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 [email protected].
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
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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,
[email protected], or Cecile Trop at (312) 220-7600, [email protected].
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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