Securities Regulation:

Oversight of SRO's Listing Procedures Could Be Improved

GGD-98-45: Published: Feb 6, 1998. Publicly Released: Feb 17, 1998.

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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.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: SEC agreed with GAO's recommendation and has implemented it by providing a report to the Commissioners detailing any open significant recommendations from previous SRO inspections. SEC plans to continue to provide such a report to the Commissioners on a periodic basis, and has informed the SROs of the new procedure.

    Recommendation: The Chairman, SEC, should require OCIE to periodically report the status of all open, significant recommendations to the Commissioners.

    Agency Affected: United States Securities and Exchange Commission

  2. Status: Closed - Implemented

    Comments: GAO recommended that the National Association of Securities Dealers develop management reports based on overall program statistics that demonstrate its Listing Department's operating results, and GAO recommended that Nasdaq submit this data periodically to the Commission for review. Nasdaq has committed to produce quarterly management summary reports based on overall program statistics beginning with the quarter ending June 30, 1998. Nasdaq issued its first management report on August 27, 1998. Nasdaq believes that these reports will assist Nasdaq in ensuring that listing standards are being enforced, and that they will also assist the Commission's staff in its routine inspections of Nasdaq's listings program.

    Recommendation: The Chairman, SEC, should 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.

    Agency Affected: United States Securities and Exchange Commission

 

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