Securities Regulation: Oversight of SRO's Listing Procedures Could Be
Improved (Letter Report, 02/06/98, GAO/GGD-98-45).

Pursuant to a congressional request, GAO reviewed the National
Association of Securities Dealers' (NASD) automated quotation (NASDAQ)
SmallCap Stock Market and the events surrounding the listing of
Comparator Systems Corporation stock.

GAO noted that: (1) the Securities Exchange Commission (SEC) has taken
actions to meet its oversight responsibilities with respect to the
NASDAQ Stock Market Listing Qualifications Department by approving two
NASDAQ requests for rule changes to tighten listing standards in 1991
and 1997 and by inspecting the Department's operations in 1979, 1983,
1986, and 1997; (2) it did not follow up on its 1986 recommendations to
improve Listing Department operations until 1997, 11 years later; (3)
when it did follow up in 1997, SEC reported that some of the same
deficiencies it had found in 1986 still existed, and it found additional
deficiencies as well; (4) NASDAQ disagreed and stated that it had
responded to SEC's 1986 inspection report and that for 11 years it
believed it had addressed the issues SEC raised; (5) before the Office
of Compliance Inspections and Examinations (OCIE) established new
procedures, SEC used subsequent and follow-up inspections as its primary
method for ensuring that its recommendations were implemented; (6) this
did not provide systematic recommendation followup when constraints such
as limited resources or changing priorities caused long periods of time
between inspections, as occurred for the NASDAQ Listing Department; (7)
OCIE has instituted a number of procedures to provide more systematic
recommendation followup, but these procedures do not involve SEC's
Commissioners, who have the authority to require self-regulatory
organizations to comply with OCIE's recommendations; (8) the Listing
Department followed its listing and maintenance requirements for
Comparator and had never granted the company any exceptions to those
requirements; (9) SEC criticized NASDAQ's handling of Comparator because
the Department had failed to investigate assets that appeared
questionable on the company's financial statements; (10) SEC
subsequently proved that Comparator officials had inflated those assets
to continue the company's NASDAQ listing and facilitate the sale of its
stock; (11) SEC made several recommendations to improve NASDAQ's Listing
Department operations, which NASDAQ has begun to implement; (12) since
the May 1996 run-up in trading of Comparator, NASDAQ has improved its
Listing Department operations in response to its own inquiry as well as
SEC's; and (13) NASDAQ monitors individual company requests for
exceptions to its listing and maintenance requirements through reviews
and approvals by the NASDAQ and NASD boards of directors and through
information by Listing Department staff.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-98-45
     TITLE:  Securities Regulation: Oversight of SRO's Listing 
             Procedures Could Be Improved
      DATE:  02/06/98
   SUBJECT:  Securities fraud
             Stocks (securities)
             Securities regulation
             Stock exchanges
             Self-regulatory organizations
             Brokerage industry
IDENTIFIER:  National Association of Securities Dealers Automated 
             Quotation System
             
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Cover
================================================================ COVER


Report to the Ranking Minority Member, Committee on Commerce, House
of Representatives

February 1998

SECURITIES REGULATION - OVERSIGHT
OF SRO'S LISTING PROCEDURES COULD
BE IMPROVED

GAO/GGD-98-45

SmallCap Stock Market

(233515)


Abbreviations
=============================================================== ABBREV

  NASD - National Association of Securities Dealers
  NASDAQ - National Association of Securities Dealers Automated
     Quotation
  NASDR - NASD Regulation, Inc. 
  NLHRC - Nasdaq Listing and Hearing Review Committee
  NLQP - Nasdaq Listing Qualifications Panel
  NYSE - New York Stock Exchange
  OCIE - Office of Compliance Inspections and Examinations
  OTC - over the counter
  SEC - Securities and Exchange Commission
  SRO - self-regulatory organization

Letter
=============================================================== LETTER


B-277217

February 6, 1998

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

Dear Mr.  Dingell: 

This report responds to your request concerning the National
Association of Securities Dealers' (NASD) Nasdaq SmallCap Stock
Market and the events surrounding the listing of Comparator Systems
Corporation stock.  Comparator, whose stock was listed on the
SmallCap Stock Market from February 1990 to June 1996, typically
traded at prices between 3 and 6 cents per share.  However, between
May 3 and May 8, 1996, the price of a share of Comparator stock
reached a high of nearly $2, and the number of shares traded set
Nasdaq records.  Subsequently, the price plummeted to 56 cents a
share.  Because of this unusual price volatility and recordbreaking
trading volumes, NASD halted trading in Comparator stock before the
market opened on May 9, 1996.  NASD began an investigation that
raised immediate concerns about the validity of the company's
financial statements, including the value of Comparator's assets.  On
May 14, the Securities and Exchange Commission (SEC) also suspended
trading in Comparator stock. 

On May 31, 1996, SEC brought charges of securities law violations
against Comparator and three of its officers, alleging they
fraudulently obtained at least $2.9 million from buyers of Comparator
stock.  SEC alleged that the purpose of the Comparator officers'
actions was to retain the stock's listing on the SmallCap Stock
Market to make it easier to sell stock to the public.  On that same
day, the United States District Court for the Central District of
California issued temporary restraining orders and other emergency
relief for all defendants.  NASD's investigation resulted in
Comparator's delisting on June 12, 1996. 

In September 1996, by mutual agreement of the parties, the court
entered a final judgment against Comparator and two of its former
officers and permanently barred these two individuals from serving as
officers and directors of a public company.  As of December 1997, the
monetary penalties to be paid by these two officers had not been
resolved, and SEC was still pursuing a third former officer of
Comparator who now resides in Malaysia. 

Comparator's trading and price run-up in May attracted public
attention to the SmallCap Stock Market.  Subsequent revelations that
Comparator's assets had no value raised serious questions about how
the company was able to meet the SmallCap Market's listing
requirements. 

We agreed with your staff that the key questions this report would
address were as follows: 

  -- What has SEC done to meet its oversight responsibilities
     regarding the Nasdaq SmallCap Market's listing requirements? 

  -- Did Nasdaq follow its listing and maintenance requirements with
     respect to Comparator Systems Corporation? 

  -- What actions has Nasdaq taken to improve its operations since
     the May 1996 run-up in trading of Comparator Systems Corporation
     stock? 

  -- How does Nasdaq monitor the effectiveness of its policies on
     granting exceptions to its listing and maintenance requirements? 


   BACKGROUND
------------------------------------------------------------ Letter :1

National securities exchanges and registered securities associations,
along with registered clearing agencies and the Municipal Securities
Rulemaking Board, are collectively termed self-regulatory
organizations (SROs) under Section 3(a)(26) of the Securities
Exchange Act of 1934 (Exchange Act).  NASD is the SRO of the
securities industry responsible for regulating the over-the-counter
(OTC) securities market and the products traded in it.  NASD's
responsibilities are contained in Section 15A of the Exchange Act,
and it operates subject to SEC oversight.  NASD has responsibility
for ensuring that its members comply with federal securities laws and
NASD rules.  It is the largest SRO in the United States, with a
membership that includes virtually every broker/dealer in the nation
that does a securities business with the public. 

Through its subsidiaries, NASD Regulation, Inc.  (NASDR)\1 and the
Nasdaq Stock Market, Inc.  (Nasdaq), NASD develops rules and
regulations, conducts regulatory reviews of members' business
activities, and designs and operates marketplace services and
facilities.  NASD helps to establish and coordinate the policy
agendas of its two subsidiaries and oversees their effectiveness.  It
has delegated to Nasdaq the obligation to develop, operate, and
maintain systems, services, and products for the securities markets
that NASD operates.  It has also delegated to Nasdaq responsibility
for formulating regulatory policies and listing criteria applicable
to the markets it operates. 

The Nasdaq Stock Market began operation in 1971 as the first
electronic, screen-based stock market for nonexchange listed
securities.\2 Nasdaq enables securities firms to execute transactions
for investors and for themselves in an environment of real-time trade
reporting and automated market surveillance.  As of December 1997,
more than 6,200 securities were traded on Nasdaq, representing
approximately 5,500 companies.\3 In addition to its screen-based
operations, Nasdaq is distinguished from stock exchanges by its use
of multiple market makers-- independent dealers who openly compete
with one another for investors' orders in each Nasdaq security. 
Nasdaq has two tiers:  the Nasdaq National Market, where
approximately 4,200 of Nasdaq's larger companies are listed and
traded; and the Nasdaq SmallCap Market, where approximately 1,300
smaller, emerging growth companies are traded. 


--------------------
\1 NASDR began operations in 1996 as a separate, independent
subsidiary of NASD.  NASD created NASDR as part of a restructuring of
NASD to separate the regulation of broker/dealers from the operation
of Nasdaq.  NASDR's mission is to regulate securities markets for the
benefit and protection of the investor.  It oversees the activities
of more than 5,400 securities firms, more than 58,000 branch offices,
and in excess of 505,000 registered securities professionals.  It
also regulates the markets operated by Nasdaq. 

\2 NASD is an association of securities dealers, and its markets are
dealers' markets--not organized exchanges.  Therefore, stocks traded
on Nasdaq are referred to as nonexchange listed. 

\3 The Nasdaq system consists of more than 6,000 workstations
throughout the United States connected to servers that link to a
central processing complex in Trumbull, CT.  A complete back-up
facility is located in Rockville, MD. 


      NASDAQ ESTABLISHES
      QUALIFICATIONS REQUIREMENTS
---------------------------------------------------------- Letter :1.1

Before a company's stock can be traded on the Nasdaq Stock Market,
the company must be admitted to Nasdaq.  Upon request, the company
receives written notice of the applicable Nasdaq qualifications
requirements.  The company must then submit a listing application
(together with supporting financial statements) in which it states
that it (1) will abide by all applicable marketplace rules, (2)
currently meets the applicable requirements for inclusion of its
stock in Nasdaq, (3) will file with NASD copies of all reports or
other information filed with SEC or other regulatory authorities, and
(4) will pay the fees associated with inclusion in Nasdaq.  As part
of the new listing requirements, all companies listing on the Nasdaq
Stock Market are required to sign and complete a listing agreement in
addition to the listing application. 

Nasdaq has authority over the initial and continued inclusion of
securities in its markets in order to maintain the quality of and
public confidence in its markets.  Nasdaq may deny initial inclusion
or delist securities even though the securities meet all criteria for
initial or continued inclusion.  SROs have broad latitude in making
judgments about whether dealings in a company's securities are
inappropriate.  Also, SEC has stated that: 

     ".  .  .  the NASD's role in Nasdaq is the same as that of the
     organized exchanges with respect to the lists of securities
     traded on them.  .  .  .  primary emphasis must be placed on the
     interests of prospective future investors.  The latter group is
     entitled to assume that the securities in the system meet the
     system's standards.  Hence, the presence in Nasdaq of
     non-complying securities could have a serious deceptive
     effect."\4


--------------------
\4 In the Matter of Tassaway, Inc., Securities Exchange Act Release
No.  11291, March 13, 1975. 


      SEC'S STATUTORY OVERSIGHT
      RESPONSIBILITIES
---------------------------------------------------------- Letter :1.2

SEC's statutory oversight responsibilities regarding Nasdaq's listing
requirements include its authority to (1) review and approve or deny
SRO-proposed rule changes, (2) inspect SROs, and (3) review listing
decisions either on appeal or by its own initiative.  SRO rules and
proposed rule changes may cover such activities as organization and
administration, financial products traded, business conduct, and
discipline.  SRO rules also include listing requirements for traded
companies.  Nasdaq's listing requirements are embodied in its
marketplace rules.\5 SEC reviews SRO-proposed rules to ensure that
they are consistent with the requirements of the Exchange Act and
subsequent regulations.\6 If SEC cannot make such a finding, it must
disapprove the proposed rule change.  On February 28, 1997, NASD
filed a proposed rule change with SEC to make listing requirements
for issuers listed on Nasdaq more stringent.\7 SEC approved the rule
change on August 22, 1997. 

In addition to its authority to approve SRO-proposed rules, the
Exchange Act authorizes the Commission to conduct "reasonable
periodic, special, or other examinations" of "[a]ll records"
maintained by SROs.\8 These examinations, or inspections, may be
conducted "at any time, or from time to time," as the Commission
"deems necessary and appropriate in the public interest, for the
protection of investors, or otherwise in furtherance of the purposes
of this title." The SEC office responsible for conducting these
inspections is the Office of Compliance Inspections and Examinations
(OCIE).  The Commission created OCIE in 1995 to streamline and
improve the inspection process.  Previously, the responsibility for
inspections was divided between the Divisions of Market Regulation
and Investment Management.  OCIE's stated mission is to protect
investors, foster compliance with the securities laws, and deter
violative conduct through effective inspections of regulated
entities. 

Among the types of inspections OCIE conducts are routine oversight
inspections of programs administered by securities industry SROs to
monitor the effectiveness with which these organizations fulfill
their statutory responsibilities under the federal securities laws.\9
These inspections test SROs' compliance with their regulatory and
other duties, and they are to be routinely conducted on a cyclical
basis.  OCIE does not inspect an entire SRO, focusing instead on
particular program areas.  OCIE has inspected several programs in
each SRO annually.  Its inspection goals are based on such criteria
as an established inspection cycle, length of time since last visit,
known problems, or recent program developments.\10 Inspection reports
are to be reviewed internally by senior management within OCIE as
well as by the Commissioners, where appropriate. 


--------------------
\5 National Association of Securities Dealers, Inc., Manual,
Marketplace Rules, Rule 4300 - Qualification Requirements for Nasdaq
Stock Market Securities; and Rule 4400 Nasdaq National Market -
Issuer Designation Requirements, July 1996. 

\6 Section 19(b) of the Exchange Act gives SEC broad statutory
authority to review and approve or deny any SRO-proposed rule
changes. 

\7 Form 19b-4 Proposed Rule Change by National Association of
Securities Dealers, Inc., File No.  SR-NASD-97-16. 

\8 Section 17(b) of the Exchange Act, 15 U.S.C.  78q(b). 

\9 OCIE also may conduct special or "cause" inspections when it
believes something may be wrong at an SRO. 

\10 A description of OCIE's inspection program accomplishments is
included each year in SEC's annual report, as required by Section 23
of the Exchange Act. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

SEC has taken actions to meet its oversight responsibilities with
respect to the Nasdaq Stock Market Listing Qualifications Department
(Listing Department) by approving two Nasdaq requests for rule
changes to tighten listing standards in 1991 and 1997 and by
inspecting the Department's operations in 1979, 1983, 1986, and 1997. 
However, it did not follow up on its 1986 recommendations to improve
Listing Department operations until 1997, 11 years later.  Such
follow-up actions are essential to ensure that operating deficiencies
are corrected properly and in a timely manner.  When it did follow up
in 1997, SEC reported that some of the same deficiencies it had found
in 1986 still existed, and it found additional deficiencies as well. 
Nasdaq disagreed and stated that it had responded to SEC's 1986
inspection report and that for 11 years it believed it had addressed
the issues SEC raised. 

Before OCIE established new procedures, SEC used subsequent and
follow-up inspections as its primary method for ensuring that its
recommendations were implemented.  However, this did not provide
systematic recommendation follow-up when constraints such as limited
resources or changing priorities caused long periods of time between
inspections, as occurred for the Nasdaq Listing Department.  OCIE has
instituted a number of procedures to provide more systematic
recommendation follow-up, but these procedures do not involve SEC's
Commissioners, who have the authority to require SROs to comply with
OCIE's recommendations. 

The Listing Department followed its listing and maintenance
requirements for Comparator and had never granted the company any
exceptions to those requirements.  However, SEC criticized Nasdaq's
handling of Comparator because the Department had failed to
investigate assets that appeared questionable on the company's
financial statements.  SEC subsequently proved that Comparator
officials had inflated those assets to continue the company's Nasdaq
listing and facilitate the sale of its stock.  SEC made several
recommendations to improve Nasdaq's Listing Department operations,
which Nasdaq has begun to implement. 

Since the May 1996 run-up in trading of Comparator, Nasdaq has
improved its Listing Department operations in response to its own
inquiry as well as SEC's.  These improvements included staffing
increases to allow the Department to focus greater attention on each
listed company, formation of a special investigative unit to focus on
listed companies with high-risk attributes, development of an
automated risk-scoring system to identify companies with profiles
that suggest the need for additional scrutiny, and more stringent
listing and maintenance requirements to strengthen the financial
stability of listed companies.  SEC acknowledged that many of the
changes Nasdaq has made meet the intent of SEC's recommended Listing
Department improvements.  However, not all of the changes have been
completely implemented, and others have not been in place long enough
to adequately assess their effectiveness. 

Nasdaq monitors individual company requests for exceptions to its
listing and maintenance requirements through reviews and approvals by
the Nasdaq and NASD boards of directors and through information
collected by Listing Department staff.  Nasdaq officials told us that
this process provides sufficient monitoring of Nasdaq's
exceptions-granting policies.  However, Nasdaq does not routinely
aggregate and analyze overall statistics to measure Listing
Department results, such as the number of exceptions granted or
denied over time or the outcomes (came back into compliance or
delisted) of companies granted exceptions.  As a consequence, Nasdaq
cannot readily identify performance gaps or align its activities,
core processes, and resources.  Leading organizations have shown that
such approaches to measuring results can become a driving force in
improving the efficiency and effectiveness of program operations. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :3

This review focuses on Nasdaq's Listing Department and SEC's Office
of Compliance Inspections and Examinations, the office responsible
for oversight of SROs.  To determine how SEC met its oversight
responsibilities regarding SRO listing programs, we reviewed SEC
inspection reports, inspection workpapers, annual reports, and other
SEC internal documents.  We also interviewed SEC officials.  To
determine whether Nasdaq followed its listing and maintenance
requirements with regard to Comparator, we reviewed NASD and Nasdaq
manuals; Nasdaq, NASDR, and SEC documents and court papers; and SEC
filings.  We also interviewed Nasdaq and SEC officials.  To identify
the actions Nasdaq has taken since May 1996, we reviewed Nasdaq
documents and SEC filings.  To determine how Nasdaq monitors
exceptions to its listing and maintenance requirements, we
interviewed Nasdaq officials and reviewed NASD and Nasdaq manuals. 

We obtained written comments on a draft of this report from SEC (see
app.  I) and Nasdaq (see app.  II), and their comments are discussed
at the end of this letter.  We did our work in Washington, D.C.,
between February and September 1997 in accordance with generally
accepted government auditing standards. 


   SEC TOOK OVERSIGHT ACTIONS
   RELATED TO NASDAQ'S LISTING
   DEPARTMENT
------------------------------------------------------------ Letter :4

SEC oversight actions related to Nasdaq's Listing Department included
approving two rule changes NASD proposed to make its Smallcap listing
requirements more restrictive.  In 1997, SEC also inspected Nasdaq's
Listing Department for the first time since 1986. 


      SEC APPROVED TWO NASDAQ RULE
      CHANGES
---------------------------------------------------------- Letter :4.1

In 1991, and again in 1997, NASD proposed, and SEC approved, rule
changes that made listing and maintenance requirements more
restrictive for the SmallCap Market.  For example, the 1991 change
doubled from $2 million to $4 million the assets NASD required of
companies applying for listing.  The 1997 change tightened this asset
requirement from total assets of $4 million to net tangible assets of
$4 million.  Net tangible assets are total assets minus total
liabilities and goodwill.  The 1997 rule change retained the $1
minimum bid price for common and preferred stock for continued
listing.  However, the 1997 rule change removes an alternative
available under the 1991 rule allowing a company to maintain its
listing when its bid price falls below $1, as long as its capital and
surplus exceed $2 million and the market value of its public float
exceeds $1 million.\11 NASD's rationale for this requirement was that
it provided a safeguard against certain market activity associated
with low-priced securities.\12 Nasdaq officials said the new
quantitative listing and maintenance requirements would further
protect investors and enhance the quality and credibility of the
Nasdaq Smallcap Market. 

In addition to the quantitative requirements, NASD's 1997 rule change
also included a peer review requirement for independent auditors of
Nasdaq SmallCap listed companies.  To meet this requirement, these
companies must be audited by an independent auditor that has received
or is enrolled in a peer review program that meets acceptable
guidelines and is subject to oversight by an independent body.  To
qualify, such a peer review program must provide that an accounting
firm's quality control system is to be externally peer reviewed every
3 years.  Nasdaq officials believe that this requirement will improve
the quality and stability of Nasdaq companies. 

When the 1997 rule change was adopted, Nasdaq officials estimated
that about 30 percent of companies listed on the SmallCap Market
would no longer be eligible for continued listing.  Companies
currently listed have 6 months to meet the new maintenance
requirements (until February 22, 1998).  The 6-month period is
intended to give currently listed companies adequate time to complete
appropriate corporate action to achieve full compliance.  Tables 1
and 2 summarize and compare Nasdaq's quantitative SmallCap listing
and maintenance requirements. 



                                     Table 1
                     
                        Comparison of Quantitative Listing
                       Requirements for the Nasdaq SmallCap
                                      Market

                                   SmallCap market listing requirements
                          ------------------------------------------------------
                               Current     1991-1997     1982-1991      Pre-1982
------------------------  ------------  ------------  ------------  ------------
Net tangible assets\a                            N/A           N/A           N/A
 Market capitalization    $4,000,000\b
 Net income (2 of last 3   $50,000,000
 years)                       $750,000
Total assets                       N/A    $4,000,000    $2,000,000    $1,000,000
Total equity                       N/A    $2,000,000           N/A           N/A
Capital/surplus                    N/A           N/A    $1,000,000      $500,000
Public float (shares)        1,000,000       100,000       100,000       100,000
Market value of public      $5,000,000    $1,000,000           N/A           N/A
 float
Minimum bid price                $4.00         $3.00           N/A           N/A
Market makers                        3             2             2             2
Shareholders                       300           300           300           300
Operating history               1\c or           N/A           N/A           N/A
 (years)                   $50,000,000
 Market capitalization
--------------------------------------------------------------------------------
\a Net tangible assets equals total assets less total liabilities and
goodwill. 

\b Current requirements are $4 million in net tangible assets or
$750,000 in net income in 2 of the last 3 years, or market
capitalization of at least $50 million. 

\c Market capitalization must be at least $50 million if operating
history is less than 1 year. 

Source:  NASD, Nasdaq. 



                                     Table 2
                     
                      Comparison of Quantitative Maintenance
                       Requirements for the Nasdaq SmallCap
                                      Market

                                 SmallCap market maintenance requirements
                          ------------------------------------------------------
                               Current     1991-1997     1982-1991      Pre-1982
------------------------  ------------  ------------  ------------  ------------
Net tangible assets\a                            N/A           N/A           N/A
 Market capitalization    $2,000,000\b
 Net income (2 of last 3   $35,000,000
 years)                       $500,000
Total assets                       N/A    $2,000,000      $750,000      $500,000
Total equity                       N/A    $1,000,000           N/A           N/A
Capital/surplus                    N/A           N/A      $375,000      $250,000
Public float (shares)          500,000       100,000     100,000 1        00,000
Market value of public      $1,000,000      $200,000           N/A           N/A
 float
Bid price                        $1.00       $1.00\c           N/A           N/A
Market makers                        2             2             1             1
Shareholders                       300           300           300           300
Operating history                  N/A           N/A           N/A           N/A
 (years)
 Market capitalization
--------------------------------------------------------------------------------
\a Net tangible assets equals total assets less total liabilities and
goodwill. 

\b Current requirements require net tangible assets of $2 million or
net income of $500,000 in 2 of the last 3 years or market
capitalization of at least $35 million. 

\c If a company's bid price falls below $1, but its capital and
surplus exceed $2,000,000 and the market value of its public float
exceeds $1,000,000, the company can maintain its listing. 

Source:  NASD, Nasdaq. 


--------------------
\11 Public float is the number of shares of a corporation that are
outstanding and available for trading by the public. 

\12 See Penny Stocks:  Regulatory Actions to Reduce Potential for
Fraud and Abuse (GAO/GGD-93-59, Feb.  1993). 


      SEC'S LACK OF FOLLOW-UP
      ALLOWED INSPECTION
      DEFICIENCIES TO CONTINUE
---------------------------------------------------------- Letter :4.2

When SEC identifies deficiencies in the operations of SROs,
improvements in these operations can occur only if the deficiencies
are effectively resolved.  Without ongoing, systematic follow-up, SEC
cannot ensure that its recommendations to correct these deficiencies
are implemented properly in a timely manner.  Before OCIE established
new procedures, SEC depended primarily on subsequent inspections to
follow up on its inspection recommendations. 

SEC provided us with information on the listing department
inspections it had performed since 1986, and this information is
presented in table 3. 



                                Table 3
                
                SRO Listing Department Inspections From
                        1986 Through August 1997

                                            Most recent          Prior
Self-regulatory organization                 inspection    inspections
----------------------------------------  -------------  -------------
American Stock Exchange                            1997    1995, 1993,
                                                                  1992
Boston Stock Exchange                              1997           1992
Chicago Stock Exchange                             1997    1995, 1991,
                                                                  1986
Nasdaq                                             1997           1986
New York Stock Exchange                          1997\a         None\b
Pacific Stock Exchange                             1997           1991
Philadelphia Stock Exchange                        1997           1991
----------------------------------------------------------------------
\a Inspection started in August 1997. 

\b SEC officials told us they had never inspected the New York Stock
Exchange (NYSE) Listing Department because they consider NYSE listed
companies among the largest, most financially stable in the world,
and these companies are audited by the largest independent accounting
firms.  They also told us SEC conducted 37 inspections of 16 programs
at NYSE from 1986 through 1997. 

Source:  Compiled from information provided by SEC. 

In its 1983 and 1986 inspections of Nasdaq's Listing Department, SEC
had followed up on recommendations it had made in prior inspections,
finding that deficiencies had been corrected.  The 1983 report refers
to an inspection conducted in 1979 and concludes that Nasdaq complied
with recommendations made in the 1979 report.  Similarly, the 1986
report refers to the 1983 inspection and concludes that Nasdaq
complied with recommendations made in the 1983 report. 

By contrast, the 1997 report refers to the 1986 report and concludes
that Nasdaq ignored the recommendations SEC made 11 years earlier. 
SEC stated that failure by Nasdaq to enforce its listing and
maintenance standards could have the effect of misleading investors
who are entitled to assume that Nasdaq-listed securities meet its
published requirements.  However, in 1986, Nasdaq's written response
to SEC's inspection report disagreed with SEC's findings.  Nasdaq
cited alternative means to address one recommendation it declined to
implement and stated that its practices regarding issuers making
delinquent filings met the intent of SEC's second recommendation. 
Because SEC had not followed up on its 1986 recommendations until
1997, this disagreement continued for 11 years, and Nasdaq believed
it had addressed the issues SEC raised.  Disagreements like this
could be avoided if recommendations were followed up systematically
and not dependent solely on subsequent inspections. 

OCIE officials told us that the reason the Nasdaq Listing Department
had not been inspected since 1986 was because SEC must inspect a wide
range of exchange programs with limited resources, and SEC had no
inspection cycle for listing departments until 1996.\13 OCIE
officials told us that they began to reevaluate the cycles and
coverage of SEC's inspection program when OCIE was created in 1995. 
They said they made a number of changes to the program, including
establishing inspection cycles for listing departments.  As
additional resources became available, OCIE shortened its inspection
cycles.  In November 1996, the OCIE Director placed regional SRO
listing departments on a regular 3-year cycle of inspections; and the
American Stock Exchange, Nasdaq, and the New York Stock Exchange were
to be inspected, at least in part, on a 2-year cycle.  OCIE inspected
equity listing programs at all the exchanges in 1997.  An SEC
document states that the length of time since the last visit and
known problems are criteria to be considered when OCIE sets its
inspection goals. 

OCIE officials also told us they have instituted a number of
procedures in addition to subsequent inspections to ensure that SEC's
recommendations are addressed.  First, the recommendations are to be
included in a report sent to the SRO, and the SRO is requested to
respond in writing to the recommendations within 60 days, outlining
remedial actions it intends to take.  SEC is to ask the SRO to
provide a specific timetable for the actions, and the SRO must send
SEC written confirmation at the completion of each action.  Second,
in cases where the findings and recommendations are more significant,
the SRO may be required to report the findings and intended remedial
actions to its board of directors.  Senior officials of the SRO may
be required to meet with OCIE to discuss the report; and in the most
egregious cases, OCIE may refer the matter to SEC's Enforcement
Division.  Third, OCIE is to analyze the written SRO responses to
ensure that (1) each recommendation has been adequately addressed,
(2) the results have been reported to senior management, and (3) any
outstanding issues are being monitored.  When OCIE makes a large
number of recommendations, it is to prepare spreadsheets to monitor
the progress of remedial actions.  Fourth, OCIE may conduct a
follow-up inspection that focuses on the remedial actions taken to
ensure that the SRO has properly implemented OCIE's recommendations. 
OCIE staff also are to review the remedial actions in its next
cyclical inspection of the program.  OCIE officials told us that
these procedures are intended to ensure that problems found during an
inspection do not persist and that immediate remedial action is
properly implemented. 

These new OCIE procedures should significantly improve recommendation
follow-up.  However, these procedures do not involve Commissioners,
the agency's highest authorities.  Involving the Commissioners in
following up on recommendations would provide them information on the
status of corrective actions deemed significant by SEC staff and
would provide an additional incentive for SROs to comply.  One way to
accomplish this would be for SEC staff to periodically report all
open, significant recommendations to the Commission.  Involving the
Commission would be analogous to OCIE's policy of involving an SRO's
board of directors when OCIE deems its findings significant enough to
merit board involvement.  As SEC staff determine that SROs comply
with recommendations, those recommendations could be closed. 


--------------------
\13 Although SEC did not inspect the Listing Department during the
11- year period, SEC inspected other NASD programs.  OCIE officials
told us that SEC conducted 24 inspections of 16 programs at NASD and
NASDR from 1986 through 1997. 


   NASDAQ FOLLOWED ITS LISTING
   REQUIREMENTS FOR COMPARATOR,
   BUT SEC FOUND THE CONTINUED
   LISTING INAPPROPRIATE
------------------------------------------------------------ Letter :5

Although Comparator occasionally had problems complying with Nasdaq's
listing and maintenance requirements, Nasdaq never granted Comparator
any exceptions.  However, SEC found that Comparator's continued
listing was inappropriate because, among other deficiencies, Nasdaq
failed to investigate the value of Comparator's assets. 


      COMPARATOR'S COMPLIANCE WITH
      LISTING AND MAINTENANCE
      REQUIREMENTS
---------------------------------------------------------- Letter :5.1

Nasdaq records show that Comparator had never received an exception,
either to listing or maintenance requirements.  Nasdaq officials
provided us copies of excerpts from Comparator's SEC filings for the
period from June 1989 through March 1996, along with selected trading
and market information for the same time period.  This information
showed that Comparator complied with all initial listing requirements
and, except as discussed below, also complied with all maintenance
requirements. 

Comparator was most recently listed on the Nasdaq SmallCap Market
from February 28, 1990, through June 12, 1996.\14 Nasdaq cited the
company for late filings in 1991 and again in 1992.  In both
instances Comparator corrected the deficiencies before the conclusion
of compliance procedures initiated by Nasdaq staff and received no
exceptions at any time. 

Although Comparator's bid price was typically less than $1,
Comparator complied with Nasdaq's $1 minimum bid price requirement by
meeting the capital and surplus alternative and under that option
maintained its listing.\15 However, in 1993 Comparator failed to meet
the alternative $2 million capital and surplus requirement.  The
company corrected this deficiency in its next public filing.  In
1995, Comparator was not current in its annual listing fees but
corrected this deficiency when notified by Nasdaq staff.  In May
1996, Nasdaq staff notified the company it was not current in its
filings.  Nasdaq staff asked Comparator for updated filings and
payment of fees.  Nasdaq officials informed us that at all other
times Comparator's public filings demonstrated compliance with Nasdaq
maintenance requirements, and the company received no exceptions at
any time. 


--------------------
\14 Comparator had been listed on the Nasdaq Stock Market from June
1979 through July 1984.  During this 5-year period, Comparator was
cited for late filings three times and was also cited for capital and
surplus or asset deficiencies four times.  In each instance the
company corrected these deficiencies before the conclusion of
compliance procedures initiated by Nasdaq staff and received no
exceptions.  Comparator was delisted in 1984 for failing to maintain
the required number of active market makers. 

\15 Nasdaq's maintenance requirements from 1991 to 1997 permitted an
alternative way to meet the $1 minimum bid requirement.  If a
company's bid price was below $1, but its capital and surplus were in
excess of $2 million and $1 million in market value of public float,
the company was allowed to maintain its listing.  Effective February
22, 1998, with the implementation of Nasdaq's new listing
requirements, Nasdaq Marketplace Rule 4310(c)(4) requires that common
and preferred stock have a minimum bid price of $1 per share for
continued inclusion.  Companies can no longer remain listed by
satisfying alternative criteria. 


      SEC CRITICIZED NASDAQ'S
      HANDLING OF COMPARATOR
---------------------------------------------------------- Letter :5.2

After its 1997 inspection of Nasdaq's Listing Department, SEC
criticized Nasdaq's handling of Comparator.  SEC staff said Nasdaq's
Listing Department should have looked more closely at Comparator's
balance sheet, particularly its assets.  SEC staff noted that in
Comparator's 1994 annual report, more than 50 percent of its assets
consisted of patents and licenses related to obscure technologies. 
This made it relatively easy for Comparator to inflate their values. 
Because Nasdaq failed to verify the value of Comparator's assets, SEC
claimed that Comparator continued to be listed inappropriately.  SEC
recommended that when asset valuation is an issue, Nasdaq staff
should obtain additional information that would allow a Nasdaq
analyst to verify, to the extent reasonably necessary, the validity
and value of the asset. 

SEC reported that Comparator had numerous problems that should have
been tracked on a watch list system.  In addition to the questionable
assets just mentioned, SEC concluded that Comparator's termination of
its corporate secretary for improper issuance of stock and stealing
from the company, in addition to the 27 unsatisfied final judgments
against it, should have foreshadowed the noncompliance that
ultimately led to Comparator's removal from the SmallCap Market on
June 12, 1996.  SEC recommended that Nasdaq institute a watch list
tracking system to identify and monitor companies experiencing
difficulties that might be an indicator of future noncompliance. 

SEC stated that Comparator had issued press releases announcing (1)
the acquisition of a company engaged in real estate development in
China, (2) its entry into a contract to produce the world's first
biometrically protected national identification card, and (3) the
introduction of its new identification verification system.  SEC
found that none of the claims made in these press releases were true. 
SEC recommended that Nasdaq require analysts to review Nasdaq
companies' press releases. 

SEC noted that on Comparator's 1993, 1994, and 1995 financial
statements, the independent auditor's opinions expressed doubts about
whether Comparator could continue as a "going concern."\16 SEC noted
no indication of concern by Nasdaq.  SEC recommended that Nasdaq
revise its procedures to require that companies receiving a
going-concern opinion on their financial statements be required to
file a business plan with Nasdaq demonstrating the company's ability
to continue to operate in compliance with Nasdaq's maintenance
requirements.\17


--------------------
\16 If an auditor concludes that there is substantial doubt about a
company's ability to continue operations as a going concern, the
audit report should reflect that conclusion.  American Institute of
Certified Public Accountants, Statement on Auditing Standards 59. 

\17 SEC staff also recommended that Nasdaq analysts reviewing
troubled companies for continued listing be required to prepare
calculations estimating the company's ability, based on current
expenses and income, to remain in compliance with Nasdaq's
maintenance requirements.  SEC staff noted that Comparator, as a
company with negative earnings trends, would have qualified for such
a review. 


      SEC ALSO GENERALLY
      CRITICIZED NASDAQ'S LISTING
      DEPARTMENT
---------------------------------------------------------- Letter :5.3

SEC's primary criticism was that Nasdaq did not adequately review
companies for initial and continued listing.  SEC reported that this
condition existed mainly because Nasdaq failed to devote sufficient
resources to the Listings Department. 

SEC also noted other deficiencies in Nasdaq's Listing Department.  In
one case, SEC noted that Nasdaq failed to follow up on or refer for
further investigation possible securities law violations it
discovered in its review process, and SEC recommended that this be
corrected.  SEC expressed its concern that investors did not fully
appreciate the difference between the National Market and the
SmallCap Market.  It recommended that Nasdaq highlight the
differences between companies trading in these two markets and the
attendant risks of investing in either market.  SEC criticized the
organizational structure of the Listing Department, noting that the
senior official in charge of the Department also had marketing
responsibilities.  SEC observed that Nasdaq had generally failed to
enforce filing deadlines and recommended that such deadlines be
enforced.  SEC also observed that Nasdaq had difficulty producing
files in a timely manner and recommended that Nasdaq review and
revise its filing system. 

Finally, SEC noted that Nasdaq's Review Committee is dominated by
members of the securities industry, and about 70 percent of its pool
of hearing panel members are employed by market makers.  SEC
recommended that the Review Committee contain a strong representation
of nonindustry representatives. 

SEC recognized that Nasdaq has taken significant steps to address
several of its recommendations to improve the Listing Department and
the SmallCap Market.  SEC believes that these developments reflect a
commitment by Nasdaq towards improving the SmallCap Market. 


   NASDAQ HAS TAKEN ACTIONS TO
   IMPROVE ITS LISTING DEPARTMENT
------------------------------------------------------------ Letter :6

Nasdaq officials disagreed with some of SEC's findings, but they
generally recognized the merits of SEC's recommendations and stated
their commitment to respond and continue to improve the quality of
the SmallCap Market.  They disagreed with SEC's findings that as a
general matter, Nasdaq staff reviews of company filings were cursory
or that Nasdaq had failed to satisfy its regulatory responsibilities
to preserve and strengthen the quality of, and public confidence in,
the SmallCap Market.  As previously discussed, Nasdaq officials also
disagreed that they had ignored recommendations SEC made in its 1986
inspection report.  Nasdaq officials noted that although the SmallCap
Market represented only about 3 percent of the Nasdaq Stock Market's
total market value, they devoted significant resources to that
market.  Nasdaq statistics indicate that in 1996 the Department
reviewed 374 applications for listing on the SmallCap Market and
denied 132 of them, about 35 percent.  During the same period the
Department identified 972 deficiencies in 640 SmallCap companies.  Of
the 640 companies receiving deficiency notices, 548, about 86
percent, achieved compliance. 

Nasdaq took several actions to address OCIE's criticism that Nasdaq
failed to verify Comparator's assets or track its problems on a watch
list.  These actions also responded to OCIE's general criticism of
inadequate review of filings due to insufficient resources.  To
complement its review procedures for listed companies, Nasdaq
increased the staffing of its Listing Department by 11 positions to
44.  In the SmallCap Market area, Nasdaq increased its review staff
by 80 percent, from five to nine.  Nasdaq's new requirement that
independent auditors of Nasdaq companies be subject to peer review is
intended to help ensure a firmer basis for the reliance Nasdaq places
upon audited financial statements, including asset valuation. 

To identify and track high-risk companies, Nasdaq has developed an
automated risk scoring system.  This system was designed to identify
companies with profiles that suggest the need for additional
scrutiny, including scrutiny of asset valuations.  These profiles are
to be based on quantitative, qualitative, and trading attributes. 
Nasdaq also created a new special investigative unit of five
experienced staff with financial and accounting expertise.  It
subsequently increased authorized staffing to a total of seven
positions.  This unit is intended to complement the listing
qualifications program and to allow Nasdaq to watch and track
high-risk issuers with more specialized focus.  Such issuers might
include those whose management, large shareholders, consultants, or
underwriters had a disciplinary history.  From its inception in
December 1996 through April 1997, the unit has delisted five SmallCap
issuers and investigated and closed two other matters. 

In response to OCIE's criticism that it failed to review Comparator's
press releases, Nasdaq stated that the review of Nasdaq companies'
press releases is the primary responsibility of Nasdaq's Market Watch
staff.  Nasdaq-listed companies are required to notify Market Watch
of the release of any significant information before its public
release.  Market Watch is to assess the information and, when
appropriate, may implement temporary trading halts.  Market Watch is
also to notify the Listing Department and NASDR when there appears to
be a pattern of misleading press releases.  Upon such notification by
Market Watch, the Listing Department is to evaluate the press release
and follow up on any concerns the Department may have with the
company.  Nasdaq stated that a separate review of all press releases
by its Listing Department is not warranted and would not be an
appropriate allocation of resources. 

In response to OCIE's criticism that Nasdaq was unconcerned about
Comparator's going concern audit opinions, Nasdaq stated it does not
believe that companies with going concern opinions should in each
instance be required to file a business plan in order to maintain
their listing.  Nasdaq stated that it took this position because
these plans focus on uncertain projections of future performance. 
Nasdaq agrees that a going concern opinion is a factor that the
Listing Department should always consider.  However, it believes that
other factors, such as the proceeds from the sale of stock, may
counterbalance the opinion.  In late 1996, Nasdaq added going concern
audit opinions as a separate data element in its database of
information about Nasdaq-listed companies.  When Nasdaq staff review
companies' filings, they are to note the presence of going concern
opinions, and those companies are to be watched and tracked more
closely. 

Nasdaq also took actions that responded to OCIE's general criticisms
of the Listing Department.  Nasdaq implemented the use of a worksheet
to be filled out when it reviews listed companies' SEC filings.  To
improve its referrals process, Nasdaq adopted a policy that referrals
to NASDR Enforcement, SEC, and other law enforcement agencies should
be in written form.  Nasdaq officials met with SEC staff to establish
the parameters of the referral program.  As of November 21, 1997,
Nasdaq staff had made three written referrals under the program. 

Regarding OCIE's recommendation that Nasdaq highlight the differences
between companies that trade in the National Market and companies
that trade in the SmallCap Market, Nasdaq agrees with SEC's general
policy that investors should be provided greater information about
the securities they are buying.  Nasdaq stated that it continues to
make substantial investments in its public Internet Web site
(Nasdaq.com), which includes a broad range of information for
individual investors, such as current company and market information. 
The NASDR Web site (NASDR.com) also provides investors with a basic
primer on how securities regulation works and how investors can avoid
problems before they occur.  The site also provides information on
steps investors can take if they run into difficulty.  In August
1996, NASD established the Office of Individual Investor Services to
enhance investor education and outreach efforts and to establish a
strong advocate for the individual investor within NASD.  This office
offers training on investment basics, provides guidance on working
with a broker, publishes an investor newsletter, makes presentations,
and provides information at investor forums. 

To separate the compliance responsibilities of the Listing Department
from its marketing responsibilities to obtain new listings, Nasdaq
restructured its reporting lines so that the head of the Listing
Department no longer reports to a Senior Vice President with direct
marketing responsibilities.  The Listing Department now reports to
the Executive Vice President for Issuer, Investor, and International
Services.  To enhance its filing delinquency program, Nasdaq now
provides its analysts with real-time access to periodic reports filed
electronically with SEC.  Nasdaq anticipates this access will
significantly reduce its delinquency discovery times and allow it to
monitor listed companies' filing status on a daily basis. 

To produce files in a timely manner when they are needed or
requested, Nasdaq converted its issuer files from paper copies to
electronic media for public filings and to an optical storage and
retrieval system for issuers' proprietary material.  To diversify the
makeup of its Listing and Hearing Review Council, Nasdaq has agreed
to change the makeup of the council.  In 1998, the council is to
comprise 11 members, with the majority being nonindustry
representatives. 

Nasdaq began designing and implementing these changes at different
times after May 1996.  Although SEC acknowledged that many of the
changes Nasdaq made met the intent of SEC's recommendations, not all
of the changes have been completely implemented, and others have not
been in effect long enough to adequately assess their effectiveness. 
Further, SEC noted that the changes in Nasdaq's listing and
maintenance requirements that it approved in August 1997 would not
affect the need for Nasdaq to implement SEC's recommendations. 


   NASDAQ MONITORS EXCEPTIONS
   GRANTED BUT DOES NOT USE
   OVERALL PROGRAM STATISTICS TO
   GUIDE ITS OPERATIONS
------------------------------------------------------------ Letter :7

When Nasdaq staff make decisions to deny listing or to delist a
company, the company can request a hearing before a Nasdaq listing
qualifications panel.  On the basis of its review, the panel may
determine that an exception is warranted.  Nasdaq staff maintain a
database to monitor information about all companies that go through
its hearings process.  Nasdaq staff use the information in the
database to gauge the day-to-day operations of the hearings process. 
However, the Listing Department does not aggregate or analyze the
information over time to assess what happens to companies that
request exceptions and their ultimate disposition.  As a result,
Nasdaq is missing opportunities for measuring the overall
effectiveness of its operations. 


      NASDAQ REVIEW PANELS GRANT
      EXCEPTIONS
---------------------------------------------------------- Letter :7.1

As described earlier, issuers must apply to be listed on the Nasdaq
SmallCap Market.  If an application is denied, or if the company has
fallen out of compliance with maintenance requirements, the company
can request an exception to the denial or delisting decision made by
Nasdaq staff.  The exception must be requested in writing and a fee
paid.  The Nasdaq Listing Qualifications Panel (NLQP), a two-member
panel composed of both securities industry and nonindustry
professionals approved by the NASD Board of Governors, reviews denial
or delisting decisions made by Nasdaq staff.  NLQP makes a decision
that is immediately actionable, but the decision is subject to review
at the request of the company or a member of the Nasdaq Listing and
Hearing Review Committee (NLHRC). 

NLHRC is an 11-member standing committee appointed by the Nasdaq
Board of Directors.  NLHRC receives all decisions made by NLQP and
can affirm, reverse, modify, or remand any decisions it receives. 
Furthermore, all NLHRC decisions are provided to, and may be called
for review by, the Nasdaq Board of Directors or the NASD Board of
Governors.  In addition to the levels of review described above,
Nasdaq officials pointed out that decisions by NLHRC after Board
consideration can be appealed to SEC, and SEC may call any NLHRC
decision for review. 


      NASDAQ COLLECTS INFORMATION
      ON COMPANIES THAT GO THROUGH
      ITS HEARINGS PROCESS
---------------------------------------------------------- Letter :7.2

Nasdaq maintains a database that includes information about a
company's deficiencies as well as the outcomes of hearings (whether a
company is approved or denied initial listing, granted an exception,
or delisted from Nasdaq).  Nasdaq staff use this database to document
the terms of any exceptions granted and the company's final
disposition with respect to the terms of the exception. 

Nasdaq officials told us the Listing Department uses the information
in its databases to generate a daily delinquency report that lists
all companies that are delinquent in their filings.  The Department
also generates a weekly list of companies that do not comply with
other maintenance requirements.  According to Nasdaq officials, the
databases that produce these reports will be replaced shortly by a
new system that will consolidate in one database all information
about a listed company, including its compliance record and a record
of any deficiencies and exceptions granted. 


      NASDAQ COULD MORE
      EFFECTIVELY USE OVERALL
      PROGRAM STATISTICS
---------------------------------------------------------- Letter :7.3

Currently, Nasdaq does not routinely use overall program statistics
to evaluate and guide its Listing Department activities.  For
example, the Department produces no routine reports for senior
management that present overall program statistics.  By not routinely
aggregating and analyzing overall program statistics over time,
Nasdaq cannot demonstrate the effectiveness of its exceptions
granting policies.  Key indicators of effectiveness, such as the
outcomes of companies granted exceptions, compared to those not
granted exceptions as well as compared to program goals, can help to
demonstrate the effectiveness of Nasdaq's exceptions granting
policies. 

For example, Nasdaq officials provided statistics that showed they
received 1,147 listing applications for the SmallCap Market between
May 1994 and June 1997.  Of that number 66 companies, or 5.8 percent,
were listed with exceptions to listing requirements.  During the same
period, Nasdaq granted exceptions to maintenance requirements to 168
companies.  On an annualized basis, the average number of companies
granted an exception was 53, or 3.8 percent of the average number of
companies (1,381) listed on the SmallCap market at any given time. 
These numbers have little meaning without some context.  Collecting
and analyzing the data over time, especially the outcomes for these
companies (whether they remain on the SmallCap Market or list on
another market), could provide Nasdaq a key indicator of the
effectiveness of its exceptions granting process. 

Nasdaq officials also provided statistics for us that showed 562
companies dropped off the SmallCap Market from May 1, 1994, to May
30, 1997.\18 Of that number, 409 were delisted as noncompliant, and
153 delisted voluntarily.  On an annualized basis, the 562 companies
that were no longer listed represent a turnover rate of about 182
companies, or 13.2 percent of the average number of companies (1,381)
listed at any given time.  Collected and analyzed over time, data on
this turnover rate of companies listed on the Nasdaq SmallCap Market,
including information on what happened to those companies, would
provide Nasdaq, SEC, and investors a key indicator of the
effectiveness of its listing and maintenance standards.  Such data,
when compared to program goals, can help demonstrate Listing
Department results; identify performance gaps; and align activities,
core processes, and resources.  The experiences of leading
organizations that use such information show that it can become a
driving force in improving the effectiveness and efficiency of
program operations. 


--------------------
\18 These numbers do not include companies that switched, either from
the Nasdaq National Market to the SmallCap Market, or vice versa. 


   CONCLUSIONS
------------------------------------------------------------ Letter :8

Although SEC inspected all SRO listing departments in 1997, during
the preceding 11 years it had inspected these departments
infrequently or not at all.  Before 1995, frequent and regular
inspections were SEC's primary method of following up to ensure its
recommendations were implemented.  Our work at Nasdaq's Listing
Department showed that infrequent inspections and the lack of an
effective recommendation follow-up system allowed deficiencies that
SEC identified to remain uncorrected for long periods.  OCIE's action
in 1996 to establish regular inspection cycles for SRO listing
departments, if properly implemented, should help ensure that
deficiencies in these departments do not remain uncorrected for long
periods.  More importantly, OCIE's new procedures provide a
systematic process to follow up on the recommendations it makes in
all of its SRO inspections.  Including SEC Commissioners, who have
the authority to require SROs to comply with OCIE's recommendations,
in the process would provide an additional incentive for SROs to
comply with OCIE recommendations. 

We share SEC's concern that the deficiencies identified in Nasdaq's
Listing Department operations could have had the effect of misleading
investors who are entitled to assume that the stocks listed on the
Nasdaq SmallCap Stock Market meet the listing and maintenance
requirements of that marketplace.  The Listing Department has made
changes in its operations that, if implemented correctly, should
improve the SmallCap Market and enhance investor protection.  Not all
of these changes have been completely implemented, and others have
not been in effect long enough to adequately assess their
effectiveness. 

Our work also showed that Nasdaq's Listing Department does not
routinely use overall program statistics to evaluate and guide its
activities.  Aggregating and analyzing such information could help
Nasdaq ensure that its programs are results oriented, its goals are
clearly established, and its strategies for achieving those goals are
appropriate and reasonable.  Such information could also help SEC
conduct better regulatory oversight of SRO listing programs. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :9

We recommend that the Chairman, SEC,

  -- require OCIE to periodically report the status of all open,
     significant recommendations to the Commissioners; and

  -- require NASD to develop management reports based on overall
     program statistics that demonstrate its Listing Department's
     operating results, such as the number of companies granted
     exceptions to listing and maintenance requirements along with
     their ultimate disposition, and to submit this data periodically
     to the Commissioners for review. 


   SEC'S COMMENTS AND OUR
   EVALUATION
----------------------------------------------------------- Letter :10

We requested comments on a draft of this report from the Chairman,
SEC.  On December 19, 1997, the Director, Office of Compliance
Inspections and Examinations for SEC, provided written comments. 
These comments are reprinted in appendix I.  SEC also provided
technical comments, which we incorporated where appropriate. 

SEC agreed with the facts as stated in our report.  It also agreed
with our recommendation that OCIE periodically apprise the Commission
of the status of all open, significant recommendations.  Further, SEC
stated that it intends to take steps to inform the Commission
whenever an SRO submits a response to an SEC inspection report that
indicates the SRO does not intend to take adequate corrective actions
in response to SEC's recommendations. 


   NASD'S COMMENTS AND OUR
   EVALUATION
----------------------------------------------------------- Letter :11

We requested comments on a draft of this report from the Chairman,
NASD.  On December 19, 1997, the President of the Nasdaq Stock
Market, Inc., provided written comments.  These comments are
reprinted in appendix II. 

Nasdaq Stock Market officials agreed with the conclusion reached in
our report regarding the need for Nasdaq to make greater use of
statistics to evaluate and guide its activities.  They accepted our
recommendations and stated they will provide senior management with
statistical reports on the Listing Department's operations on a
quarterly basis. 

As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 14 days
from its issue date.  At that time, we will send copies of this
report to the Majority and Minority Members of the House Commerce
Committee and to other interested parties.  We will also make copies
available to others on request. 


Major contributors to this review are listed in appendix III.  Please
contact me at (202) 512-8678 if you or your staff have any questions. 

Sincerely yours,

Thomas J.  McCool
Director, Financial Institutions
 and Markets Issues




(See figure in printed edition.)Appendix I
COMMENTS FROM THE SECURITIES AND
EXCHANGE COMMISSION
============================================================== Letter 



(See figure in printed edition.)




(See figure in printed edition.)Appendix II
COMMENTS FROM THE NASDAQ STOCK
MARKET, INC. 
============================================================== Letter 



(See figure in printed edition.)



(See figure in printed edition.)


The following is GAO's comment on the Nasdaq Stock Market, Inc.'s,
December 19, 1997, letter. 

GAO COMMENT

1.  We added text on pages 11 and 16-19 that indicates that (1)
Nasdaq officials disagreed with SEC that they had ignored
recommendations SEC made in its 1986 inspection report; and (2)
Nasdaq officials, until 1997, believed they had addressed the issues
raised in SEC's 1986 inspection. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C. 

Richard J.  Hillman, Acting Associate Director
Michael A.  Burnett, Assistant Director
Gerald C.  Schober, Project Manager
Edwin J.  Lane, Evaluator
Katherine D.  Kitzmiller, Secretary
Donna M.  Leiss, Communications Analyst

OFFICE OF GENERAL COUNSEL,
WASHINGTON, D.C. 

Rosemary Healy, Senior Attorney

*** End of document. ***