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Securities Markets: Opportunities Exist to Enhance Investor Confidence and Improve Listing Program Oversight

GAO-04-75 Published: Apr 08, 2004. Publicly Released: May 11, 2004.
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Highlights

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.

Recommendations

Recommendations for Executive Action

Agency Affected Recommendation Status
United States Securities and Exchange Commission To restore investor confidence in the markets, further strengthen the listing standards of the self-regulatory organizations (SRO), and improve SEC listing program oversight, the Chairman, SEC, should 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.
Closed – Implemented
Actions responsive to this recommendation have been taken. NYSE took steps in November 2004 to redesign its website and improve the visibility of the indicator to investors. With respect to SEC's efforts to encourage NYSE to work with vendors to distribute the indicator through the print media and the Internet, GAO reviewed correspondence between SEC and NYSE. NYSE said that it has contacted print and Internet vendors that do not currently display the indicator to encourage them to do so; however, these vendors are not interested in displaying the indicator.
United States Securities and Exchange Commission To restore investor confidence in the markets, further strengthen the listing standards of the SROs, and improve SEC listing program oversight, the Chairman, SEC, should 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.
Closed – Implemented
After further dialogue with SEC, NASDAQ and Amex implemented a indicator similar to that of the NYSE to provide the public with 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.
United States Securities and Exchange Commission To restore investor confidence in the markets, further strengthen the listing standards of the SROs, and improve SEC listing program oversight, the Chairman, SEC, should 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.
Closed – Implemented
To ensure early public notification of issuer's noncompliance with continued listing standards, on March 11, 2004, SEC finalized the rule requiring that issuers file the Form 8-K within four business days after receiving notice of being deficient with their market's listing standards.
United States Securities and Exchange Commission To restore investor confidence in the markets, further strengthen the listing standards of the SROs, and improve SEC listing program oversight, the Chairman, SEC, should work with Amex, NASDAQ, and NYSE to assess the feasibility of providing early and ongoing public notification of issuers' noncompliance with qualitative listing standards.
Closed – Implemented
We reviewed correspondence between SEC and the three exchanges regarding the feasibility of providing early and ongoing public notification of issuers' noncompliance with qualitative listing standards. By June 2006, NYSE, NASDAQ, and Amex had implemented an indicator consistent with this recommendation. All three exchanges now transmit an indicator to the consolidated tape (the high-speed electronic system that continuously provides the last sales price and volume of securities transactions in listed stocks to information vendors) when an issuer is provided notice that it is non compliant with the exchange's qualitative listing standards.
United States Securities and Exchange Commission To restore investor confidence in the markets, further strengthen the listing standards of the SROs, and improve SEC listing program oversight, the Chairman, SEC, should ensure the development and implementation of a policy requiring the Office of Compliance Inspections and Examinations (OCIE) staff to routinely use SRO internal review reports in planning and conducting SRO inspections.
Closed – Implemented
This recommendation has been implemented. As part of SRO examination guidance issued in August 2008, SEC instructs examiners to routinely request and use SRO internal review reports in planning and conducting SRO inspections.
United States Securities and Exchange Commission To restore investor confidence in the markets, further strengthen the listing standards of the SROs, and improve SEC listing program oversight, the Chairman, SEC, should work with Amex to ensure that issuers disclose the names of those directors that they have designated as independent.
Closed – Implemented
On February 23, 2004, Amex filed a rule change with SEC requiring that issuers disclose the names of those directors that they have designated as independent.
United States Securities and Exchange Commission To restore investor confidence in the markets, further strengthen the listing standards of the SROs, and improve SEC listing program oversight, the Chairman, SEC, should 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.
Closed – Not Implemented
Neither SEC nor the exchanges agree that separating the positions of CEO and chairman or having a super-majority of independent directors on the board should be required of issuers through listing standards.
United States Securities and Exchange Commission To restore investor confidence in the markets, further strengthen the listing standards of the SROs, and improve SEC listing program oversight, the Chairman, SEC, should work with the SROs to ensure that they have established effective processes for ensuring issuers' compliance with corporate governance listing standards.
Closed – Implemented
Consistent with our recommendation, OCIE inspected the corporate governance listing program of the NYSE in June 2006 to assess whether it has established effective processes for ensuring issuers' compliance with corporate governance listing standards, and as of August 20, 2008, is in the process of inspecting the listing programs of the NASDAQ, including its corporate governance listing program. With respect to the Amex, the NYSE is in the process of acquiring it. OCIE staff said that they will assess whether there will be a need to inspect Amex after any merger is completed.
United States Securities and Exchange Commission To restore investor confidence in the markets, further strengthen the listing standards of the SROs, and improve SEC listing program oversight, the Chairman, SEC, should ensure that OCIE conducts timely inspections of the three largest SROs to assess their oversight of issuers' compliance with corporate governance standards.
Closed – Implemented
Consistent with our recommendation, OCIE inspected the corporate governance listing program of the NYSE in June 2006 to assess the effectiveness of its oversight of listed issuers' compliance with corporate governance listing standards. As of August 20, 2008, OCIE is in the process of inspecting the listing programs of the NASDAQ, including its corporate governance listing program, to also assess the effectiveness of NASDAQ oversight. With respect to the Amex, the NYSE is in the process of acquiring it. OCIE staff said that they will assess whether there will be a need to inspect Amex after any merger is completed.
United States Securities and Exchange Commission To restore investor confidence in the markets, further strengthen the listing standards of the SROs, and improve SEC listing program oversight, the Chairman, SEC, should 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.
Closed – Implemented
SEC has taken actions that address our recommendation relating to conflicts of interest of public company boards of directors and has completed its rule-making process related to shareholder access to the director nomination process. In December 2009, the Commission completed its review of issuers' qualitative disclosure requirements related to potential director and director nominee conflicts of interest when it adopted a rule that would require public companies to provide additional information in public filings about individuals nominated for directors on their boards. In September 2010, SEC published final rules that facilitate the exercise of shareholders' traditional state law rights to nominate and elect directors to company boards of directors. The new rules will require, under certain circumstances, a company's proxy materials to provide shareholders with information about, and the ability to vote for, a shareholder's or group of shareholders'nominees for director.
United States Securities and Exchange Commission To restore investor confidence in the markets, further strengthen the listing standards of the SROs, and improve SEC listing program oversight, the Chairman, SEC, should ensure that Market Regulation places a high priority on establishing and meeting time frames for completing its reviews of the SROs' self-evaluations 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.
Closed – Implemented
Securities and Exchange Commission (SEC) staff in the Division of Trading and Markets (formerly known as the Division of Market Regulation) have reviewed the corporate governance structure of the self-regulatory organizations (SROs) since our report issuance in April 2004. However, this review was not facilitated through the self evaluations that the SROs had begun when the report was issued. According to an assistant director in Trading and Markets, these reviews were not completed because the SROs soon began to effect significant structural changes--undergoing mergers, acquisitions, and in some cases transformations into public companies. As part of these structural changes, the SROs were required to submit a number of filings to Trading and Markets for review and approval. Included were documents describing the corporate governance structure that the SROs planned to implement. The Trading and Markets official said that through this formal filing review process, she and other SEC staff reviewed the proposed corporate governance structures of all of the SROs. She said that the SROs have implemented corporate governance structures that meet the spirit of the Sarbannes-Oxley Act of 2002, which imposed greater structural independence on public company boards of directors.
United States Securities and Exchange Commission To restore investor confidence in the markets, further strengthen the listing standards of the SROs, and improve SEC listing program oversight, the Chairman, SEC, should 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.
Closed – Implemented
The Securities and Exchange Commission (SEC) met the intent of this recommendation through actions taken by its Division of Trading and Markets, instead of its Office of Compliance Inspections (OCIE). The self-regulatory organizations (SROs) did not actually complete the corporate governance self-reviews started in 2004. According to an assistant director in Trading and Markets, these reviews were not completed because the SROs soon began to effect significant structural changes--undergoing mergers, acquisitions, and in some cases transformations into public companies. As part of these structural changes, the SROs were required to submit a number of filings to Trading and Markets for review and approval. Included were documents describing the corporate governance structure that the SROs planned to implement. The Trading and Markets official said that through this formal filing review process, she and other SEC staff reviewed the proposed corporate governance structures of all of the SROs. This formal review process by Trading and Markets met the intent of GAO's original recommendation, which was that OCIE inspect the SROs to assess whether the SROs had addressed weaknesses identified in their self-reviews.

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Internal controlsInvestmentsNoncomplianceSelf-regulatory organizationsStandardsStandards evaluationStock exchangesStocks (securities)Regulatory noncomplianceSecurities