United States General Accounting Office

GAO 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

GAO United States

General Accounting Office

Washington, D.C. 20548

General Government Division

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.

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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 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,

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.

Page 2 GAO/GGD-98-45 SmallCap Stock Market
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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.

Nasdaq Establishes

Qualifications

Requirements

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.

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.

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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

SEC’s Statutory Oversight

Responsibilities

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

4

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

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).

Page 4 GAO/GGD-98-45 SmallCap Stock Market
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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.

Results in Brief 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

9

OCIE also may conduct special or “cause” inspections when it believes something may be wrong at an

SRO.

10A 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.

Page 5 GAO/GGD-98-45 SmallCap Stock Market
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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

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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

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

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

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

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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.

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

the public.

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

Feb. 1993).

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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 assetsa

Market capitalization

Net income (2 of last 3 years)

$4,000,000b

$50,000,000

$750,000

N/A N/A N/A

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 float $5,000,000 $1,000,000 N/A N/A

Minimum bid price $4.00 $3.00 N/A N/A

Market makers 3 2 2 2

Shareholders 300 300 300 300

Operating history (years)

Market capitalization

1c or 

$50,000,000

N/A N/A N/A

aNet tangible assets equals total assets less total liabilities and goodwill.

bCurrent 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.

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

Source: NASD, Nasdaq.

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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 assetsa

Market capitalization 

Net income (2 of last 3 years)

$2,000,000b

$35,000,000

$500,000

N/A N/A N/A

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 float $1,000,000 $200,000 N/A N/A

Bid price $1.00 $1.00c N/A N/A

Market makers 2 2 1 1

Shareholders 300 300 300 300

Operating history (years)

Market capitalization

N/A N/A N/A N/A

aNet tangible assets equals total assets less total liabilities and goodwill.

bCurrent 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.

cIf 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.

SEC’s Lack of Follow-Up

Allowed Inspection

Deficiencies to Continue

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.

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Table 3: SRO Listing Department

Inspections From 1986 Through

August 1997 Self-regulatory organization

Most recent

inspection Prior 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 1997a Noneb

Pacific Stock Exchange 1997 1991

Philadelphia Stock Exchange 1997 1991

aInspection started in August 1997.

bSEC 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.

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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.

13Although 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.

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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.

Nasdaq Followed Its

Listing Requirements

for Comparator, but

SEC Found the

Continued Listing

Inappropriate

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

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.

14Comparator 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.

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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.

SEC Criticized Nasdaq’s

Handling of Comparator

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

15Nasdaq’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.

Page 14 GAO/GGD-98-45 SmallCap Stock Market
B-277217 

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

SEC Also Generally

Criticized Nasdaq’s Listing

Department

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.

16If 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.

17SEC 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.

Page 15 GAO/GGD-98-45 SmallCap Stock Market
B-277217 

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

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

Page 16 GAO/GGD-98-45 SmallCap Stock Market
B-277217 

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

Page 17 GAO/GGD-98-45 SmallCap Stock Market
B-277217 

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

Page 18 GAO/GGD-98-45 SmallCap Stock Market
B-277217 

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

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

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

Page 19 GAO/GGD-98-45 SmallCap Stock Market
B-277217 

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

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

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

Page 20 GAO/GGD-98-45 SmallCap Stock Market
B-277217 

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.

Conclusions 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

18These numbers do not include companies that switched, either from the Nasdaq National Market to

the SmallCap Market, or vice versa.

Page 21 GAO/GGD-98-45 SmallCap Stock Market
B-277217 

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 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.

Page 22 GAO/GGD-98-45 SmallCap Stock Market
B-277217 

SEC’s Comments and

Our Evaluation

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

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.

Page 23 GAO/GGD-98-45 SmallCap Stock Market
B-277217 

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

Page 24 GAO/GGD-98-45 SmallCap Stock Market
Page 25 GAO/GGD-98-45 SmallCap Stock Market
Contents

Letter 1

Appendix I 

Comments From the

Securities and

Exchange

Commission

28

Appendix II 

Comments From the

NASDAQ Stock

Market, Inc.

30

Appendix III 

Major Contributors to

This Report

34

Tables Table 1: Comparison of Quantitative Listing Requirements for the

Nasdaq SmallCap Market

9

Table 2: Comparison of Quantitative Maintenance Requirements

for the Nasdaq SmallCap Market

10

Table 3: SRO Listing Department Inspections From 1986 Through

August 1997

11

Abbreviations

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

Page 26 GAO/GGD-98-45 SmallCap Stock Market
Page 27 GAO/GGD-98-45 SmallCap Stock Market
Appendix I 

Comments From the Securities and

Exchange Commission

Page 28 GAO/GGD-98-45 SmallCap Stock Market
Appendix I 

Comments From the Securities and

Exchange Commission

Page 29 GAO/GGD-98-45 SmallCap Stock Market
Appendix II 

Comments From the NASDAQ Stock

Market, Inc.

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

Page 30 GAO/GGD-98-45 SmallCap Stock Market
Appendix II 

Comments From the NASDAQ Stock

Market, Inc.

Page 31 GAO/GGD-98-45 SmallCap Stock Market
Appendix II 

Comments From the NASDAQ Stock

Market, Inc.

Page 32 GAO/GGD-98-45 SmallCap Stock Market
Appendix II 

Comments From the NASDAQ Stock

Market, Inc.

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.

Page 33 GAO/GGD-98-45 SmallCap Stock Market
Appendix III 

Major Contributors to This Report

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

(233515) Page 34 GAO/GGD-98-45 SmallCap Stock Market
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