global market capitalization. 2. $25 million.d

    For those companies that listed pursuant to the aggregate operating cash
    flow, and global market capitalization and revenue standards:

    1. global market capitalization and total 1. $250 millione and $20
    million,e revenues or respectively, or

    e

    2. global market capitalization. 2. $75 million.

    For those companies that listed pursuant to the global market
    capitalization and revenue standard:

    1. global market capitalization and total 1. $375 milliond and $15
    million,d revenues or respectively, or

    2. global market capitalization. 2. $100 million.d

    Source: The New York Stock Exchange.

    Notes:

    The New York Stock Exchange introduced a pilot program, effective January
    29, 2004, through July 29, 2004, that amends certain of its minimum
    quantitative standards for continued listing. While data provided in the
    table reflect information from the New York Stock Exchange, the
    definitions provided in the following notes are from David L. Scott, Wall
    Street Words (1997), unless otherwise indicated.

    aAn issuer is out of compliance with the price standard if the average
    price is below the minimum standard over a 30-consecutive-day trading
    period.

    bAn issuer is out of compliance with the trading volume standard if the
    average monthly trading volume is below the minimum requirement in the
    most recent 12-month period and total stockholders are less than 1,200.

    cAccording to NYSE, global market capitalization includes all domestic and
    foreign companies and all domestic and foreign shares. An issuer is out of
    compliance with the global market capitalization standard if average
    global market capitalization is below the minimum standard for a
    30-consecutivetrading-day period.

    dThe New York Stock Exchange has revised this standard under the pilot
    program.

    eThe New York Stock Exchange has added this standard under the pilot
    program.

    Appendix III

    Deficiency and Hearing Processes for Domestic Issuers Listed on the Three
    Largest Markets

    After a domestic company is listed on the American Stock Exchange (Amex),
    Nasdaq Stock Market, Inc. (NASDAQ), or the New York Stock Exchange (NYSE),
    it must comply with the market's quantitative continued listing standards
    (see app. II). If a domestic issuer does not maintain compliance with one
    or more of these standards, the SRO's rules generally require that its
    deficiency, or delisting, process begins. If an SRO decides to delist a
    noncompliant issuer, the issuer may request a review of the delisting
    decision through the SRO's hearings process. The deficiency and hearings
    processes for domestic issuers listed on Amex, NASDAQ, and NYSE are
    described below.

    The Amex Deficiency and Hearing Processes for Domestic Issuers

    Amex's procedures require the SRO to send an issuer a deficiency letter
    within 10 business days of determining that the issuer is deficient with
    one or more continued listing standards. The letter offers the issuer an
    opportunity to submit a compliance plan detailing definitive actions the
    issuer has taken or will take to return to compliance with Amex's
    continued listing standards. If Amex accepts the issuer's plan, the issuer
    will be granted a compliance period for up to 18 months, during which time
    it will have the opportunity to regain compliance with the continued
    listing standards (see fig. 2). The issuer must issue a press release
    within 5 business days disclosing that it does not meet Amex's continued
    listing standards and that its listing is being continued pursuant to an
    extension.

                                      Appendix III
                          Deficiency and Hearing Processes for
                      Domestic Issuers Listed on the Three Largest
                                        Markets

         Figure 2: Key Points in Amex's Deficiency Process for Domestic Issuers

    Source: Amex.

    Notes:

    All days are calendar days, unless otherwise indicated.

    a Amex has 45 days to review an issuer's proposed compliance plan. If Amex
    rejects the plan, or if the issuer does not submit a plan within 30 days,
    Amex is to send the issuer a delisting letter.

    bThe issuer must issue a press release within 5 business days disclosing
    that it does not meet Amex's continued listing standards and that its
    listing is being continued pursuant to an extension; we have converted the
    5 business days to 7 calendar days for purposes of this figure.

    cThe compliance period begins on the day that Amex sends an issuer a
    deficiency letter. Under its rules, Amex can grant issuers a compliance
    period of up to 18 months.

    dSee figure 3.

    Under Amex procedures, the SRO is to send an issuer a delisting letter if
    it does not regain compliance within the compliance period granted, Amex
    rejects its proposed compliance plan, or it does not submit a plan within
    30 calendar days. The delisting letter explains the basis for Amex's
    decision to begin delisting proceedings against an issuer and informs the
    issuer of its right to a hearing (see fig. 3). The issuer must issue a
    press release announcing the initiation of delisting proceedings and the
    basis for the delisting decision within 7 calendar days of receiving the
    delisting letter. The Amex hearing panel may decide to uphold the
    delisting decision or allow the issuer to remain listed if it determines
    that the delisting decision was erroneous. Normally, trading in an
    issuer's securities will continue pending a decision by the Amex hearing
    panel. If the hearing panel upholds the delisting decision, trading in the
    issuer's securities will be suspended.

                                      Appendix III
                          Deficiency and Hearing Processes for
                      Domestic Issuers Listed on the Three Largest
                                        Markets

    The issuer may request a review by the Committee on Securities, appointed
    by the Amex Board of Directors, which can uphold the delisting decision or
    reinstate the issuer's securities for trading.

          Figure 3: Key Points in Amex's Hearing Process for Domestic Issuers

    Source: Amex.

    Notes:

    All days are calendar days, unless otherwise indicated.

    aThe Amex hearing panel must hold a hearing within 45 days of receiving an
    issuer's request to review the delisting decision. According to an Amex
    official, the Amex hearing panel issues a decision within 5 calendar days
    of holding the hearing.

    The NASDAQ NASDAQ's procedures require the SRO to send a deficiency letter
    when an

    issuer becomes deficient in one or more of its continued listing
    standards.Deficiency and Hearing The deficiency process differs depending
    on the listing standard. An issuer Processes for with a deficiency in the
    equity, total assets and total revenue, publicly held Domestic Issuers
    shares, and/or round-lot shareholders standards has 10 business days from

    the date of the letter to comply with the applicable standard or submit a

    compliance plan (see fig. 4).

                                      Appendix III
                          Deficiency and Hearing Processes for
                      Domestic Issuers Listed on the Three Largest
                                        Markets

    Figure 4: Key Points in NASDAQ's Equity, Total Assets and Total Revenue,
    Publicly Held Shares, and/or Round-Lot Shareholders Deficiency Process for
    Domestic Issuers

    Source: NASDAQ.

    Notes:

    All days are calendar days, unless otherwise indicated.

    a An issuer with a deficiency in the equity, total assets and total
    revenue, publicly held shares, and/or round-lot shareholders standards has
    10 business days from the date of the letter to comply with the applicable
    standards or submit a compliance plan; we have converted the 10 business
    days to 14 calendar days for purposes of this figure.

    bNASDAQ takes up to 63 calendar days to review an issuer's compliance
    plan. If NASDAQ rejects the plan, the issuer does not submit a plan within
    10 business days, or the issuer does not regain compliance within the
    compliance period, NASDAQ is to send the issuer a delisting letter.

    cNASDAQ procedures allow the SRO to accept an issuer's compliance plan and
    grant a short extension period during which the issuer must meet certain
    milestones to regain compliance. Upon receipt of a delisting letter, an
    issuer may request a hearing to remain listed under a short-term exception
    to the listing standards.

    dSee figure 8.

    Issuers that fail to meet the market value of listed securities and market
    maker standards for 10 consecutive business days are granted an automatic
    compliance period during which they have the opportunity to regain
    compliance with the applicable standard (see fig. 5).

                                      Appendix III
                          Deficiency and Hearing Processes for
                      Domestic Issuers Listed on the Three Largest
                                        Markets

     Figure 5: Key Points in NASDAQ's Market Value of Listed Securities and Market
                     Makers Deficiency Process for Domestic Issuers

    Source: NASDAQ.

    Notes:
    All days are calendar days, unless otherwise indicated.
    aSee figure 8.

    Issuers that do not meet the market value of publicly held shares and
    bidprice standards for 30 consecutive business days are granted automatic
    compliance periods during which they have the opportunity to regain
    compliance with the applicable standard. Figure 6 describes the key points
    in the deficiency process for issuers deficient in the market value of
    publicly held shares standard, and figure 7 describes the key points in
    the deficiency process for issuers deficient in the NASDAQ National Market
    (NNM) and SmallCap (SCM) bid-price standards.

    Appendix III
    Deficiency and Hearing Processes for
    Domestic Issuers Listed on the Three Largest
    Markets

    Figure 6: Key Points in NASDAQ's Market Value of Publicly Held Shares
    Deficiency Process for Domestic Issuers

    Source: NASDAQ.

    Notes:
    All days are calendar days, unless otherwise indicated.
    aSee figure 8.

                                      Appendix III
                          Deficiency and Hearing Processes for
                      Domestic Issuers Listed on the Three Largest
                                        Markets

     Figure 7: Key Points in NASDAQ's SCM and NNM Bid-Price Deficiency Process for
                                    Domestic Issuers

    Source: NASDAQ.

    Notes:

    All days are calendar days, unless otherwise indicated.

    aAn SCM or NNM issuer must meet all of its market's initial listing
    standards, except for bid price, to take advantage of the second 180-day
    bid-price compliance period; if the issuer does not meet these standards,
    NASDAQ is to send the issuer a delisting letter.

    bIf an NNM issuer has not regained compliance with the bid-price standard
    45 days before the expiration of the second NNM 180-day compliance period,
    NASDAQ is to send a letter notifying the issuer of its noncompliance, the
    pending expiration of the compliance period, and its right to request a
    hearing.

    cNNM issuers that do not regain compliance at the end of the second
    180-day compliance period may elect to transfer to the SCM provided that
    they meet all of the SCM continued listing standards, except for bid
    price, and other requirements; if the issuer does not meet all the SCM
    continued standards and requirements or elects not to transfer to the SCM,
    NASDAQ is to send the issuer a delisting letter.

    dAn issuer must meet all initial SCM listing standards, except for bid
    price, to take advantage of the additional compliance period; if the
    issuer does not meet these standards, NASDAQ is to send the issuer a
    delisting letter.

    eIf the issuer meets all initial SCM listing standards, except for bid
    price, it will be provided with an additional compliance period up to its
    next shareholder meeting scheduled to occur within the next 370 days,
    provided the issuer commits to seeking shareholder approval of a reverse
    stock split to address the bid-price deficiency at that meeting. If the
    issuer does not meet all the initial standards or fails to timely propose,
    obtain approval of, or promptly execute the reverse stock split, NASDAQ is
    to send the issuer a delisting letter.

    fSee figure 8.

    Appendix III
    Deficiency and Hearing Processes for
    Domestic Issuers Listed on the Three Largest
    Markets

    If NASDAQ rejects an issuer's compliance plan, if the issuer does not
    submit a plan, or if an issuer does not regain compliance within the
    applicable compliance period, NASDAQ is to send the issuer a delisting
    letter. Upon receipt of a delisting letter, the issuer has 7 calendar days
    to issue a press release announcing receipt of the delisting letter and
    the basis for the delisting decision. It may also within this time frame
    request a hearing to remain listed under an exception to the listing
    standards (see fig. 8).1 Before the hearing, issuers are asked to submit a
    compliance plan for the NASDAQ Hearing Panel's review. If the NASDAQ
    Hearing Panel determines that the issuer will be able to implement in the
    short term a plan of compliance that will likely enable the issuer to
    achieve and sustain longterm compliance, the NASDAQ Hearing Panel may
    allow the issuer to remain listed under a temporary exception to the
    listing standards. Normally, trading in an issuer's securities will
    continue pending a decision by the NASDAQ Hearing Panel. If the NASDAQ
    Hearing Panel determines that it is unlikely that the issuer will be able
    to achieve and sustain longterm compliance, the issuer's securities will
    be delisted. An issuer may appeal the NASDAQ Hearing Panel decision to the
    NASDAQ Listing and Hearing Review Council, which can uphold the delisting
    decision or reinstate the issuer's securities for trading.

    1For all deficiencies, if an issuer chooses not to request a hearing
    following receipt of a delisting letter, the issuer is to be delisted in 7
    calendar days. In addition, rather than request a hearing or delist, NNM
    issuers have the opportunity to transfer to the SCM, provided they meet
    all SCM continued listing standards, except for bid price. An issuer that
    wishes to transfer from NNM to SCM must submit an application, a copy of
    the SCM Listing Agreement, and pay the applicable entry fee.

                                      Appendix III
                          Deficiency and Hearing Processes for
                      Domestic Issuers Listed on the Three Largest
                                        Markets

         Figure 8: Key Points in NASDAQ's Hearing Process for Domestic Issuers

    Source: NASDAQ.

    Notes:All days are calendar days, unless otherwise indicated.aThe
    delisting letter at the end of the compliance period triggers the
    requirement for the press release.bAn issuer may appeal a delisting
    decision to the NASDAQ Listing and Hearing Review Council.

    The NYSE Deficiency and Hearing Processes for Domestic Issuers

    NYSE has different deficiency procedures for price and nonprice
    deficiencies. If an issuer's average closing price over a 30-day trading
    period is less than $1, NYSE must send a deficiency letter to the issuer
    within 10 business days, stating that the issuer has the later of 6 months
    or its next annual meeting of shareholders (should the company determine
    that its action to cure the price deficiency requires shareholder
    approval) to bring the share price and average share price back above $1
    (see fig. 9). NYSE transmits an indicator on the consolidated tape 5
    business days following notification to the issuer that it is below the $1
    share-price requirement. In addition, the issuer is required to issue a
    press release within 45 calendar days of notification from NYSE that it is
    below the $1 share-price requirement. NYSE may initiate delisting
    proceedings before the expiration of the compliance period, by shortening
    the period, if it appears likely that the issuer will be unable to regain
    compliance due to an abnormally low price.

                                      Appendix III
                          Deficiency and Hearing Processes for
                      Domestic Issuers Listed on the Three Largest
                                        Markets

      Figure 9: Key Points in NYSE's Price Deficiency Process for Domestic Issuers

    Source: NYSE.

    Notes:

    All days are calendar days, unless otherwise indicated.

    aNYSE issues a press release disclosing the issuer's listing status and
    the basis for its delisting decision.

    bAccording to NYSE officials, continued listing during a hearing is rare
    in cases of a price deficiency. See figure 11.

    NYSE must send an issuer a deficiency letter within 10 business days of
    determining that the issuer is deficient with one or more nonprice
    continued listing standards. The letter provides the issuer an opportunity
    to submit a compliance plan to NYSE detailing definitive actions the
    issuer has taken or is taking to return to compliance with the continued
    listing standards. NYSE transmits an indicator on the consolidated tape 5
    business days following notification to the issuer that it is not in
    compliance with NYSE nonprice continued listing standards. In addition,
    the issuer is required to issue a press release within 45 calendar days of
    notification from NYSE that it is not in compliance with NYSE nonprice
    continued listing standards (see fig. 10). If NYSE accepts the issuer's
    plan, the issuer will be granted a compliance period, during which time it
    will have an opportunity to regain compliance with the standards. This
    compliance period is subject to quarterly monitoring of the goals outlined
    in the issuer's plan, and NYSE may, subject to approval, initiate
    delisting proceedings before the expiration of the compliance period if
    the issuer fails to meet a goal or if it appears likely that the issuer
    will be unable to regain compliance.

                                      Appendix III
                          Deficiency and Hearing Processes for
                      Domestic Issuers Listed on the Three Largest
                                        Markets

    Source: NYSE.

    Notes:

    All days are calendar days, unless otherwise indicated.

    aNYSE has 45 days to review an issuer's proposed compliance plan. If NYSE
    rejects the plan, or if the issuer does not submit a plan within the
    45-day time frame, NYSE is to send the issuer a delisting letter.

    bNYSE issues a press release disclosing the issuer's listing status and
    the basis for its delisting decision.

    cSee figure 11.

    Under NYSE procedures, the SRO is to issue a press release and send an
    issuer a delisting letter if the issuer does not regain compliance within
    the 6-month compliance period for price deficiencies or the 18-month
    compliance period for nonprice deficiencies, NYSE rejects the issuer's
    proposed compliance plan, the issuer does not submit a plan within the
    45calendar-day time frame, or the issuer fails to meet a quarterly
    milestone. The press release and the delisting letter explain the basis
    for NYSE's decision to begin delisting proceedings against an issuer and
    inform the issuer of its right to a hearing by a committee of the board of
    directors (see fig. 11). Generally, trading in an issuer's securities will
    continue pending a decision by the committee. The committee may decide to
    uphold the delisting decision or allow the issuer to remain listed.

                                      Appendix III
                          Deficiency and Hearing Processes for
                      Domestic Issuers Listed on the Three Largest
                                        Markets

    Source: NYSE.

    Notes:

    All days are calendar days, unless otherwise indicated.

    aThe issuer must request a review of the delisting decision within 10
    business days; we have converted the 10 business days to 14 calendar days
    for purposes of this figure.

    bAccording to a NYSE official, a committee of the board of directors holds
    a hearing within 70 days of the issuer's request and issues a decision
    within 1 day of holding a hearing.

    Appendix IV

    Market Participants Contacted During This Review

    As part of our review of the actions the three largest SROs have taken to
    strengthen corporate governance for issuers and themselves, we interviewed
    market participants representing the following 14 investor, legal,
    business, and professional organizations:

    American Federation of Labor and Congress of Industrial Organizations

    American Institute of Certified Public Accountants

    Association for Investment Management and Research

    The Business Roundtable

    California Public Employees' Retirement System

    The Corporate Library

    Council of Institutional Investors

    Institute of Internal Auditors

    Institutional Shareholder Services

    Investment Company Institute

    National Association of Corporate Directors

    Securities Industry Association

    Teachers Insurance and Annuity Association-College Retirement Equities
    Fund

    Weil, Gotshal, & Manges LLP

    Appendix V

    Comments from the Securities and Exchange Commission

    Appendix V Comments from the Securities and Exchange Commission Appendix V
    Comments from the Securities and Exchange Commission

    Appendix VI

    Comments from the American Stock Exchange

    Appendix VI
    Comments from the American Stock
    Exchange

    Appendix VI
    Comments from the American Stock
    Exchange

    Appendix VII

    Comments from the Nasdaq Stock Market, Inc.

    Appendix VII
    Comments from the Nasdaq Stock Market,
    Inc.

    Appendix VII
    Comments from the Nasdaq Stock Market,
    Inc.

    Appendix VII
    Comments from the Nasdaq Stock Market,
    Inc.

    Appendix VII
    Comments from the Nasdaq Stock Market,
    Inc.

    Appendix VIII

    Comments from the New York Stock Exchange

    Appendix VIII
    Comments from the New York Stock
    Exchange

    Appendix VIII
    Comments from the New York Stock
    Exchange

    Appendix VIII
    Comments from the New York Stock
    Exchange

    Appendix VIII
    Comments from the New York Stock
    Exchange

    Appendix VIII
    Comments from the New York Stock
    Exchange

    Appendix IX

                         GAO Contacts and Staff Acknowledgments

    GAO Contacts	Richard Hillman, (202) 512-8678 Cecile Trop, (312) 220-7600

    Staff 	In addition to those named above, Rachel DeMarcus, Stefanie
    Jonkman, Marc Molino, Josephine Perez, Carl Ramirez, Barbara Roesmann, and
    Cory

    Acknowledgments Roman made key contributions to this report.

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