Securities Markets:

Opportunities Exist to Enhance Investor Confidence and Improve Listing Program Oversight

GAO-04-75: Published: Apr 8, 2004. Publicly Released: May 11, 2004.

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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.

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.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: 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.

    Recommendation: 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.

    Agency Affected: United States Securities and Exchange Commission

  2. Status: Closed - Implemented

    Comments: 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.

    Recommendation: 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.

    Agency Affected: United States Securities and Exchange Commission

  3. Status: Closed - Implemented

    Comments: 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.

    Recommendation: 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.

    Agency Affected: United States Securities and Exchange Commission

  4. Status: Closed - Implemented

    Comments: 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.

    Recommendation: 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.

    Agency Affected: United States Securities and Exchange Commission

  5. Status: Closed - Implemented

    Comments: 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.

    Recommendation: 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.

    Agency Affected: United States Securities and Exchange Commission

  6. Status: Closed - Implemented

    Comments: 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.

    Recommendation: 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.

    Agency Affected: United States Securities and Exchange Commission

  7. Status: Closed - Not Implemented

    Comments: 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.

    Recommendation: 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.

    Agency Affected: United States Securities and Exchange Commission

  8. Status: Closed - Implemented

    Comments: 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.

    Recommendation: 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.

    Agency Affected: United States Securities and Exchange Commission

  9. Status: Closed - Implemented

    Comments: 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.

    Recommendation: 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.

    Agency Affected: United States Securities and Exchange Commission

  10. Status: Closed - Implemented

    Comments: 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.

    Recommendation: 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.

    Agency Affected: United States Securities and Exchange Commission

  11. Status: Closed - Implemented

    Comments: 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.

    Recommendation: 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.

    Agency Affected: United States Securities and Exchange Commission

  12. Status: Closed - Implemented

    Comments: 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.

    Recommendation: 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.

    Agency Affected: United States Securities and Exchange Commission

 

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