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GAO Reports on Improvements to SRO Listing Standards

The GAO, at the request of Reps. John Dingell (D-MI), Barney Frank (D-MA) and Paul Kanjorski (D-PA), has released an April 2004 report on the listing programs of the three largest self-regulatory organizations as they relate to the protection of investors. The report includes 12 recommendations for strengthening the listing standards and improving investor confidence. The GAO advised that the only significant recommendations of the SEC's Office of Compliance Inspections and Examinations ("OCIE") that the SROs have not yet instituted is the attachment of a modifier to the stock symbol of issuers that no longer meet the continued listing standards to provide the public with early notification of their lack of compliance.

The Congressmen had asked the GAO to report on the status of the SROs' improvements to their equity listing programs, particularly with respect to market notification of noncompliance with the continuing listing standards. They also asked the GAO to discuss the extent to which OCIE uses the SROs' internal review reports in its inspections, the SEC's oversight of the moratorium permitted after September 11, 2001 for Nasdaq companies that failed to meet the bid-price listing standards and the actions the SROs have taken to strengthen issuers' and their own corporate governance standards.

The SROs have addressed the OCIE recommendations that were unique to their markets, according to the GAO, with the exception of the stock symbol modifier for issuers that did not meet the continued listing standards. The NYSE has implemented procedures for transmitting an indicator with the issuer's stock quotation data over the consolidated tape to information vendors, the GAO advised, but the information is not routinely transmitted to investors. Nasdaq has proposed a similar indicator, but the proposal would not provide early notice of a listing deficiency. The American Stock Exchange has proposed a similar indicator.

The GAO noted at the time of its report that the SEC had proposed an amendment to Form 8-K to complement OCIE's efforts by requiring companies to report their receipt of a notice of noncompliance with the SROs' continued listing standards. The proposal has subsequently been adopted (Rel. No. 33-8400, March 16, 2004) and will require the reporting on Form 8-K of the notice of noncompliance within four business days. The filing requirement will provide investors with the early notification that OCIE was seeking. OCIE will monitor the SROs' progress in implementing a stock symbol modifier or indicator to notify the public of an issuer's noncompliant status. The SEC has the authority to resolve the issue or take alternative actions if necessary, the GAO noted.

OCIE does not routinely use the SROs' internal review reports in planning and conducting its inspections. OCIE explained that the routine use of the reports would have a chilling effect on the flow of information between the SRO internal review staff and employees, which could reduce the effectiveness of the internal reviews. The GAO responded that the use of the reports is consistent with professional standards. The inspectors general offices of the CFTC and the Treasury routinely use such reports, according to the GAO, and it recommended that OCIE do so as well.

After September 11, 2001, the SEC allowed Nasdaq to impose a moratorium on the delisting of companies based on the bid-price listing standards because of the number of companies that would be affected and the resulting impact on investors. The relief affected about 11% of Nasdaq issuers. After it expired, the SEC permitted Nasdaq to establish a pilot program to further delay delistings or to permit issuers to transfer to the SmallCap Market. Some issuers have been permitted to trade up to two years while noncompliant with the bid-price standard, the GAO observed, which it considered a long time without providing the public with an early and ongoing notification of the issuer's status.

The GAO also reported that the American Stock Exchange does not require issuers to disclose the names of independent directors and recommended that they be required to do so. The GAO recommended that issuers be required to establish a supermajority of independent directors and that they separate the positions of CEO and chairman through revisions to the SRO listing standards. The GAO also called on the SEC to conduct a timely review of the markets' oversight of recent governance changes.