a

GAO

United States General Accounting Office

Report to Congressional Requesters

April 2004 SECURITIES 

MARKETS

Opportunities Exist to 

Enhance Investor 

Confidence and 

Improve Listing 

Program Oversight

GAO-04-75
www.gao.gov/cgi-bin/getrpt?GAO-04-75.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Rick Hillman at 

(202) 512-8678 or hillmanr@gao.gov. 

Highlights of GAO-04-75, a report to 

congressional requesters 

April 2004

SECURITIES MARKETS

Opportunities Exist to Enhance Investor 

Confidence and Improve Listing Program 

Oversight 

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 SarbanesOxley 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. 

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. 

This report includes 12 

recommendations to SEC designed 

to enhance investor confidence in 

the markets, further strengthen the 

listing standards of the selfregulatory organizations (SRO) that 

oversee the markets, and improve 

SEC and SRO oversight of the 

markets’ listing programs. SEC 

generally agreed with the 

recommendations; the SROs 

expressed concerns about those 

related to notifying the public of 

noncompliance with listing 

standards and enhancing board 

independence. 
Page i GAO-04-75 SEC Oversight of SRO Listing Programs

Contents

Letter 1

Results in Brief 4

Background 9

The SROs Have Addressed All OCIE Recommendations, Except One 

to Use Stock Symbol Modifiers 13

OCIE Does Not Routinely Use SRO Internal Review Reports in 

Planning and Conducting Inspections 28

The NASDAQ Moratorium and Subsequent Rule Changes Allowed 

Issuers to Remain Listed Longer 32

Listing Standards Have Been Used as a Vehicle for Improving 

Corporate Governance 40

Conclusions 66

Recommendations for Executive Action 69

Agency Comments and Our Evaluation 70

Appendixes

Appendix I: Scope and Methodology 77

Appendix II: Quantitative Listing Standards for Domestic Issuers of the 

Three Largest Markets 81

Appendix III: Deficiency and Hearing Processes for Domestic Issuers 

Listed on the Three Largest Markets 88

The Amex Deficiency and Hearing Processes for Domestic 

Issuers 88

The NASDAQ Deficiency and Hearing Processes for Domestic 

Issuers 90

The NYSE Deficiency and Hearing Processes for Domestic 

Issuers 96

Appendix IV: Market Participants Contacted During This Review 100

Appendix V: Comments from the Securities and Exchange Commission 101

Appendix VI: Comments from the American Stock Exchange 104

Appendix VII: Comments from the Nasdaq Stock Market, Inc. 107

Appendix VIII: Comments from the New York Stock Exchange 112

Appendix IX: GAO Contacts and Staff Acknowledgments 118

GAO Contacts 118

Staff Acknowledgments 118
Contents

Page ii GAO-04-75 SEC Oversight of SRO Listing Programs

Tables Table 1: Lowest and Highest Numbers of Issuers Trading 

Noncompliant with Quantitative Continued Listing 

Standards in Calendar Year 2003, by SRO 18

Table 2: Total Number of Issuers Trading Noncompliant with 

Quantitative Continued Listing Standards in Calendar Year 

2003 and Their Listing Status on December 31, 2003, by 

SRO 19

Table 3: The American Stock Exchange’s Quantitative Standards 

for Initial Listing of Domestic Issuers 81

Table 4: The American Stock Exchange’s Quantitative Standards 

for Continued Listing of Domestic Issuers 82

Table 5: The NASDAQ National Market’s Quantitative Standards for 

Initial Listing of Domestic Issuers 83

Table 6: The NASDAQ National Market’s Quantitative Standards for 

Continued Listing of Domestic Issuers 84

Table 7: The NASDAQ SmallCap Market’s Quantitative Standards 

for Initial Listing of Domestic Issuers 85

Table 8: The NASDAQ SmallCap Market’s Quantitative Standards 

for Continued Listing of Domestic Issuers 85

Table 9: The New York Stock Exchange’s Quantitative Standards 

for Initial Listing of Domestic Issuers 86

Table 10: The New York Stock Exchange’s Quantitative Standards 

for Continued Listing of Domestic Issuers 87

Figures Figure 1: Maximum Number of Calendar Days in NASDAQ 

Bid-Price Compliance Periods from August 1991 

(Premoratorium) through December 2003 (Latest Rule 

Change) 40

Figure 2: Key Points in Amex’s Deficiency Process for Domestic 

Issuers 89

Figure 3: Key Points in Amex’s Hearing Process for Domestic 

Issuers 90

Figure 4: Key Points in NASDAQ’s Equity, Total Assets and Total 

Revenue, Publicly Held Shares, and/or Round-Lot 

Shareholders Deficiency Process for Domestic Issuers 91

Figure 5: Key Points in NASDAQ’s Market Value of Listed Securities 

and Market Makers Deficiency Process for Domestic 

Issuers 92

Figure 6: Key Points in NASDAQ’s Market Value of Publicly Held 

Shares Deficiency Process for Domestic Issuers 93
Contents

Page iii GAO-04-75 SEC Oversight of SRO Listing Programs

Figure 7: Key Points in NASDAQ’s SCM and NNM Bid-Price 

Deficiency Process for Domestic Issuers 94

Figure 8: Key Points in NASDAQ’s Hearing Process for Domestic 

Issuers 96

Figure 9: Key Points in NYSE’s Price Deficiency Process for 

Domestic Issuers 97

Figure 10: Key Points in NYSE’s Nonprice Deficiency Process for 

Domestic Issuers 98

Figure 11: Key Points in NYSE’s Hearing Process for Domestic 

Issuers 99

Abbreviations

AFEP-AGREF Association of French Private Sector Companies and 

Association of Major French Corporations

AFL-CIO American Federation of Labor and Congress of Industrial 

Organizations

Amex American Stock Exchange 

CEO Chief Executive Officer

CFTC Commodity Futures Trading Commission

EDGAR Electronic Data Gathering, Analysis, and Retrieval

IG Inspector General

NASD National Association of Securities Dealers, Inc.

NASDAQ Nasdaq Stock Market, Inc. 

NNM NASDAQ National Market

NYSE New York Stock Exchange

OCIE Office of Compliance Inspections and Examinations

SEC Securities and Exchange Commission

SCM SmallCap Market

SRO self-regulatory organization

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Page 1 GAO-04-75 SEC Oversight of SRO Listing Programs

United States General Accounting Office

Washington, D.C. 20548

A

April 8, 2004 Letr

The Honorable John D. Dingell

Ranking Minority Member

Committee on Energy and Commerce 

House of Representatives 

The Honorable Barney Frank 

Ranking Minority Member

Committee on Financial Services

House of Representatives

The Honorable Paul E. Kanjorski

Ranking Minority Member

Subcommittee on Capital Markets, Insurance, 

 and Government Sponsored Enterprises

Committee on Financial Services

House of Representatives

The equity listing standards of the three largest U.S. securities markets—

the American Stock Exchange (Amex), Nasdaq Stock Market, Inc. 

(NASDAQ), and New York Stock Exchange (NYSE)—have received 

heightened attention as part of public and private efforts to restore investor 

confidence in the markets.1

 Listing standards have been the focus of 

attention because they govern which companies can be listed for trading on 

a particular market and are intended in part to maintain public confidence 

in the markets. In its role as a self-regulatory organization (SRO), each 

market establishes and enforces the standards that companies must meet 

to be listed for trading.2

 To oversee the effectiveness of the SROs’ listing 

programs, the Securities and Exchange Commission (SEC), through its 

Office of Compliance Inspections and Examinations (OCIE), periodically 

1

Amex, NASDAQ, and NYSE are the three largest U.S. securities markets for equities trading 

based on the number of listed U.S. companies.

2

The markets are regulated under a combination of self-regulation (subject to oversight by 

the Securities and Exchange Commission) and direct federal regulation. Except where the 

context otherwise requires, we use the term “SRO” to include NASDAQ, although as of 

March 10, 2004, NASDAQ’s application for registration as a national securities exchange was 

pending at the Securities and Exchange Commission. Until its application is approved, 

NASDAQ is not an SRO. Instead, NASDAQ proposes its rules through the responsible SRO, 

the National Association of Securities Dealers, Inc. 
Page 2 GAO-04-75 SEC Oversight of SRO Listing Programs

inspects these programs and makes recommendations intended to improve 

them. 

Your ongoing interest in learning how the three largest SROs have 

addressed OCIE’s recommendations for improving their listing programs, 

particularly those related to protecting investors, has broadened as listing 

standards have increasingly become the focus of solutions to challenges 

facing the markets.3

 First, in response to the market turmoil resulting from 

the September 2001 terrorist attacks on the United States, NASDAQ, 

subject to SEC’s oversight, implemented a rule that imposed a moratorium 

on enforcing its listing standards for bid price4

 and market value of publicly 

held shares5 and subsequently implemented two additional rules that 

further relaxed its bid-price standard. These actions raised questions about 

how NASDAQ and SEC, in their regulatory roles, balanced the goal of 

market stability against that of investor protection. Second, the unexpected 

failures of several major corporations beginning in 2001 focused 

congressional and regulatory attention on improving issuers and SROs’ 

corporate governance—that is, the way boards oversee management to 

ensure that organizations are well-run and shareholders are treated fairly.6

As agreed with your offices, we discuss the following in this report: (1) the 

status of OCIE’s recommendations to the three largest SROs for improving 

their markets’ equity listing programs, focusing on a recommendation 

intended to ensure early and ongoing public notification of issuers’ 

noncompliance with continued listing standards; (2) the extent to which 

OCIE uses SROs’ internal review reports in its inspection process;7

 (3) 

SEC’s oversight of NASDAQ’s moratorium and subsequent bid-price rule 

changes and the listing status of the issuers directly affected by these 

3

The term “three largest SROs” is used in this report to refer to Amex, NASDAQ, and NYSE. 

4

NASDAQ defines bid price as the price a buyer is willing to pay for a security.

5

Market value of publicly held shares is the bid price multiplied by the number of 

outstanding shares held by investors that are not officers, directors, or 10 percent or greater 

shareholders. 

6

Issuers are organizations such as corporations that are selling or have sold their securities 

to the public. 

7

The term “internal review reports,” as used in this report, includes internal audit reports, 

management review reports, and internal reports prepared by outside consultants or 

auditors.
Page 3 GAO-04-75 SEC Oversight of SRO Listing Programs

changes; and (4) actions the three largest SROs have taken to strengthen 

corporate governance for issuers and themselves. 

To report on the status of OCIE’s recommendations to the three largest 

SROs for improving their markets’ equity listing programs, we reviewed 

OCIE’s inspection reports and related workpapers and obtained available 

information from OCIE, Amex, NASDAQ, and NYSE officials on OCIE’s 

recommendations and the SROs’ efforts to address them. In addition to 

these steps, in reviewing actions to address OCIE’s recommendation 

intended to ensure early and ongoing public notification of issuers’ 

noncompliance with continued listing standards, we contacted 11 

information vendors, visited their Web sites, or both, to determine whether 

they were distributing the information on issuers’ noncompliance with 

NYSE’s quantitative continued listing standards.8

 To report on the extent to 

which OCIE uses SROs’ internal review reports in its inspection process, 

we obtained and reviewed information from OCIE and other regulatory 

agencies on their policies for using these reports in planning and 

conducting inspections and examinations and reviewed authoritative 

standards and selected SRO internal review reports. To report on SEC’s 

oversight of NASDAQ’s moratorium and subsequent bid-price rule changes 

and the listing status of issuers directly affected by these changes, we 

reviewed relevant NASDAQ proposed and final rules and discussed their 

purposes with NASDAQ officials, obtained information from SEC officials 

on their review of the proposals, and analyzed data provided by NASDAQ. 

Finally, to report on the actions the three largest SROs have taken to 

strengthen corporate governance for issuers and themselves, we reviewed 

SROs’ proposed and final (new) corporate governance rules for issuers and 

self-evaluations of their own governance. We obtained information from 

regulatory officials on the purpose of the new rules and their plans for 

ensuring compliance with them. We also obtained selected market 

participants’ views of the adequacy of the SROs’ new rules.9

 We performed 

our work from April 2002 through March 2004 in accordance with generally 

accepted government auditing standards. Appendix I provides a detailed 

discussion of our scope and methodology.

8

Quantitative continued listing standards are the minimum financial requirements that 

issuers must meet to remain listed for trading on a market. See appendix II for Amex, 

NASDAQ, and NYSE’s quantitative listing standards.

9

See appendix IV for a list of the market participants that we contacted during this review.
Page 4 GAO-04-75 SEC Oversight of SRO Listing Programs

Results in Brief OCIE has concluded that the three largest SROs have addressed the 

recommendations that were unique to their markets from its inspections of 

their listing programs. The only significant, open recommendation applies 

to all three SROs—that they append a modifier to the stock symbols of 

issuers that do not meet their continued listing standards to provide the 

public early and ongoing notification of issuers’ noncompliance with these 

standards. OCIE’s recommendation addressed its concern that the SROs 

were allowing noncompliant issuers to remain listed for significant periods 

of time without providing adequate notification to investors. To avoid 

investor confusion caused by temporary changes to stock symbols, NYSE 

has implemented procedures for transmitting an indicator with the issuer’s 

stock quotation data over the consolidated tape10 to information vendors,11

beginning 5 business days after NYSE notifies the issuer of its 

noncompliance with the market’s quantitative continued listing standards. 

OCIE officials said that NYSE’s response could meet the intent of OCIE’s 

recommendation as it relates to quantitative listing standards, if concerns 

about distributing the information transmitted by the indicator from 

vendors to investors were resolved. A NASDAQ official told us that 

NASDAQ has used a symbol modifier since before 1980 to provide the 

public ongoing notification of some issuers’ noncompliance with 

quantitative listing standards. In April 2003, NASDAQ tentatively proposed 

replacing the modifier with an indicator that would be used in a manner 

similar to NYSE’s. However, as in the case of its symbol modifier, the 

indicator would not be transmitted early in the deficiency process. Amex 

has also proposed using an indicator that would not be transmitted early in 

the deficiency process. Complementing OCIE’s efforts, SEC’s Division of 

Corporation Finance (Corporation Finance) has proposed a rule that would 

require, among other things, that an issuer report on SEC’s Form 8-K12 the 

receipt of a notice of noncompliance with quantitative or qualitative

10The consolidated tape is a high-speed electronic system that continuously provides the last 

sales price and volume of securities transactions in listed Amex and NYSE stocks to 

information vendors. NASDAQ operates a similar, but separate, tape to transmit information 

on its stocks to information vendors.

11Information vendors supply quotation and market data for investors’ use.

12Issuers use the Form 8-K to report significant specified corporate events as well as any 

other event or change that the issuers deem to be of importance to investors and that has 

not been previously reported. (Proposed Rule: Additional Form 8-K Disclosure 

Requirements and Acceleration of Filing Date, SEC Release No. 33-8106, June 17, 2002.)
Page 5 GAO-04-75 SEC Oversight of SRO Listing Programs

continued listing standards,13 along with an explanation of the facts 

surrounding the issuer’s noncompliance, within 2 business days of 

receiving the notice.14 If finalized, the revised filing requirement would 

provide investors the early notification that OCIE seeks as well as 

information that would allow them to better understand the issuer’s 

noncompliant status. OCIE officials told us that further use could be made 

of modifiers or indicators to identify issuers that do not meet the markets’ 

qualitative listings standards, which include corporate governance 

standards. For example, a NASDAQ official said that since before 1984, 

NASDAQ has appended a modifier to the stock symbols of issuers that do 

not comply with its qualitative listing standard that requires timely filing of 

SEC quarterly and annual financial reports and in doing so has provided 

investors early and ongoing notification that significant corporate 

information has not been made available. OCIE plans to report to the 

Commission on the SROs’ progress in implementing its recommendation, 

and the Commission has authority under the Securities Exchange Act of 

1934 (the Exchange Act) to resolve implementation issues or to take 

alternative actions to ensure that the public receives early and ongoing 

notification of issuers’ noncompliant status. 

OCIE officials told us that they do not routinely use SROs’ internal review 

reports in planning and conducting inspections designed to assess the 

quality of SROs’ oversight. These officials said that OCIE does not have a 

written policy that specifically addresses the use of internal review reports 

in inspections and that OCIE relies on the guidance provided in a policy 

memorandum addressing their use in examinations of broker-dealers, 

investment advisers, and investment companies. Under the policy, internal 

review reports would be used in inspections when OCIE believed specific 

problems existed at an SRO that warranted further investigation. 

According to OCIE officials, routine use of the reports would have a 

“chilling effect” on the flow of information between SRO internal review 

staff and other SRO employees, thereby reducing the effectiveness of the 

internal review function. Nonetheless, professional standards recommend 

the use of the reports for planning and conducting inspections, and officials 

of the Inspectors General (IG) offices for the Commodity Futures Trading 

Commission (CFTC) and the Department of the Treasury (Treasury) told us 

13Qualitative continued listing standards are the market’s minimum nonfinancial 

requirements that issuers must meet to remain listed for trading on a market. 

14Corporation Finance officials told us that they are considering alternatives to the proposed 

2-business-day filing requirement based on public comments. 
Page 6 GAO-04-75 SEC Oversight of SRO Listing Programs

that they routinely use the reports for these purposes. Also, our work 

showed that some of the SROs’ reports addressed topics that OCIE has 

addressed in its listing program inspections, such as internal reviews of 

SROs’ initial and continued listing programs, and that the reports could 

have been useful to OCIE in planning and conducting its inspections. 

However, according to OCIE officials, to the best of their knowledge, they 

have never requested an SRO internal review report as part of a listing 

program inspection. 

In September 2001, SEC allowed a NASDAQ rule to remain in effect that 

imposed a 3-month moratorium on enforcing continued listing standards 

for bid price and market value of publicly held shares.15 NASDAQ had 

concluded that the moratorium was necessary because of the increasing 

number of issuers that were falling below the applicable standards after 

September 11. NASDAQ officials expressed concern that delisting these 

issuers would, among other things, disadvantage investors who would be 

limited to trading the related securities in markets that were not subject to 

the same level of regulation and transparency as NASDAQ.16 According to 

NASDAQ data, the moratorium provided relief from pending or potential 

delisting to at least 509 issuers, or about 11 percent of all NASDAQ 

issuers.17 After the moratorium expired, SEC allowed another NASDAQ 

rule to remain in effect establishing a pilot program that (1) extended from 

90 days18 to almost 1 year the period that SmallCap Market (SCM) issuers 

that were noncompliant with the market’s bid-price continued listing 

standard could remain listed and (2) established procedures that allowed 

NASDAQ National Market (NNM) issuers that remained noncompliant with 

the bid-price standard to transfer to the SCM.19 As of February 28, 2003, 246 

15NASDAQ proposed the moratorium in a filing with SEC under procedures contained in 

federal securities law and SEC regulations that allowed the proposal to become effective 

upon filing, subject to a waiting period that SEC waived.

16Transparency is, among other things, the degree to which trade and quotation information 

is available to the public.

17NASDAQ stopped tracking individual issuers’ compliance with the bid-price and market 

value of publicly held shares standards during the moratorium; therefore, the total number 

of issuers affected by the moratorium could not be determined.

18Unless otherwise indicated, all days in this report are calendar days.

19NASDAQ is a two-tier market, consisting of the SCM, which as of December 31, 2003, listed 

685 smaller companies, and the NNM, which as of December 31, 2003, listed 2,648 larger 

companies. Quantitative listing standards are generally lower for the SCM than the NNM. 
Page 7 GAO-04-75 SEC Oversight of SRO Listing Programs

of the 509 issuers receiving relief through the moratorium (48 percent) 

continued to trade on NASDAQ.20 Of these, 132 took advantage of the 

extended compliance period. The remaining 263 of the 509 issuers (52 

percent) were delisted because they did not comply with one or more 

continued listing standards or for other reasons, such as a merger with or 

acquisition by another company. On December 23, 2003, SEC approved, 

also as a pilot program, a NASDAQ rule that, subject to requirements 

intended to protect investors, further extended the SCM and NNM bid-price 

compliance periods for up to 2 years and almost 1 year, respectively. 

The collapse of several major U.S. corporations beginning in 2001 

motivated efforts to strengthen the oversight of boards of directors through 

revisions to the markets’ corporate governance listing standards. In 

response to a 2002 SEC request as well as rules implementing the SarbanesOxley Act of 2002 (Sarbanes-Oxley), the three largest SROs adopted rules 

intended to significantly strengthen these standards. Among other things, 

the new standards increase the role and authority of independent directors 

and corporate governance disclosures. However, unlike NASDAQ and 

NYSE’s standards, Amex’s standards do not currently require issuers to 

disclose the names of the directors they have designated as independent, 

hampering regulators and investors’ ability to assess the independence of 

boards. Market participants told us that they support the SROs’ new 

standards, although they held differing views on the need for further 

enhancements. Consistent with the position of some market participants, 

we have expressed the view in prior work that SEC, in conjunction with the 

SROs, should consider using listing standards to further strengthen board 

independence by requiring a supermajority of independent directors and 

separating the positions of chief executive officer (CEO) and board 

chairman.21 SRO officials told us that they are taking steps to enhance their 

ability to assess compliance with their new corporate governance 

standards, and OCIE officials told us that they will work with the SROs to 

20We determined the listing status of the 509 issuers as of February 28, 2003, approximately 1 

year after NASDAQ implemented its postmoratorium rule change—because by this date 

issuers that were affected by the moratorium would have had an opportunity to go through 

NASDAQ’s deficiency process. Examining this period also allowed us to determine the 

listing status of issuers affected by the first postmoratorium bid-price rule change.

21U.S. General Accounting Office, Protecting the Public’s Interest: Considerations for 

Addressing Selected Regulatory Oversight, Auditing, Corporate Governance, and 

Financial Reporting Issues, GAO-02-601T (Washington, D.C.: Apr. 9, 2002); and Financial 

Statement Restatements: Trends, Market Impacts, Regulatory Responses, and Remaining 

Challenges, GAO-03-138 (Washington, D.C.: Oct. 4, 2002). 
Page 8 GAO-04-75 SEC Oversight of SRO Listing Programs

ensure effective processes are in place to more thoroughly assess 

compliance with these standards. Complementing the SROs’ enhancements 

to listing standards, SEC has proposed rule changes that address 

longstanding investor interest in gaining greater access to the director 

nomination process and approved rules increasing disclosures of that 

process. Also, Corporation Finance officials told us that in response to a 

market participant’s request, they plan to review SEC requirements 

governing disclosures of potential director and director nominees’ conflicts 

of interest. Further, to better ensure that the SROs hold themselves to 

standards of governance that are consistent with those imposed on issuers, 

SEC has asked the SROs to evaluate their own governance, including board 

structures, policies, and practices. Although SEC’s Division of Market 

Regulation (Market Regulation) has not completed its review of the SROs’ 

self-evaluations, as a result of this process, both NASDAQ and NYSE have 

separated the positions of CEO and chairman, and NYSE has made other 

significant changes to its governance structure. 

This report makes 12 recommendations to the SEC Chairman that should 

help restore investor confidence in the markets, further strengthen the 

listing standards of the SROs, and improve SEC listing program oversight. 

We recommend, among other things, that the Chairman take actions, 

working with the SROs as necessary, to ensure that the public receives 

early and ongoing notification of issuers’ noncompliance with the markets’ 

continued listing standards; SRO internal review reports are used in 

planning and conducting OCIE inspections of SROs; Amex issuers are 

required to disclose the names of their independent directors; serious 

consideration is given to requiring issuers to establish a supermajority of 

independent directors and separate the positions of CEO and chairman 

through revisions to listing standards; OCIE conducts timely inspections to 

assess SRO oversight of issuers’ compliance with new corporate 

governance listing standards; and Market Regulation places a high priority 

on completing reviews of the SROs’ self-evaluations of their governance 

practices. 

We received comments on a draft of this report from SEC, Amex, NASDAQ, 

and NYSE, which are included in appendixes V-VIII. SEC generally agreed 

with our findings and recommendations and is taking or plans to take 

actions to address them. The SROs expressed concerns about the 

recommendations related to notifying the public of noncompliance with 

listing standards, giving serious consideration to requiring a supermajority 

of independent directors, and separating the positions of CEO and 

chairman. Recognizing their concerns, we nonetheless continue to believe 
Page 9 GAO-04-75 SEC Oversight of SRO Listing Programs

that further SEC and SRO actions are needed to address our 

recommendations. The comments are discussed in greater detail at the end 

of this letter. 

Background The Exchange Act established the regulatory structure of the U.S. 

securities markets. These markets are regulated under a combination of 

self-regulation (subject to SEC oversight) and direct SEC regulation. This 

regulatory structure was intended to give SROs responsibility for 

administering their own operations, including most of the daily oversight of 

the securities markets and their participants. One of the SROs—the 

National Association of Securities Dealers, Inc. (NASD)—is a national 

securities association that regulates registered securities firms, 

professionals, and NASDAQ.22 Other SROs include national securities 

exchanges that operate the markets where securities are traded.23 These 

SROs are primarily responsible for establishing the standards under which 

their members conduct business; monitoring the way that business is 

conducted; and bringing disciplinary actions against their members for 

violating applicable federal statutes, SEC’s rules, and their own rules. SEC 

oversees the SROs by inspecting their operations and reviewing their rule 

proposals and appeals of final disciplinary proceedings. 

Each SRO proposes the rules that establish its listing standards. To be 

eligible for listing, issuers must comply with initial quantitative and 

22NASD is registered as a national securities association under section 15A, 15 U.S.C. § 78o-3 

and is considered an SRO pursuant to section 3(a)(26), 15 U.S.C. § 78c(a)(26). NASD 

develops rules and regulations governing the business and sales practices of NASD 

members, conducts regulatory reviews of members’ business activities, and disciplines 

those members that fail to comply with its rules and regulations. NASDAQ and Amex are 

subsidiaries of NASD. NASD has delegated to NASDAQ the responsibility for operating 

NASDAQ as well as for developing, adopting, and administering rules governing listing 

standards for NASDAQ issuers. In April 2000, NASD members voted to restructure NASD 

and sell a substantial part of NASD’s ownership in NASDAQ in part to minimize the potential 

for conflicts of interest associated with NASD’s responsibility for both the business 

operations and regulation of NASDAQ. Unlike NASDAQ, Amex is a registered SRO. On 

November 3, 2003, NASD and Amex announced an agreement to make Amex an 

independent entity and transfer control of Amex to the Amex Membership Corporation. The 

agreement is subject to approval by Amex, Amex Membership Corporation, Amex and 

NASD’s Boards of Governors, Amex seat holders, and SEC.

23The national securities exchanges are Amex, the Boston Stock Exchange, the Chicago 

Board Options Exchange, the Chicago Stock Exchange, the International Securities 

Exchange, the National Stock Exchange, NYSE, NQLX, OneChicago, the Pacific Exchange, 

and the Philadelphia Stock Exchange.
Page 10 GAO-04-75 SEC Oversight of SRO Listing Programs

qualitative listing standards. Quantitative listing standards are minimum 

financial requirements addressing such areas as the issuer’s total revenues, 

distribution, and market capitalization.24 Qualitative listing standards, 

which include corporate governance standards, are nonfinancial 

requirements addressing such matters as the definition of director 

independence, the number of independent directors on the board of 

directors and audit committee, and provisions for annual stockholder 

meetings and shareholder approval of certain corporate actions. In 

addition, to remain listed, issuers must maintain compliance with the 

market’s continued listing requirements. For quantitative listing standards, 

these are generally lower than initial listing standards, while for qualitative 

standards they are the same. 

In general, a company applies to have its securities listed for trading on a 

specific market, subject to that market’s rules. This process includes 

submitting an application for review, together with supporting information 

such as financial statements, a prospectus, and relevant share distribution 

information. The market’s equity listing department reviews these 

submissions for compliance with its initial listing standards and conducts 

background checks of company officers and other insiders. This 

department or a committee of the exchange makes the listing decision. The 

equity listing department also monitors listed companies for compliance 

with the market’s continued listing standards and, in accordance with the 

market’s rules, is expected to take action when these standards are not 

met. 

Amex, NASDAQ, and NYSE are the three largest U.S. securities markets for 

equities trading based on the number of listed U.S. companies. According 

to Amex, as of the end of the third quarter 2003, it listed 735 issuers with a 

total market capitalization of approximately $282 billion.25 For this same 

period, NASDAQ said it listed 3,367 issuers with a total market 

capitalization of approximately $2.99 trillion for the SCM and the NNM

24Market capitalization is the price of a stock multiplied by the total number of shares 

outstanding and represents the market’s total valuation of a public company.

25According to Amex and NASDAQ, their total market capitalization includes the value of 

shares and American Depository Receipts in the United States. The receipts are issued by a 

U.S. depository bank and represent shares of a foreign corporation held by the bank.
Page 11 GAO-04-75 SEC Oversight of SRO Listing Programs

combined. Finally, for this period, NYSE told us that it listed approximately 

2,800 issuers with a total market capitalization of approximately $14.8 

trillion.26 

The Exchange Act created SEC as an independent agency to oversee the 

securities markets and their participants. SEC has a five-member 

Commission headed by a chairman who is appointed by the President of 

the United States for a 5-year term. In overseeing the SROs’ implementation 

and enforcement of rules, SEC may use its statutory authority to, among 

other things, review and approve SRO-proposed rule changes and abrogate 

(annul) SRO rules. Section 19(b) of the Exchange Act governs the process 

by which SROs can change their rules. Section 19(b)(1) requires an SRO to 

file a proposed rule or amendment to an existing rule with SEC for 

publication and solicitation of comments. Under section 19(b)(2), SEC may 

approve the rule change by order or conduct proceedings to determine 

whether it must be disapproved. SEC must approve a proposal if it finds 

that it is consistent with Exchange Act requirements; otherwise, it must 

institute disapproval proceedings. However, if the rule change proposed by 

the SRO does not comply with the filing requirements promulgated under 

section 19(b) of the Exchange Act, SEC may deem the submission as not 

properly filed and reject it. 

In addition, section 19(c) gives SEC power by rule to abrogate, add to, or 

delete from the rules of an SRO, subject to specified procedures. SEC 

officials said that SEC rarely uses this authority to amend SRO rules, 

because, among other things, a number of procedural steps must be 

satisfied, potentially making a section 19(c) ruling time-consuming. SEC 

officials said that, in view of the procedural steps that would need to be 

followed under section 19(c) to amend rules related to listing standards 

and the need to consider any such proceeding in light of Business 

Roundtable v. SEC, in which the D.C. Court of Appeals vacated a listing 

standard that SEC had adopted using section 19(c) authority, SEC prefers 

to rely on its powers of persuasion to convince the SROs to enhance their 

corporate governance listing standards.27

26According to NYSE, its total market capitalization includes the global market value of all 

listed companies.

27Business Roundtable v. SEC, 905 F. 2d 406 (D.C. Cir. 1990).
Page 12 GAO-04-75 SEC Oversight of SRO Listing Programs

SEC’s Market Regulation division is responsible for the administration and 

execution of SEC’s programs under the Exchange Act relating to the 

structure and operation of the securities markets, which includes oversight 

of the SROs and review of their proposed rule changes. SEC has delegated 

authority to Market Regulation with respect to other aspects of SRO 

rulemaking as well, including the authority to publish notices of proposed 

rule changes and to approve such proposed rule changes. 

In addition to granting authority to approve SRO-proposed rules, the 

Exchange Act authorizes SEC to conduct reasonable, periodic, special, or 

other examinations of all records that the SROs are required to maintain.28

Under the Exchange Act, the national securities exchanges, national 

securities associations, members of these exchanges and associations, 

brokers, and dealers are required by SEC to preserve certain books and 

records and keep them available for inspection.29 The Exchange Act, in 

conjunction with relevant rules, gives SEC the authority to request and 

review such records as part of its inspections and examinations. These 

examinations may be conducted at any time, or from time to time, as SEC 

deems necessary or appropriate in the public interest, for the protection of 

investors or otherwise in furtherance of the purposes of the Exchange Act. 

OCIE, the SEC office responsible for conducting inspections and 

examinations, is divided into three primary units—the Office of BrokerDealer and SRO Examinations, the Office of Market Oversight, and the 

Office of Investment Advisor/Investment Company Examinations.30 The 

Office of Broker-Dealer and SRO Examinations and the Office of Market 

Oversight are responsible for conducting examinations of broker-dealers 

and inspections of SROs pursuant to the Exchange Act. According to OCIE 

officials, the inspections conducted by the Office of Broker-Dealer and SRO 

Examinations generally focus on a program area such as the listing 

program, with the objective of evaluating whether the SROs’ programs and 

procedures are adequate and whether these programs and procedures as 

well as recommendations from previous inspections are effectively 

implemented. OCIE officials also told us that Office of Market Oversight 

inspections primarily focus on issues related to trading securities and that 

28Section 17(b) of the Exchange Act; 15 U.S.C. § 78q(b).

29Section 17(a) of the Exchange Act; 15 U.S.C. § 78q(a).

30SEC generally refers to its reviews of SROs as “inspections” and its reviews of brokerdealers, investment companies, and investment advisers as “examinations.” 
Page 13 GAO-04-75 SEC Oversight of SRO Listing Programs

the Office of Investment Advisor/Investment Company Examinations is 

responsible for examinations conducted pursuant to the Investment 

Company and Investment Advisers Acts of 1940. 

Under the Securities Act of 1933 and the Exchange Act, publicly traded 

companies are required to file disclosures with SEC concerning their 

business and financial affairs, both when securities are initially offered and 

sold and on a periodic basis thereafter. Corporation Finance reviews these 

disclosures, which include annual reports to shareholders and proxy 

statements.31 Corporation Finance also provides companies with assistance 

in interpreting SEC rules and recommends to the Commission new rules 

for its approval. 

The SROs Have 

Addressed All OCIE 

Recommendations, 

Except One to Use 

Stock Symbol 

Modifiers

OCIE has concluded that the three largest SROs have addressed the 

recommendations that were unique to their markets from its inspections of 

their listing programs. OCIE officials said that the only significant, open 

recommendation was for the three SROs to use stock symbol modifiers to 

provide the public early and ongoing notification of issuers that do not 

meet their continued listing standards. 

31A proxy statement contains material information that SEC regulations require issuers to 

provide their shareholders as a prerequisite to soliciting votes, including biographical 

information on directors and director nominees and information on their financial and 

business relationships with the issuer and its executive officers.
Page 14 GAO-04-75 SEC Oversight of SRO Listing Programs

The SROs Have Addressed 

OCIE Recommendations 

That Were Unique to Their 

Markets 

According to OCIE officials, Amex, NASDAQ, and NYSE have addressed 

the recommendations that were unique to these markets’ listing programs 

from OCIE’s recent inspection reports and have improved the structure and 

operations of their programs in doing so. OCIE officials told us that Amex’s 

recent listing standards revisions met the intent of OCIE’s 2001 inspection 

report recommendations.32 For example, in response to these 

recommendations, Amex converted its discretionary listing guidelines into 

mandatory listing standards to provide more certainty to investors about 

the eligibility of issuers to trade on Amex. In addition, Amex set firm time 

limits within which issuers that are not compliant with its continued listing 

standards must regain compliance. 

According to OCIE’s June 2002 inspection report on NASDAQ’s listing 

program, the SRO had addressed the recommendations from prior reports, 

issued in 1997 and 1999, and the listing program was operating according to 

NASDAQ’s policies and procedures. OCIE found that the SRO was 

generally thorough in its financial and regulatory reviews of companies and 

complied with its obligation to compile periodic management reports 

containing statistical data on issuers. While the 2002 report identified some 

new areas where the SRO could enhance listing program operations, 

according to OCIE officials, NASDAQ addressed the related 

recommendations. 

OCIE’s March 2003 inspection report on NYSE’s listing program concluded 

that the SRO had substantially improved its listing program since OCIE’s 

initial report, issued in 1998, and was generally adhering to SRO listing 

rules and procedures. For example, OCIE found that NYSE had enhanced 

its systems for detecting issuers that were out of compliance with its 

continued listing standards and prepared quarterly management reports to 

assist in monitoring the status of listed companies. The 2003 report made 

some new recommendations that OCIE officials said NYSE addressed. 

32We also addressed the need for Amex to improve its listing standards in a November 2001 

report. See U.S. General Accounting Office, Securities Regulation: Improvements Needed 

in the Amex Listing Program, GAO-02-18 (Washington, D.C.: Nov. 27, 2001).
Page 15 GAO-04-75 SEC Oversight of SRO Listing Programs

The Intent of the 

Recommendation to Use 

Stock Symbol Modifiers Has 

Not Been Fully Addressed 

OCIE recommended that the SROs append a modifier to the stock symbols 

of issuers that do not meet their continued listing standards to provide the 

public early and ongoing notification of issuers’ noncompliance with these 

standards—a recommendation that Market Regulation also made. NYSE 

has begun transmitting an indicator over the consolidated tape to 

information vendors, which OCIE officials said could address the intent of 

OCIE’s recommendation as it relates to NYSE’s quantitative listing 

standards, if concerns about vendor distribution of the information 

transmitted by the indicator are addressed. NASDAQ and Amex have 

reservations about modifiers and their proposals for implementing them 

would not provide early public notification. Complementing OCIE’s efforts, 

Corporation Finance proposed changes to SEC’s Form 8-K, which, if 

finalized, would provide investors with early notification of an issuer’s 

noncompliance with qualitative and quantitative listing standards and 

additional information on the issuer’s noncompliant status. OCIE officials 

told us that further use could be made of modifiers or indicators to identify 

issuers that do not meet the markets’ qualitative listings standards. OCIE 

plans to report to the Commission on the SROs’ progress in implementing 

its recommendation, and the Commission has authority to resolve 

implementation issues or to take alternative actions to ensure that the 

public receives early and ongoing notification of issuers’ noncompliance 

with the SROs’ continued listing standards. 

OCIE and Market Regulation 

Recommended the Use of 

Symbol Modifiers to Provide 

Early and Ongoing Notification 

of Issuers’ Noncompliance 

In its most recent reports on Amex, NASDAQ, and NYSE’s listing programs, 

OCIE recommended that the three largest SROs use stock symbol 

modifiers to provide the public early and ongoing notification of issuers’ 

noncompliance with their continued listing standards. 33 OCIE’s 

recommendation would have extended NASDAQ’s practice of modifying 

the stock symbols of certain noncompliant SCM issuers. Market Regulation 

concurred with the recommendation and also requested that the three 

largest SROs append the modifier.34 The recommendation addressed 

OCIE’s concern, which surfaced during its listing program inspections, that 

the SROs were allowing deficient issuers to remain listed for significant 

33In our November 2001 report on Amex’s listing program, we also addressed the need for 

ongoing notification of issuers’ listing status and recommended that the SEC Chairman 

direct Amex to implement mandatory equity listing requirements or provide ongoing public 

disclosure of the noncompliant status of companies. 

34Market Regulation asked the three SROs in a May 1, 2002, letter to consider whether it 

would be feasible and advisable to use symbol modifiers to disclose issuers’ noncompliance 

with continued listing standards. 
Page 16 GAO-04-75 SEC Oversight of SRO Listing Programs

periods of time without adequately notifying investors. For example, an 

OCIE report on the listing program of one SRO identified several instances 

in which the SRO granted issuers excessive delisting deferrals or did not 

commence delisting proceedings in a timely manner. The report cited one 

instance of an issuer being allowed to remain listed for approximately 2 

years while out of compliance with the market’s continued listing 

standards. An OCIE report on another SRO found that two issuers had been 

listed for at least 3 years without meeting the SRO's continued listing 

standards.35

According to OCIE and Market Regulation officials, modifiers would make 

the listing status of an issuer more transparent to investors and reduce the 

misleading perception that because an issuer is listed it meets a market’s 

continued listing standards. Investors currently receive information on an 

issuer’s noncompliance with these standards through issuer press releases 

that are required by Amex, NASDAQ, and NYSE rules. However, these rules 

do not provide for early public investor notification of an issuer’s 

noncompliance. For example, while Amex’s rules require it to send an 

issuer a deficiency notice within 10 business days of identifying the issuer’s 

noncompliance with continued listing standards, by applying the various 

rules in Amex’s deficiency process, the issuer would not have to issue a 

press release for up to 80 days after receiving the notice.36 NASDAQ’s rules 

require it to send a similar deficiency notice within 5 days, but an issuer is 

not required to issue a press release for approximately 35–97 days (up to 

730 days in the case of bid-price deficiencies) after receiving the notice, 

depending on the listing standard. Under NYSE’s rules, the SRO also sends 

its deficiency notice within 10 business days after detecting the 

noncompliance, but issuers are not required to issue a press release until 45 

days after receiving a deficiency notice. Further, OCIE and Market 

Regulation officials said that symbol modifiers provide continuous 

disclosure that an issuer is not meeting continued listing standards, unlike 

a press release, which is a one-time event. Also, according to OCIE and 

Market Regulation officials, information vendors may not distribute the 

press releases of smaller companies, and vendors may not be consistent in 

35In response to the OCIE report, the SRO said that under its policy, these issuers were 

considered compliant with its continued listing standards. OCIE responded that the SRO's 

application of such a policy was improper and that such issuers should be considered to be 

noncompliant. 

36See appendix III for a description of the deficiency and hearing processes of the three 

largest SROs.
Page 17 GAO-04-75 SEC Oversight of SRO Listing Programs

the amount of time that they make the press releases available to the 

public—factors that could affect the usefulness of the releases for making 

investment decisions. 

The effect of implementing OCIE and Market Regulation’s recommendation 

on issuers that were noncompliant with quantitative listing standards in 

2003 is illustrated by table 1.37 The table shows that a low of 1 percent of 

issuers (NASDAQ and NYSE) were trading noncompliant with the market’s 

quantitative continued listing standards during calendar year 2003, 

meaning that as few as 1 percent of the issuers on these markets would 

have been identified with a symbol modifier or comparable identifier had 

OCIE’s recommendation been implemented. Similarly, a high of 10 percent 

of issuers (NASDAQ) traded noncompliant with their market’s quantitative 

continued listing standards, meaning that at most 10 percent of the issuers 

on any of the markets would have been identified with a modifier or 

comparable identifier during that year. 

37We did not provide data on the number of qualitative deficiencies at each SRO because 

differences exist in how they address these deficiencies. While officials from all three SROs 

told us they send deficiency notices to issuers upon detecting noncompliance with 

quantitative listing standards, they do not use similar notices in all instances of 

noncompliance with qualitative listing standards. Officials of two SROs told us that because 

some qualitative deficiencies were more serious than others and because it was not always 

possible to make an objective assessment of compliance with these standards, they use 

their discretion in determining whether to send an issuer a deficiency notice, which would 

trigger the deficiency and delisting process, or whether to work informally with an issuer to 

address the deficiency. 
Page 18 GAO-04-75 SEC Oversight of SRO Listing Programs

Table 1: Lowest and Highest Numbers of Issuers Trading Noncompliant with 

Quantitative Continued Listing Standards in Calendar Year 2003, by SRO 

Sources: Amex, NASDAQ, and NYSE.

Notes:

a

For Amex, the percentages for the lowest and highest number of noncompliant issuers are based on 

the month-end numbers and the 738 listed issuers trading on both December 31, 2003, and June 30, 

2003. 

b

For NASDAQ, the percentages for the lowest and highest number of noncompliant issuers are based 

on the month-end numbers and the 3,333 listed issuers trading on December 31, 2003, and the 3,620 

listed issuers trading on January 31, 2003, respectively.

c

For NYSE, the percentages for the lowest and highest number of noncompliant issuers are based on 

the month-end numbers and the 2,938 listed issuers trading on December 31, 2003, and the 2,959 

listed issuers trading on December 31, 2002, respectively.

The total numbers of issuers identified with a symbol modifier or its 

equivalent would have been greater for each market than the numbers 

shown in the table, because not all issuers were noncompliant with the 

quantitative listing standards at the same time. As shown in table 2, the 

total number of issuers that traded while noncompliant with their markets’ 

quantitative standards at any time during calendar year 2003 ranged from 

68 (NYSE) to 617 (NASDAQ). Of these issuers, some regained compliance 

with continued listing standards by December 31, 2003, while others 

continued to trade noncompliant or were delisted as of that date. 

SRO

Lowest number of 

noncompliant issuers 

trading (percent)

Highest number of 

noncompliant issuers 

trading (percent)

Amex 32 (4%)a 51 (7%)a

NASDAQ 45 (1%)b 351(10%)b

NYSE 15 (1%)c 48 (2%)c
Page 19 GAO-04-75 SEC Oversight of SRO Listing Programs

Table 2: Total Number of Issuers Trading Noncompliant with Quantitative Continued Listing Standards in Calendar Year 2003 

and Their Listing Status on December 31, 2003, by SRO

SRO

Total number of noncompliant 

issuers in 2003 (percent)

Their Listing status on December 31, 2003

Number compliant 

(percent)

Number noncompliant 

(percent)

Number delisted 

(percent)

Amex 94 (100%) 22 (23%) 32 (34%) 40 (43%)

NASDAQ 617 a (100%) 381 (62%) 45 (7%) 191 (31%)

NYSE 68 (100%) 13 (19%) 15 (22%) 40 (59%)

Sources: Amex, NASDAQ, and NYSE.

Note:

a

According to NASDAQ, 486 of the 617 noncompliant issuers (79 percent) were noncompliant with 

standards related to bid price.

NYSE’s Transmittal of Indicators 

Could Address the Intent of 

OCIE’s Recommendation If 

Vendor Distribution Concerns 

Are Addressed 

To avoid investor confusion caused by temporary changes to stock 

symbols, on July 1, 2003, NYSE began transmitting an indicator that reflects 

an issuer’s noncompliance with its quantitative continued listing 

standards.38 Under its procedures, NYSE transmits the indicator over the 

consolidated tape with the issuer’s quotation data beginning 5 business 

days after it notifies an issuer of its noncompliant status and continuing 

until the issuer regains compliance with the listing standard or is delisted. 

According to NYSE officials, the 5-business-day period provides the issuer 

an opportunity to bring to NYSE’s attention any inaccuracy in NYSE’s 

noncompliance determination, as well as an opportunity to release a 

statement to the public. Further distribution of the information transmitted 

by NYSE’s indicator from the consolidated tape to investors is at the 

discretion of information vendors. NYSE officials told us that NYSE has 

notified all vendors by e-mail of the availability of the indicator and 

followed up with some of the major vendors to further discuss its 

distribution, but NYSE has not formally notified the public of the 

indicator’s availability. However, NYSE displays the indicator and a list of 

companies that do not meet its continued listing standards on its Web site. 

38In May 2000, Market Regulation approved an amendment to NYSE’s procedures for 

delisting securities, which, if implemented, would have required that a modifier be attached 

to the stock symbol of an issuer that no longer met the quantitative continued listing 

standards of the exchange. Upon further analysis, NYSE determined that because attaching 

the modifier would change the stock symbol of an issuer, investors would be required to 

know the modified stock symbol, for example, to retrieve information on a noncompliant 

issuer through the Internet. As a result, NYSE filed a rule in December 2000 withdrawing its 

May 2000 rule. Unlike the modifier, NYSE’s indicator does not change an issuer’s stock 

symbol.
Page 20 GAO-04-75 SEC Oversight of SRO Listing Programs

According to NYSE officials, the list included 15 issuers on December 31, 

2003. 

The Associated Press, which according to a company representative, 

provides quotation information to all major U.S. daily newspapers except 

The Wall Street Journal, began distributing the information transmitted by 

the NYSE indicator in September 2003.39 It does so by appending an “h” to 

an issuer’s stock symbol to identify NYSE-listed securities that do not meet 

the market’s continued listing standards. A representative of Dow Jones & 

Company told us that the organization plans to distribute the information 

transmitted by NYSE’s indicator to investors through print media such as 

The Wall Street Journal and over the Internet through www.WSJ.com, and 

that it would begin doing so when technical difficulties are resolved.40 A 

representative of Ameritrade Holding Company told us that the brokerdealer is considering publicizing the information transmitted by NYSE’s 

symbol indicator during calendar year 2004.41 

Of the five other information vendors we contacted that provide quotation 

information to investors over the Internet, none planned to distribute the 

information transmitted by NYSE’s symbol indicator. These vendors, 

including two broker-dealers, provide market data on their own Web sites 

or to third-party vendors, including many financial Web sites such as

www.cbs.marketwatch.com, www.cnnfn.com, www.finance.yahoo.com,

www.moneycentral.msn.com, and www.smartmoney.com.42 In addition, 

none of three additional broker-dealers whose Web sites we visited were 

distributing the information transmitted by the indicator. Among the 

reasons vendors gave for not distributing this information were a lack of 

client demand and reluctance to divert resources from more important 

initiatives. 

39For example, The Associated Press provides quotation information to such newspapers as 

The Boston Globe, The Chicago Tribune, The Los Angeles Times, The New York Times, USA 

Today, and The Washington Post.

40Dow Jones & Company provides quotation information to the public through The Wall 

Street Journal and Barron’s—financial print media—and through www.WSJ.com. 

41Ameritrade Holding Corporation provides electronic brokerage services to investors, 

primarily through the Internet.

42Third-party vendors, such as Yahoo, have a contract to receive consolidated tape 

information from another information vendor, rather than the Consolidated Tape 

Association. 
Page 21 GAO-04-75 SEC Oversight of SRO Listing Programs

OCIE and Market Regulation officials said that NYSE can and should do 

more to actively encourage information vendors to implement and 

distribute the information transmitted by its indicator. For example, OCIE 

officials said that NYSE could consider adding provisions to its contracts 

with information vendors requiring them to distribute and display the 

indicator. NYSE officials said that this option is not practical, in part 

because information vendors are NYSE customers. NYSE officials said that 

SEC has the authority to implement rules requiring information vendors to 

distribute and display indicators, and it would be appropriate for them to 

do so. Officials of all three SROs stressed the desirability of having a 

marketwide solution to the information distribution issue.

OCIE officials also said that although NYSE displays the indicator with the 

stock symbol of issuers and a list of companies that do not meet its 

continued listing standards on its Web site, NYSE could do more to make 

this information readily accessible to investors. To determine whether a 

Web site visitor could locate the indicator and the list of noncompliant 

NYSE issuers, we visited the NYSE Web site and inputted the stock symbol 

of a noncompliant issuer in the “Quick Quote” search box located on the 

top right corner of NYSE’s home page. In response, we received quotation 

information that included the indicator with a footnote explaining that the 

issuer did not meet NYSE’s continued listing standards. However, the 

indicator was not readily identifiable because it did not visually stand out 

from all of the other information presented on the page. Also, the 

information explaining the meaning of the indicator was located at the very 

bottom of the page, separate from the indicator itself and mingled with 

press releases and information vendor logos. In addition, NYSE did not 

provide a link to its list of noncompliant issuers on its home page, limiting 

its accessibility to investors who do not already know of its existence. 

OCIE officials told us that NYSE’s approach to implementing symbol 

modifiers could meet the intent of its recommendation to provide early and 

ongoing notification to investors as it relates to quantitative listing 

standards, provided that issues related to the distribution of the indicator 

from vendors to investors were resolved. 

NASDAQ and Amex Have 

Reservations about Symbol 

Modifiers, and Their Proposals 

Would Not Provide Early Public 

Notification 

NASDAQ and Amex have both expressed reservations to OCIE and Market 

Regulation about the effectiveness and fairness of using symbol modifiers 

to communicate information about issuers’ noncompliance with continued 

listing standards to the public. In commenting on the value of modifiers, 

they both stated that investors would view a modifier as a warning not to 

invest in a company, which could have other negative consequences for the 
Page 22 GAO-04-75 SEC Oversight of SRO Listing Programs

issuer, including impeding its ability to raise capital and regain compliance 

with the market’s continued listing standards. 

A NASDAQ official told us that since before 1980 NASDAQ has appended a 

modifier—the character “C”—to the stock symbol of an SCM issuer if the 

NASDAQ Hearing Panel determined that the issuer was noncompliant with 

quantitative continued listing standards and granted the issuer a 

conditional listing, termed an “exception.” According to NASDAQ, 32 

noncompliant SCM issuers received a NASDAQ Hearing Panel exception in 

2003 and had the modifier appended to their stock symbol. NASDAQ has 

not appended the modifier to the stock symbols of NNM issuers because, 

according to market officials, doing so would have put the NNM at a 

competitive disadvantage to NYSE, which until 2003 did not identify 

noncompliant issuers with either a symbol modifier or indicator. NASDAQ 

said that its use of modifiers to identify SCM issuers that are listed under an 

exception to its listing standards has raised concerns among these issuers. 

NASDAQ officials told us that issuers have complained that the modifier 

has a depressive effect on their stock price, frustrating their efforts to 

regain compliance with listing standards related to bid price. In addition, 

they said that issuers have indicated that a modifier may make it more 

difficult to attract investors for a private placement or complete other 

transactions that may address a deficiency with a listing standard, such as 

the shareholder equity requirement. In contrast, NYSE officials told us that 

while the few affected companies have not been pleased by the presence of 

the indicator, these companies have generally not found it to have an 

adverse affect on their ability to raise capital. However, NYSE’s experience 

with the indicator has been limited, due to the small number of companies 

that have been out of compliance with its quantitative listing standards 

since the implementation of the indicator. Amex said it does not believe 

that anyone has attempted to evaluate the collateral consequences of 

symbol modifiers, especially for small and middle market companies—the 

types of companies that are generally listed on Amex.

NASDAQ and Amex also said that symbol modifiers oversimplify each 

issuer’s unique situation by lumping together dissimilar deficiencies under 

one type of notification, regardless of the seriousness of the deficiency and 

the likelihood that it will be corrected. They also said that other issues that 

might affect the continued listing status of an issuer would not be disclosed 

to the public with a symbol modifier—for example, a going concern 

opinion from an issuer’s auditors, major litigation, the initiation of a 

regulatory investigation, or notice that security holders should no longer 

rely on previously issued financial statements or a related audit report. 
Page 23 GAO-04-75 SEC Oversight of SRO Listing Programs

Nonetheless, the use of a modifier or indicator to alert the public to an 

issuer’s noncompliance with continued listing standards would not 

preclude using different modifiers or indicators to identify different types 

of deficiencies or significant events that are unrelated to listing standards. 

For example, while NASDAQ uses the symbol modifier “C” for SCM issuers 

that receive an exception to the certain continued quantitative listing 

standards of that market, it uses the symbol modifiers “Q” and “E” for both 

SCM and NNM issuers that have filed for bankruptcy or have not filed 

required SEC reports, respectively.43 Also, these required reports would 

generally contain the information affecting the continued listing status of 

issuers that is cited in NASDAQ and Amex’s example above.

Additionally, Amex and NASDAQ stated that a significant number of issuers 

are able to regain compliance with continued listing standards within the 

time frames allowed under SRO rules. According to Amex officials, during 

calendar year 2003, 26 (25 percent) of 104 issuers deficient with both 

quantitative and qualitative listing standards regained compliance with the 

standards before the expiration of the compliance period, 31 (30 percent) 

were still trading within their compliance period, and 47 (45 percent) had 

been delisted or were in the delisting process by the end of the year.44

According to NASDAQ officials, during calendar year 2003, 150 (75 

percent) of 200 issuers deficient in those quantitative NASDAQ listing 

standards that specify compliance periods regained compliance before the 

compliance periods expired.45 The remaining 50 (25 percent) were either 

delisted, achieved compliance after the compliance period expired, or were 

in the hearings process as of December 31, 2003. 

43NYSE also uses an indicator to identify issuers that file for bankruptcy. 

44For purposes of this discussion, Amex provided us with data on the number of issuers that 

were noncompliant with both qualitative and quantitative standards in 2003. In contrast, the 

data in tables 1 and 2 reflect issuers with only quantitative deficiencies. Also, the 47 issuers 

that Amex identified as either in the delisting process or already delisted by December 31, 

2003, could include some of those Amex issuers identified in table 2 as remaining 

noncompliant at the end of the year, because that category comprises both issuers that were 

trading within their compliance period and issuers that were in the delisting process. 

45The 200 deficient issuers include only those issuers that NASDAQ identified in 2003 as 

noncompliant with quantitative listing standards for which NASDAQ’s rules specify a 

compliance period. These include NASDAQ’s bid price, market value of publicly held 

securities, market capitalization, and market maker standards. In contrast, the data 

NASDAQ provided in tables 1 and 2 reflect deficiencies with all of NASDAQ’s quantitative 

standards and include issuers that were identified as noncompliant in 2002, but continued to 

trade noncompliant into 2003, and issuers that were identified as noncompliant in 2003. 
Page 24 GAO-04-75 SEC Oversight of SRO Listing Programs

Further, the two SROs said that investors have access to timely and 

comprehensive notice of an issuer’s listing status through press releases, 

thus obviating the need for symbol modifiers. Also, they both stated that 

the information on listed companies available to investors through the 

Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system—a 

searchable database on SEC’s Web site—and media such as the Internet are 

sufficient for investors to make informed investment decisions. However, 

as previously discussed, issuers are not required to issue press releases 

early in the deficiency process, and press releases do not provide ongoing 

public notification of an issuer’s listing status. 

OCIE did not formally respond to the markets’ individual concerns. 

However, according to OCIE and Market Regulation officials, using the 

symbol modifier to provide investors early and ongoing notification of 

noncompliance with continued listing standards would strike an 

appropriate balance between investor and issuer needs. These officials said 

that modifiers would provide investors with adequate, timely, and 

continuous notice of the listing status of affected issuers and also allow 

these issuers to remain listed on the markets as they address deficiencies. 

OCIE officials told us that NASDAQ’s proposal for addressing OCIE’s 

recommendation does not provide for early notification of issuer’s 

noncompliance. In an April 22, 2003, letter to OCIE, NASDAQ tentatively 

proposed replacing all its symbol modifiers with indicators, which would 

be used in a manner similar to the NYSE indicator. NASDAQ said that one 

advantage of using an indicator is that it would minimize the potential for 

investor confusion that may result from symbol modifications.46 As part of 

its proposal, NASDAQ would discontinue use of the “C” modifier on the 

SCM and instead transmit an indicator to the consolidated tape whenever 

the NASDAQ Hearing Panel determined that an SCM or NNM issuer was 

noncompliant with NASDAQ’s quantitative continued listing standards and 

received an exception, just as it does now with the “C” modifier. Under 

NASDAQ’s tentative proposal, an issuer that is deficient with applicable 

listing standards could be listed on NASDAQ for up to 145 days before the 

indicator would be transmitted. However, NASDAQ would not initially 

transmit an indicator with the symbols of issuers that were deficient with 

standards for which its rules specify a time period to regain compliance, 

46NASDAQ said that when a symbol is changed by appending a symbol modifier, an investor 

that is trying to get a quote using the original symbol will sometimes receive a message that 

says “security not in NASDAQ” or “security not found.”
Page 25 GAO-04-75 SEC Oversight of SRO Listing Programs

such as its bid-price standard. Instead, NASDAQ said it would transmit an 

indicator for these issuers, if, after the expiration of the compliance period, 

the issuer requested a hearing and the NASDAQ Hearing Panel allowed the 

issuer to remain listed pursuant to an exception. NASDAQ officials said 

that they do not consider it appropriate to transmit the indicator earlier in 

the deficiency process, because doing so would deny deficient issuers their 

due process. OCIE officials said that NASDAQ should transmit the 

indicator early in the deficiency process so that investors are fully informed 

that an issuer is not in compliance with listing standards. Further, they said 

NASDAQ should more fully address instances of noncompliance with 

listing standards. 

OCIE officials also told us that Amex has not addressed the intent of 

OCIE’s recommendation and that its proposals would not meet the goal of 

providing early notification of issuers’ noncompliance with continued 

listing standards. In a May 21, 2003, letter to OCIE, Amex proposed 

transmitting an indicator over the consolidated tape in a manner similar to 

that used by NYSE. However, unlike at NYSE, under this Amex proposal, an 

indicator would not be transmitted until the issuer received notice that 

Amex was initiating delisting proceedings. As a result, a noncompliant 

issuer could be listed for up to 18 months before the indicator was 

transmitted.47 Amex officials told us that they expected the SRO to begin 

using indicators during the third quarter of 2004. They also said that they 

plan to discuss a second proposal with the Amex Board of Governors at its 

April 2004 meeting. Under this proposal, an indicator would be transmitted 

when a noncompliant issuer was granted an extension pursuant to an 

accepted compliance plan, which would reduce the time that a 

noncompliant issuer could be listed without an indicator from 18 months to 

up to 75 days.48 According to OCIE officials, Amex should transmit its 

indicator when it first notifies an issuer that it is deficient with one or more 

of its standards.

47Amex does not have a minimum bid-price listing standard, but instead uses its discretion in 

delisting issuers with a low bid price by evaluating bid price in the context of an issuer’s 

trading, financial, and operational circumstances. As a result, Amex officials said that Amex 

would not use an indicator in association with a low bid price. They also noted that low 

price is readily apparent to investors. 

48A compliance plan describes the steps the issuer has committed to taking in order to 

return to compliance with the market’s listing standards. 
Page 26 GAO-04-75 SEC Oversight of SRO Listing Programs

Proposed Changes to SEC’s 

Form 8-K Would Provide Early 

Notification of Noncompliance 

In June 2002, Corporation Finance proposed a rule that would require, 

among other things, that issuers report on SEC’s Form 8-K the receipt of 

either a notice of noncompliance with quantitative and qualitative 

continued listing standards or a notice of delisting within 2 business days of 

receiving either notice.49 The proposed changes would also require the 

issuer to discuss its planned response to either notice and give an 

explanation of the facts surrounding the issuer’s noncompliance. OCIE 

officials said that the Form 8-K revisions, if finalized, would complement 

the symbol modifier or its equivalent; that is, the symbol modifier or 

indicator could be a trigger for investors to do further research on an 

issuer, for example, by retrieving an issuer’s Form 8-K from the EDGAR 

system to learn more about the nature of an issuer’s noncompliance with 

listing standards and the issuer’s plans to take corrective action. 

According to OCIE officials, public disclosure through the Form 8-K is 

preferable to existing disclosures provided through press releases because 

issuers will be required to file the form earlier in the deficiency process. In 

addition, unlike press releases, Form 8-K filings would be available to 

investors through the EDGAR system. However, agency officials said that 

the filings would not provide the ongoing notification OCIE seeks through 

the modifier because they reflect the company’s status at the time the Form 

8-K is filed and, as a result, would not provide information about the 

ongoing listing status of issuers. OCIE officials also said that investors 

would have to know that they could search for an issuer’s Form 8-K. 

Corporation Finance officials said they expect the Commission to consider 

whether to approve the final Form 8-K revisions in March 2004.

OCIE Said that Modifiers or 

Indicators Could Be Used to 

Further Identify Noncompliance 

with Qualitative Listing 

Standards 

OCIE officials told us that their discussions with the SROs have focused on 

using modifiers or indicators when issuers do not meet their market’s 

quantitative listings standards but that they could also be useful in further 

alerting the public to issuers’ noncompliance with qualitative listing 

standards, which include corporate governance standards. The three 

largest SROs have already taken a step in this direction. For example, 

Amex and NASDAQ have qualitative standards addressing the timely filing 

of required SEC reports. According to a NASDAQ official, since before 

1984, NASDAQ has appended a modifier to the stock symbols of all issuers 

within 2 business days of detecting that they have not met time frames for 

filing required SEC quarterly and annual financial reports and in doing so 

49As previously discussed, Corporation Finance officials said that they are considering 

alternatives to the proposed 2-business-day filing requirement based on public comments.
Page 27 GAO-04-75 SEC Oversight of SRO Listing Programs

has provided investors early and ongoing notification that significant 

corporate information has not been made available. The required reports 

contain financial statements and other information that NASDAQ officials 

described as being critical for investors’ decision making and for 

regulators’ assessment of issuers’ compliance with listing standards. 

According to Amex officials, the SRO expects to begin transmitting an 

indicator identifying listed companies that have not filed required reports 

during the third quarter of 2004, although it has not yet determined if it will 

use the indicator for nonfiling of annual reports alone or for both quarterly 

and annual reports. NYSE officials told us that the SRO will also begin 

transmitting indicators for issuers that have not filed required annual 

reports at the end of the first quarter of 2004.50 

OCIE officials said that they are exploring the feasibility of requiring the 

SROs to implement symbol modifiers to disclose issuers’ noncompliance 

with other qualitative standards, such as corporate governance standards. 

For example, all three SROs require a majority of directors on issuer 

boards to meet their respective definition of director independence. A 

modifier could potentially be used to indicate when an issuer does not have 

the requisite number of independent directors. 

OCIE Plans to Report SRO 

Progress to the Commission, 

Which Has Authority to Ensure 

Early and Ongoing Notification 

of Noncompliant Issuers

OCIE officials told us that they are in the process of drafting a report to the 

Commission that details the progress the SROs have made in addressing its 

symbol modifier recommendation. According to OCIE officials, the report 

will discuss the implementation issues that OCIE has encountered—

including early public notification and information distribution. The report 

will also recommend how these problems could be resolved. OCIE officials 

told us that their goal was for the public to get the same type of information 

from each of the SROs on issuers’ noncompliance with continued listing 

standards, even if small differences existed in how each SRO provides the 

information. The Commission has authority under the Exchange Act to 

address obstacles to implementing symbol modifiers or indicators, or to 

take alternative actions to meet the goal of early and ongoing public 

notification. For example, the Commission could approve Corporation 

Finance’s proposed revisions to the Form 8-K to address early notification 

issues. Also, according to an OCIE official, SEC could require the SROs to 

implement symbol modifiers or indicators and prohibit the SROs through 

50Instead of requiring timely filing of SEC reports, NYSE’s rules require issuers to notify 

NYSE if they do not file the required reports on time. 
Page 28 GAO-04-75 SEC Oversight of SRO Listing Programs

rulemaking from entering into a contract with an information vendor that 

refuses to display a modifier or indicator.51 

OCIE Does Not 

Routinely Use SRO 

Internal Review 

Reports in Planning 

and Conducting 

Inspections

OCIE officials told us that they do not routinely use SROs’ internal review 

reports in planning and conducting inspections designed to assess the 

quality of SROs’ oversight, nor does the guidance on which they rely 

specifically address the use of these reports in SRO inspections. 

Nonetheless, professional standards recommend that internal review staff 

use the reports prepared by or on behalf of the organizations they are 

reviewing for these purposes, and other organizations that have an 

oversight role similar to OCIE’s told us that they do so. Our work showed 

that many of the topics and findings in the SROs’ internal review reports 

were similar to those covered in OCIE’s listing program inspections, and 

the reports could be useful to OCIE in planning and conducting 

inspections. 

OCIE Does Not Routinely 

Use SRO Internal Review 

Reports, Nor Does the 

Guidance Upon Which It 

Relies Specifically Address 

Their Use

OCIE officials said that they do not routinely use SROs’ internal review 

reports in planning and conducting inspections designed to assess the 

quality of SRO oversight. Although OCIE does not have a written policy 

that specifically addresses the routine use of internal review reports in SRO 

inspections, OCIE officials said that they rely on guidance provided in a 

policy memorandum that addresses the use of these reports in 

examinations of broker-dealers, investment advisers, and investment 

companies. The policy directs OCIE staff to request internal review reports 

when they believe specific problems exist at an SRO.52 OCIE officials said 

that, using their discretion, they might review a sample of internal review 

reports to determine whether a broker-dealer, investment adviser, 

investment company, or SRO had identified problems being reviewed by 

OCIE and, if so, how the problems were addressed. For example, OCIE 

51In order to require the SROs to take actions to resolve implementation issues associated 

with symbol modifiers, the Commission would have to use its section 19(c) rule-making 

authority, subject to specified procedures. As previously discussed, SEC rarely uses this 

authority. 

52The policy also directs OCIE staff to request internal review reports as part of a review of 

internal controls or supervisory systems of broker-dealers, investment advisers, and 

investment companies. OCIE officials said that they have not conducted these types of 

reviews at the SROs; therefore, the use of internal audit reports would not be applicable in 

this context.
Page 29 GAO-04-75 SEC Oversight of SRO Listing Programs

officials told us that they requested copies of NYSE’s internal review 

reports when investigating alleged violations by floor brokers at NYSE that 

resulted in a 1999 report, which concluded that NYSE failed to dedicate 

sufficient resources to allow regulatory staff to perform required random 

and for-cause examinations of floor-broker activity. 53 OCIE officials said 

that, to the best of their knowledge, they have never requested an SRO 

internal review report as part of a listing program inspection. 

OCIE officials told us that routine use of SRO internal review reports would 

have a “chilling effect” on the flow of information between SRO internal 

review staff and other SRO employees. They said that routine use would 

make employees less forthcoming in disclosing information to SRO internal 

review staff for fear that the information would be provided to government 

regulators and through them be made public. They concluded that the 

consequences might outweigh the benefit of reviewing the reports. 

Officials at one SRO said that they believe OCIE would attempt to keep the 

SRO’s internal review reports confidential, but that there was no assurance 

that OCIE could do so. Officials at each of the three largest SROs told us 

that they have provided and would continue to provide OCIE with copies of 

their internal review reports if OCIE requested them.

Professional Standards 

Recommend Using Internal 

Review Reports and Other 

Organizations with an 

Oversight Function Said 

That They Do So 

The Government Auditing Standards, also called the Yellow Book, 

recommend the use of internal review reports in conducting performance 

and other types of reviews.54 The Yellow Book defines performance reviews 

to include reviews that assess the extent to which legislative, regulatory, or 

organizational goals and objectives are being achieved. OCIE’s SRO 

inspections share many of the attributes of performance reviews, including 

their objectives. Although OCIE is not required to follow the Yellow Book 

standards in inspecting SROs, OCIE inspections may benefit from adopting

53Order Instituting Public Proceedings Pursuant to Section 19(h)(1) of the Securities 

Exchange Act of 1934, Making Findings and Ordering Compliance with Undertakings, SEC 

Release No. 34-41574 (June 29, 1999); and Inspection of the New York Stock Exchange’s 

Undertakings Regarding the Surveillance, Examination, Investigatory, and Disciplinary 

Programs for Independent Floor Brokers, (Aug. 23, 2001). The 2001 report followed up on 

actions NYSE took to improve its regulation of independent floor brokers as a result of the 

1999 findings.

54The Yellow Book refers to reviews as “audits.” 
Page 30 GAO-04-75 SEC Oversight of SRO Listing Programs

some of the standards applicable to performance reviews.55 The Yellow 

Book standards recognize that previous reports can be a useful source of 

information for planning and conducting reviews and can impact the areas 

on which subsequent reviewers focus. The Yellow Book states that those 

conducting reviews should determine if internal review staff have 

previously done, or are doing, reviews of the program or the entity being 

examined. It suggests that these staff review previous internal review 

reports or other studies to consider how areas identified as warranting 

further study might affect the selection of their review objectives and that 

internal review staff follow up to assess the actions taken to address 

significant report findings and recommendations related to the objectives 

of the current review. 

CFTC and Treasury IG officials told us that, consistent with Yellow Book 

requirements, they routinely request internal review reports in doing their 

work. According to CFTC IG officials, the agency’s policy is to request 

copies of all relevant audits, management reviews, consultant reports, and 

other related materials so that they can familiarize themselves with the 

program they are reviewing. They said that this information provides them 

with useful background on the program under review and helps them to 

determine the objectives and scope of the current review.56 They also said 

that they use internal review reports to follow up on the agency’s 

implementation of prior IG recommendations. Finally, Treasury IG 

guidance requires the review of prior IG reports, GAO reports, management 

reviews, studies, and consulting reports on the function or activity that is 

being reviewed as a means of understanding the agency and its operations. 

Treasury IG officials also told us that they refer to these reports in 

establishing the objectives and scope of reviews and in following up on 

actions to address previous recommendations. 

55Generally accepted government auditing standards (also known as “GAGAS” and outlined 

in the Yellow Book) apply to audits and attestation engagements of government entities, 

programs, activities, and functions.

56Bank examiners may request the internal review reports of the banks they are reviewing. 

However, while Treasury and CFTC IG officials use internal review reports in determining 

the objectives and scope of their reviews, bank examiners use them in testing the bank’s 

internal audit or loan review function. An OCIE official told us that in reviews of brokerdealers, investment companies, and investment advisors, OCIE also uses the internal review 

reports of these entities in testing internal controls. 
Page 31 GAO-04-75 SEC Oversight of SRO Listing Programs

Topics and Findings in SRO 

Internal Reviews and OCIE 

Listing Program Inspections 

Were Similar, and the 

Reports Could be Useful to 

OCIE in Planning and 

Conducting Inspections

Our review of selected internal review reports of two SROs and 

conversations with one other about its reports revealed that the SROs’ 

internal review functions have examined or were in the process of 

examining aspects of their listing programs that OCIE covered in its most 

recent inspections.57 Consistent with OCIE’s inspection objective related to 

evaluating the effectiveness of the SROs in implementing rules and 

procedures applicable to listing issuers, all three SROs conducted internal 

reviews of their initial and continued listing programs and hearings and 

appeals processes for issuers that received delisting notices. Also, one SRO 

addressed policies, procedures, and systems for reviewing issuer 

information as part of the initial listing process. Consistent with OCIE’s 

inspection objective related to determining whether the SROs have 

implemented recommendations from previous OCIE inspections, officials 

of one SRO told us that as part of their internal reviews, they follow up on 

OCIE’s recommendations to ensure that the corrective actions taken were 

consistent with the intent of OCIE’s recommendations. Finally, all three 

SROs told us that they follow up on all recommendations made as a part of 

their own internal reviews. 

Moreover, SEC has recognized that a strong internal review function is 

important to the effectiveness of the SROs in fulfilling their regulatory 

responsibilities by recommending on at least two occasions that the SROs 

strengthen this function to improve their oversight. First, an investigation 

SEC began in 1994 into the operations and activities of NASD and the 

market making activities of NASDAQ found that NASD failed over a period 

of time to conduct an appropriate inquiry into anticompetitive actions 

among NASDAQ market makers.58 In responding to SEC’s resulting 

recommendations, NASD agreed to, among other things, ensure the 

existence of a “substantial,” independent internal review staff reporting 

directly to NASDAQ’s Board of Governors.59 Second, as discussed, SEC 

reported in 1999 that its investigation of the activity of NYSE floor brokers 

57NASD is responsible for conducting oversight inspections of Amex.

58Report Pursuant to Section 21(a) of the Securities Exchange Act of 1934 Regarding the 

NASD and NASDAQ Market, SEC Release No. 34-37542 (Aug. 8, 1996).

59More recently, NASDAQ has taken steps to further bolster the independence of its internal 

review function by providing that its internal review department report directly to the audit 

committee, which consists solely of independent directors, and mandating that its internal 

review department have free and open access to information deemed necessary by the 

department to perform its reviews. 
Page 32 GAO-04-75 SEC Oversight of SRO Listing Programs

found that NYSE failed to dedicate sufficient resources to allow regulatory 

staff to perform certain required examinations of floor-broker activity. To 

address SEC’s resulting recommendation, NYSE agreed to maintain its 

Regulatory Quality Review Department as a “substantial,” independent 

internal review staff with adequate resources to regularly review all aspects 

of NYSE. 

The NASDAQ 

Moratorium and 

Subsequent Rule 

Changes Allowed 

Issuers to Remain 

Listed Longer 

Following September 11, 2001, SEC allowed a NASDAQ rule to remain in 

effect that implemented a moratorium on enforcing its continued listing 

standards for bid price and market value of publicly held shares. After the 

moratorium ended, SEC allowed a separate NASDAQ rule to remain in 

effect that established a pilot program extending the bid-price compliance 

period for SCM issuers from 90 days to almost 1 year and allowing NNM 

issuers that were noncompliant with the bid-price standard to transfer to 

the SCM at the end of the compliance period, rather than enter the delisting 

process. On December 23, 2003, SEC approved another NASDAQ rule 

proposal that further extended the time noncompliant issuers could remain 

listed, also under a pilot program.

SEC Allowed NASDAQ’s 

Rule Implementing a 

Moratorium on Enforcing 

Bid-Price and Market Value 

of Publicly Held Shares 

Continued Listing Standards 

to Remain in Effect 

In response to market conditions after September 11, SEC allowed a 

NASDAQ rule to remain in effect that implemented a 3-month moratorium 

on enforcing its continued listing standards for bid price and market value 

of publicly held shares. According to NASDAQ officials, NASDAQ’s Listing 

and Hearing Review Council began to study the possible effects of 

modifications to the bid-price standard about 1 year before the 

moratorium. These officials said that as the market was already 

experiencing a downturn in the months before September 11, 2001, many 

NASDAQ-listed companies saw their stock price fall below the minimum 

bid-price standard. According to NASDAQ officials, after this date, market 

conditions worsened considerably and the bid price of more issuers fell 

below the standard. NASDAQ expressed concern that, in the absence of the 

moratorium, a large number of otherwise financially sound companies 

would have to be delisted. According to NASDAQ officials, delisting these 

issuers would, among other things, disadvantage investors who would be 

limited to trading the related securities in markets that were not subject to 

the same level of regulation and transparency as NASDAQ. To give the 

markets time to stabilize and to provide issuers that were noncompliant 

with only these standards time to return to compliance, NASDAQ proposed 
Page 33 GAO-04-75 SEC Oversight of SRO Listing Programs

the rule that implemented the moratorium. The rule became operative on 

September 27, 2001, and the moratorium expired on January 2, 2002.60

NASDAQ filed its proposal with SEC in accordance with a procedure set 

forth in the Exchange Act and SEC regulations that allows a rule proposed 

by an SRO to take effect upon filing without any action being taken by SEC. 

A proposed rule change can become immediately effective without SEC 

action if it is properly designated by the SRO as effecting a change that (1) 

does not significantly affect the protection of investors or the public 

interest; (2) does not impose any significant burden on competition; and (3) 

by its terms does not become operative for 30 days after the date of the 

filing, or such shorter time as SEC may designate if consistent with the 

protection of investors and the public interest.61 SEC, within 60 days of the 

date of filing, may summarily abrogate the rule change if it appears to SEC 

that such action is necessary or appropriate in the public interest, for the 

protection of investors, or otherwise in furtherance of the purposes of the 

Exchange Act.62

60Self-Regulatory Organizations: Notice of Filing and Immediate Effectiveness of Proposed 

Rule Change by the National Association of Securities Dealers, Inc. to Provide Nasdaq 

Issuers Temporary Relief from Listing Requirements Relating to the Bid Price for Continued 

Inclusion and the Market Value of the Public Float, SEC Release No. 34-44857 (Sept. 27, 

2001). After the date of this release, NASDAQ changed the name of the market value of 

public float listing standard to market value of publicly held shares.

61These criteria are found in SEC Rule 19b-4(f)(6), 17 C.F.R. 240.19b-4(f)(6), which 

implements section 19(b)(3)(A) of the Exchange Act, 15 U.S.C. § 78s(b)(3)(A). SEC Rule 

19b-4(f)(6) also requires that, for a rule change to take effect immediately upon filing with 

SEC, the SRO must give SEC written notice of its intent to file the proposed rule change, 

along with a brief description and text of the proposed rule change, at least 5 business days 

before the date of filing of the proposed rule change, or such shorter time as designated by 

SEC. This 5-day period allows SEC staff to offer its opinion to the SRO regarding whether 

the proposal meets the criteria for filing under Rule 19b-4(f)(6).

62Section 19(b)(3)(C) of the Exchange Act, 15 U.S.C. § 78s(b)(3)(C).
Page 34 GAO-04-75 SEC Oversight of SRO Listing Programs

SEC did not abrogate NASDAQ's proposed rule change implementing the 

moratorium. Moreover, to provide issuers immediate relief, SEC waived the 

30-day waiting period and allowed the rule to become operative 

immediately.63 In the notice of this proposal, SEC stated that the rule’s 

potential benefits could have been lost without accelerating the operative 

date, because NASDAQ might otherwise have been required to begin 

delisting proceedings against issuers that did not meet the bid-price and 

market value of publicly held shares standards.

The moratorium provided relief to at least 50964 issuers that were 

noncompliant or approaching noncompliance with the bid-price or market 

value of publicly held shares continued listing standards.65 During the 

moratorium, NASDAQ stopped enforcing these standards, which meant 

that noncompliant issuers were no longer subject to NASDAQ’s deficiency 

process, thereby relieving those that were in the process from potential 

delisting. NASDAQ also stopped tracking individual issuers’ compliance 

with these standards so that issuers approaching noncompliance that might 

otherwise have entered the deficiency process did not do so. Because 

NASDAQ stopped tracking individual issuers’ compliance with the bidprice and market value of publicly held shares standards during the 

moratorium, it could not determine the total number of issuers that might 

have become noncompliant in the absence of the moratorium and, 

therefore, benefited from it. Neither could NASDAQ determine the number 

of noncompliant issuers that would have returned to compliance in the 

absence of the moratorium.

63Without SEC action, a rule filed under this procedure would become "effective" 

immediately but not "operative" until 30 days later. The net result would be a 30-day delay 

before the SRO could enforce the proposed rule. However, if SEC waives the 30-day period, 

the proposed rule can become "effective" and "operative" at the same time. According to 

SEC staff, the 30-day "preoperative" waiting period gives affected parties, such as issuers 

and investors, time to adjust to the new rule. The period also serves to give SEC time during 

which it can evaluate the rule and, if warranted, abrogate it without significantly disrupting 

SRO operations. In waiving the 30-day waiting period, SEC is to consider the proposed rule's 

impact on efficiency, competition, and capital formation, as required by 15 U.S.C. § 78c(f).

64Of these 509 issuers—about 11 percent of the issuers listed on NASDAQ—152 traded on 

the SCM and 357 traded on the NNM.

65Before the moratorium, if bid price or market value of publicly held shares fell below the 

continued listing standards for 30 consecutive trading days, the issuer was classified as 

noncompliant and had 90 days to return to compliance.
Page 35 GAO-04-75 SEC Oversight of SRO Listing Programs

At the end of the moratorium, 447 of the 509 issuers that could be identified 

as having received temporary relief remained listed. The remaining 62 were 

no longer listed at the time the moratorium expired on January 2, 2002. Of 

these, 47 were delisted for deficiencies in listing standards not related to 

bid price and 15 were delisted for other reasons, such as merger with or 

acquisition by another company.

SEC Subsequently Allowed 

a NASDAQ Rule to Remain 

in Effect That Allowed 

Noncompliant SCM Issuers 

Almost 1 Year to Comply 

with the Bid-Price Standard 

and NNM Issuers to 

Transfer to the SCM 

In February 2002, shortly after the moratorium ended, SEC allowed a 

NASDAQ rule to remain in effect that extended the bid-price compliance 

period from 90 days to almost 1 year for SCM issuers and allowed 

noncompliant NNM issuers to transfer to the SCM at the end of the NNM 

bid-price compliance period, rather than enter the delisting process.66 The 

rule implemented these changes on a 2-year pilot basis, and NASDAQ 

agreed to evaluate the rule’s impact on the market at the end of the 2-year 

period. First, the new rule extended the initial SCM bid-price compliance 

period from 90 days to 180 days. Second, at the expiration of the 180 days, 

SCM issuers that had not regained compliance with the bid-price standard 

were allowed an additional 180 days to regain compliance if they met one 

of three initial SCM listing standards.67 The net result was that 

noncompliant SCM issuers that met these higher initial listing standards 

had almost 1 year to regain compliance before entering the delisting 

process. The rule also established procedures for noncompliant NNM 

issuers to transfer to the SCM at the end of the 90-day NNM bid-price 

compliance period. Under these procedures, NNM issuers that did not 

comply with the bid-price standard at the end of the 90-day NNM 

compliance period could, in lieu of entering the delisting process, elect to 

transfer to the SCM, if they (1) met all but the SCM’s bid-price continued 

listing standards, (2) filed an application, and (3) paid the applicable listing 

fee. Under rules applicable to SCM issuers, noncompliant NNM issuers that 

transferred to the SCM could trade for as much as an additional 270 days 

66Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of a Proposed 

Rule Change by the National Association of Securities Dealers, Inc., Relating to the Bid 

Price Criteria of Nasdaq Listing Standards, 67 Fed. Reg. 6306 (Feb. 11, 2002).

67The three SCM initial listing standards were a minimum of (1) $5,000,000 in shareholders’ 

equity, (2) $50,000,000 in market capitalization, or (3) $750,000 in net income from continued 

operations in the most recent fiscal year or in 2 of the last 3 most recent fiscal years. Issuers 

are required to meet at least one of these three standards to be eligible for initial listing. 

SCM initial listing standards for shareholders’ equity, market capitalization, and net income 

are higher than for continued listing. 
Page 36 GAO-04-75 SEC Oversight of SRO Listing Programs

(the remaining 90 days of the first 180-day SCM compliance period and the 

entire second 180-day compliance period). 

According to NASDAQ, the rule was proposed in order to provide 

noncompliant NNM issuers more time to develop and implement strategies 

for regaining compliance with the bid-price standard. Until the rule change, 

the bid-price continued listing standards for the SCM and NNM were the 

same. As a result, NNM issuers failing to meet the bid-price standard after 

the expiration of the compliance period were not eligible to trade on the 

SCM and, if delisted by NASDAQ, would be forced to trade in another overthe-counter market. NASDAQ filed this rule change under the same 

procedure as the rule change implementing the moratorium. As with the 

moratorium rule, SEC took no action to abrogate the proposed rule and 

also waived the 30-day waiting period, allowing NASDAQ to enforce it 

immediately. In waiving the 30-day waiting period, SEC stated that no 

purpose would be served by having 30 days pass before the rule became 

operative because, during the intervening period, issuers and investors 

could become confused about which compliance period applied.68

The February 2002 rule change affected the listing status of issuers that 

were provided relief from pending or potential delisting by the moratorium 

(moratorium issuers) and other issuers that were not identified as receiving 

such relief (nonmoratorium issuers). As previously discussed, 447 (88 

percent) of the 509 moratorium issuers continued to trade when the 

moratorium expired on January 2, 2002. By February 28, 2003, 

approximately 1 year after NASDAQ implemented its February 2002 rule 

change, the number of issuers trading had dropped to 246 (48 percent of 

the 509 moratorium issuers).69 This drop reflects 201 additional delistings, 

increasing the total number of moratorium issuers delisted from 62 to 263 

(52 percent of the 509 moratorium issuers).70

68According to a Market Regulation official, if SEC had not granted NASDAQ’s request to 

waive the 30-day waiting period, different SCM issuers could have been subject to different 

compliance periods, depending on which rule applied at the time they became deficient. 

69The 246 moratorium issuers trading on February 28, 2003, included issuers that were in full 

compliance with the continued listing standards as well as issuers that were noncompliant 

with bid-price or other continued listing standards. 

70Of the 201 moratorium issuers that were delisted between January 2, 2002, the day the 

moratorium expired, and February 28, 2003, 70 were delisted for noncompliance with the 

bid-price standard alone or noncompliance with the bid-price and other listing standards; 95 

were delisted for noncompliance with listing standards not related to bid price; and 36 were 

delisted for other reasons, such as merger with or acquisition by another company.
Page 37 GAO-04-75 SEC Oversight of SRO Listing Programs

Of the 246 issuers that continued to trade as of February 28, 2003, 132 

issuers were listed on the SCM and were trading under the extended 

compliance period or had traded in an extended compliance period and 

regained compliance with the bid-price standard, including 87 that had 

transferred from the NNM. Under the premoratorium bid-price rule, all of 

the 132 issuers would have entered the delisting process. Also, as of 

February 28, 2003, 150 nonmoratorium issuers had traded or were trading 

on the SCM under the extended bid-price compliance period, including 89 

issuers that transferred from the NNM. These 150 issuers also would have 

entered the delisting process under the premoratorium bid-price rule. 

SEC Approved a Rule That 

Further Extended the BidPrice Compliance Periods 

In January 2003, the NASDAQ and NASD boards of directors approved 

NASDAQ’s plans to propose to SEC a rule change that would further extend 

the SCM and NNM bid-price compliance periods up to 2 years and almost 1 

year, respectively, under a pilot program. Market Regulation subsequently 

asked NASDAQ to modify its request to submit the proposal under 

provisions that would allow the rule to be applied immediately upon filing. 

Market Regulation officials said that they wanted to assess whether the 

public perceived any negative consequences for investors in allowing SCM 

issuers to trade while noncompliant for up to 2 years. After ongoing 

discussions with Market Regulation officials, NASDAQ divided its proposal 

into two rule filings—one that would partially implement the extended 

compliance periods and become immediately effective upon filing, and the 

other that would subject the remainder of the proposal to public notice and 

comment before final SEC action. 

Accordingly, in March 2003, NASDAQ submitted to SEC a proposal to 

extend the bid-price compliance periods on both the SCM and NNM by 90 

days.71 SEC took no action to abrogate the rule and waived the 30-day 

waiting period, allowing NASDAQ to enforce the rule immediately. The rule 

allowed noncompliant SCM issuers that met one of three initial SCM listing 

standards another 90-day compliance period extension, increasing the SCM

71Self-Regulatory Organizations: Notice of Filing and Immediate Effectiveness of Proposed 

Rule Change by the National Association of Securities Dealers, Inc. Relating to the Bid Price 

Test in Nasdaq Listing Standards, 68 Fed. Reg. 12729 (Mar. 17, 2003). 
Page 38 GAO-04-75 SEC Oversight of SRO Listing Programs

compliance period to a potential total of 450 days.72 The rule also extended 

the NNM’s initial bid-price compliance period from 90 days to 180 days. At 

the end of the 180-day compliance period an NNM issuer could apply to 

transfer to the SCM, provided it (1) met all but the SCM bid-price continued 

listing standards, (2) filed an application, and (3) paid the applicable listing 

fee. In addition, the rule extended the pilot program established under the 

February 2002 rule change until December 31, 2004, by which time 

NASDAQ is expected to evaluate the rule’s impact on the market. 

NASDAQ proposed the remainder of its plan to extend the SCM bid-price 

compliance period up to 2 years and the NNM bid-price compliance period 

to almost 1 year, using a different procedure that requires affirmative SEC 

approval of the proposed rule change. This procedure allows SEC to review 

comments submitted by the public before the rule becomes effective. 

However, no public comments were submitted. SEC approved the rule on 

December 23, 2003.73 The new rule amended the March 2003 rule to extend 

the SCM bid-price compliance period up to 2 years and the NNM bid-price 

compliance period to almost 1 year under the pilot program. The new rule 

allows NASDAQ to continue to grant a noncompliant SCM issuer a second 

180-day compliance period extension; however, NASDAQ now requires the 

issuer to meet all SCM initial listing standards, except for bid price, rather 

than only one of three initial listing standards as specified in the February 

2002 and March 2003 rule changes.74 NASDAQ officials told us that this new 

requirement was intended to protect investors by preventing financially 

weak companies from taking advantage of the compliance period 

extensions. 

72The three SCM initial listing standards were a minimum of (1) $5,000,000 in shareholders’ 

equity, (2) $50,000,000 in market value of listed securities, or (3) $750,000 in net income from 

continued operations in the most recent fiscal year or in 2 of the last 3 most recent fiscal 

years. 

73Self-Regulatory Organizations; Order Granting Approval to Proposed Rule Change and 

Amendment Nos. 1 and 2 Thereto and Notice of Filing and Order Granting Accelerated 

Approval to Amendment No. 3 Thereto by the National Association of Securities Dealers, 

Inc. to Modify an Existing Pilot Program Relating to the Bid Price Test of the Nasdaq 

Maintenance Listing Standards, 68 Fed. Reg. 75677 (Dec. 31, 2003). Also, see SEC’s 

correction to the text of the rule: Self-Regulatory Organizations; Order Granting Approval to 

Proposed Rule Change and Amendment Nos. 1 and 2 Thereto and Notice of Filing and Order 

Granting Accelerated Approval to Amendment No. 3 Thereto by the National Association of 

Securities Dealers, Inc. to Modify an Existing Pilot Program Relating to the Bid Price Test of 

the Nasdaq Maintenance Listing Standards, 69 Fed. Reg. 6707 (Feb. 11, 2004). 

74See appendix III, figure 7, for NASDAQ’s current bid-price deficiency process.
Page 39 GAO-04-75 SEC Oversight of SRO Listing Programs

An SCM issuer that is still noncompliant with the bid-price standard at the 

end of the 180-day extension but that meets all other SCM initial listing 

standards can receive a further compliance period extension, up to the 

time of its next scheduled shareholders’ meeting, if the issuer agrees to 

seek shareholder approval for a reverse stock split at that meeting and 

implement it promptly afterward.75 The new rule allows NASDAQ to grant 

this compliance period only if the next shareholders’ meeting is scheduled 

to occur within 2 years of the date on which NASDAQ initially notified the 

issuer of its noncompliance, thus limiting the time a noncompliant issuer 

can remain trading to 2 years. Under the new rule, NASDAQ must 

immediately begin delisting proceedings if the issuer does not propose, 

obtain approval for, or promptly execute the reverse stock split. 

The new rule also permits NASDAQ to grant a noncompliant NNM issuer a 

second 180-day compliance period extension, if the issuer meets all NNM 

initial listing standards except bid price. An issuer may elect to transfer to 

the SCM at the end of either the first or second compliance period, 

provided it (1) meets all of the SCM continued listing standards except bid 

price, (2) files an application, and (3) pays the applicable listing fee. Thus, 

under the new rule, noncompliant NNM issuers can remain listed for 

almost 1 year on the NNM and for up to 2 years if they transfer to the SCM 

instead of entering the delisting process. Figure 1 shows how NASDAQ has 

lengthened the SCM and NNM bid-price compliance periods from the 

premoratorium standards through the December 2003 rule. 

75A reverse stock split is the reduction of the total number of shares outstanding. The total 

number of shares will have the same market value immediately after the reverse split as 

before it, but each share will be worth more. For example, if a firm with 10 million 

outstanding shares selling at $10 a share executes a reverse 1 for 10 split, the firm will end 

up with 1 million shares selling for $100 each. 
Page 40 GAO-04-75 SEC Oversight of SRO Listing Programs

Figure 1: Maximum Number of Calendar Days in NASDAQ Bid-Price Compliance Periods from August 1991 (Premoratorium) 

through December 2003 (Latest Rule Change) 

In its approval order, SEC said that the length of the extended compliance 

periods under the new rule raises investor protection concerns. According 

to SEC, if a listing standard is suspended for too long, the standard is not 

transparent and the investor protection principles underlying the premise 

of listing standards could be compromised. SEC said that the heightened 

requirements that NASDAQ issuers must meet under the rule to be eligible 

for the extended compliance periods should offer reassurance to investors 

that the issuer remains a viable business despite its low bid price. SEC 

further noted that if NASDAQ seeks permanent approval for the new rule, 

the results of NASDAQ’s study on the effects of the rule under the pilot 

program would be essential in analyzing whether the length of the 

extended compliance periods undermines investor protection. 

Listing Standards Have 

Been Used as a Vehicle 

for Improving 

Corporate Governance 

Responding to the unexpected collapse of several major corporations, SEC 

requested in 2002 that the SROs strengthen their corporate governance 

standards. In addition, Congress passed Sarbanes-Oxley, which mandated 

that the SROs adopt rules governing audit committees of listed issuers. The 

three largest SROs responded by adopting rules that amended their 

corporate governance standards for listed companies, by among other 

things, increasing the role and authority of independent directors. 

Additionally, in response to an SEC request in 2003, the three largest SROs 

Number of calendar days in the bid-price compliance period

Bid-price compliance period

(date approved by SEC)

Bid-price compliance period

in effect before the

moratorium (August 1991)

First postmoratorium 

rule change (February 2002)

Second postmoratorium

rule change (March 2003)

Third postmoratorium

rule change (December 2003)

90

90 360

180 450

360 730

SCM

NNM

Source: NASDAQ.
Page 41 GAO-04-75 SEC Oversight of SRO Listing Programs

began evaluating their own governance against the standards proposed for 

their issuers. Finally, we reviewed the actions taken by public and private 

institutions in four other countries related to the role and authority of 

independent directors of issuers in those markets. 

Corporate Collapses Led to 

SEC and Congressional 

Efforts to Strengthen 

Corporate Governance 

through Listing Standards

The collapse of major U.S. corporations, such as the Enron Corporation, 

Inc., and WorldCom, Inc., beginning in 2001 raised congressional, SEC, and 

market participant concerns about the quality of corporate governance at 

publicly traded companies. One area of concern focused on the ability of 

directors to provide active and independent oversight of management. For 

example, various congressional committees, including the Senate 

Permanent Subcommittee on Investigations, held hearings as part of their 

examination of the collapse of Enron.76 The subcommittee’s final report on 

the role of the board of directors in Enron’s collapse raised concerns about 

the failure of the Enron board to safeguard the interests of shareholders by 

allegedly allowing management to engage in, among other things, 

inappropriate conflict-of-interest transactions.77 The report alleged that 

financial ties existed between the company and certain board members 

that likely compromised their independence. Also, at companies such as 

Enron and WorldCom, allegedly conflicted boards approved excessive 

compensation for their chief executives. Similarly, hearings by Congress as 

well as an investigation mandated by a U.S. district court into the 2002 

collapse of WorldCom questioned the effectiveness of the board’s oversight 

of the CEO. According to the court-mandated report, the CEO appeared to 

have dominated the course of the company’s growth, as well as the agenda, 

discussions, and decisions of the board.78 

Consistent with the court’s decision in Business Roundtable v. SEC, SEC 

did not mandate changes to the SROs’ listing standards to address these 

76Other congressional committees holding hearings on the collapse of Enron included the 

Senate Committee on Banking, Housing, and Urban Affairs; the Senate Committee on 

Commerce, Science, and Transportation; the House Committee on Energy and Commerce, 

Subcommittee on Oversight and Investigations; and the House Committee on Financial 

Services and its Subcommitee on Capital Markets, Insurance, and Government Sponsored 

Enterprises.

77U.S. Senate Permanent Subcommittee on Investigations, The Role of the Board of 

Directors in Enron’s Collapse, 107th Cong., 2nd sess., 2002, S. Rept. 107-70.

78Dick Thornburgh, First Interim Report of Dick Thornburgh, Bankruptcy Court 

Examiner (November 2002).
Page 42 GAO-04-75 SEC Oversight of SRO Listing Programs

lapses in corporate governance. Instead, the former SEC Chairman asked 

NASDAQ and NYSE in a February 2002 letter to review ways in which they 

could strengthen corporate governance through their listing standards.79 He 

suggested several issues for the SROs to consider, including whether public 

companies should be required to adopt codes of conduct for their officers 

and directors, take steps to ensure directors are qualified for board service, 

and further strengthen audit committee requirements. SEC staff sent Amex 

a similar letter in June 2002.80

Also, responding to the corporate collapses, Congress mandated, with the 

passage of Sarbanes-Oxley in July 2002, that listing standards be used as a 

vehicle for improving corporate governance. Section 301 of Sarbanes-Oxley 

sought to improve the effectiveness of issuer audit committees by imposing 

requirements designed to enhance their independence, authority, and 

responsibility. Sarbanes-Oxley required SEC to direct the SROs through 

rulemaking to prohibit the listing of issuers that do not meet these 

requirements. SEC issued its final rules in April 2003.81

79SEC’s 2002 request was preceded by a 1998 request that resulted in NASD and NYSE 

convening the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit 

Committees (Blue Ribbon Committee) to make recommendations for strengthening audit 

committee oversight. Amex, NASDAQ, and NYSE adopted many of the resulting 

recommendations in 1999 as listing standards. Among other things, they required issuers to 

establish audit committees comprising directors that meet specific independence and 

financial literacy requirements and required audit committees to adopt written charters 

detailing their responsibilities. SEC also followed a Blue Ribbon Committee 

recommendation by requiring issuers to disclose these charters as an appendix to the proxy 

statement at least once every 3 years. 

80SEC also sent letters to other securities exchanges requesting that they review their 

corporate governance listing standards.

81Standards Relating to Listed Company Audit Committees, 68 Fed. Reg. 18788 (Apr. 16, 

2003). SEC’s final rules require most issuers to comply with the new audit committee 

requirements by their first annual shareholders’ meeting after January 15, 2004, or by 

October 31, 2004, whichever is earlier. 
Page 43 GAO-04-75 SEC Oversight of SRO Listing Programs

The SROs Adopted Rules 

That, Among Other Things, 

Increase the Role and 

Authority of Independent 

Directors

Addressing the SEC request and Sarbanes-Oxley mandates, the three 

largest SROs adopted rules that, according to SEC, should foster greater 

board accountability to shareholders.82 Market participants supported the 

rules but held differing views on the need for further enhancements to 

board independence. OCIE officials said that they will work with the SROs 

to ensure processes are developed to more thoroughly assess compliance 

with the new standards. SEC has also taken steps to further strengthen 

director accountability to shareholders, including addressing longstanding 

investor interest in gaining increased access to the director nomination 

process and planning a review of SEC requirements governing disclosures 

of qualitative corporate information.

SEC Stated That the SROs’ Rules 

Should Foster Board 

Accountability 

The SROs submitted rules that SEC stated should foster greater 

accountability, transparency, and objectivity in board oversight.83 Among 

other things, these rules increase the role of independent directors, extend 

corporate governance disclosures, and expand shareholder oversight of 

equity compensation plans.84 SEC completed its review and approval of 

these rules for Amex, NASDAQ, and NYSE between June 2002 and 

December 2003.85 According to Corporation Finance and Market 

Regulation officials, although they worked with the markets to harmonize 

their listing standards in some key areas, they did not push the SROs to 

have identical standards because some differences were warranted, such 

as those related to the size of issuers.

82NASDAQ officials said that NASDAQ’s Listing and Hearing Review Council, a standing 

independent advisory committee on listing and corporate governance issues, began an 

evaluation of potential actions to strengthen corporate governance listing standards before 

NASDAQ received the SEC Chairman’s February 2002 letter. 

83Amex submitted its initial rule proposals in separate filings to SEC on May 6 and June 23, 

2003. NASDAQ submitted its initial rule proposals in separate filings on June 11 and October 

9, 2002. NYSE submitted its initial rule proposals on August 16, 2002. 

84An equity compensation plan is a plan or other arrangement under which the equity 

securities of the issuer are used to compensate such persons as officers, directors, or 

employees for services rendered. 

85The SROs submitted revised rule filings during this period in response to ongoing 

discussions with SEC officials and SEC’s April 2003 rules implementing Sarbanes-Oxley 

audit committee requirements.
Page 44 GAO-04-75 SEC Oversight of SRO Listing Programs

New Rules Increased the Role of Independent Directors 

Amex, NASDAQ, and NYSE’s new rules increase the role of independent 

directors by (1) requiring that in most circumstances issuers have a 

majority of independent directors on their boards and that they meet 

regularly in executive sessions,86 (2) tightening the definition of 

independence that applies to directors, (3) strengthening independent 

directors’ oversight of financial reporting, and (4) increasing independent 

directors’ authority over CEO compensation and director nominations.87

First, according to Amex and NYSE, requiring that a majority of directors 

be independent, with limited exceptions, and free from relationships with 

the issuer or its management that might compromise their independence, 

will promote board decision making that is aligned with shareholders’ 

interests and thereby enhance board accountability. NASDAQ similarly 

stated that such a requirement empowers independent directors to more 

effectively carry out their oversight responsibilities. Further, according to 

Amex and NASDAQ, requiring that independent directors regularly meet 

without management present, as specified in these SROs’ rules, is designed 

to encourage open discussion among independent directors. NYSE’s rules 

include a similar requirement for independent directors and other directors 

who are not company officers. NYSE’s rules further require issuers to 

disclose either the name of the director chosen to preside at the executive 

sessions or the procedure by which a presiding director is selected for each 

executive session. The issuers must also disclose a method interested 

parties can use to communicate any concerns directly to the presiding 

director or nonmanagement directors as a group. 

86Amex, NASDAQ, and NYSE’s new rules apply in full to all domestic issuers listing common 

equity securities, with limited exceptions. For example, all three SROs exempt from the 

“majority of independent directors” standard those issuers for which an individual, a group, 

or another company holds more than 50 percent of the voting power. In addition, Amex 

exempts small business issuers from this standard, requiring instead that their boards of 

directors consist of at least 50 percent independent directors. Small business issuers, based 

on SEC’s definition, are those issuers that, among other things, have less than $25 million in 

revenues and market capitalization.

87Self Regulatory Organizations; New York Stock Exchange, Inc. and National Association of 

Securities Dealers, Inc.; Order Approving Proposed Rule Changes Relating to Corporate 

Governance, 68 Fed. Reg. 64154 (Nov. 12, 2003); Self-Regulatory Organizations; Order 

Granting Approval of Proposed Rule Change by the American Stock Exchange LLC and 

Notice of Filing and Order Granting Accelerated Approval of Amendment No. 2 Relating to 

Enhanced Corporate Governance Requirements Applicable to Listed Companies, 68 Fed. 

Reg. 68432 (Dec. 8, 2003). 
Page 45 GAO-04-75 SEC Oversight of SRO Listing Programs

Second, the three SROs’ new rules tighten the definition of director 

independence by specifying additional bright-line criteria that boards must 

apply when making independence determinations. The three SROs specify, 

among other things, additional financial and employment relationships for 

directors and immediate family members that would preclude an 

independence determination. For example, Amex and NASDAQ’s new rules 

maintain a test of financial independence that prohibits independent 

directors from receiving compensation from the issuer in excess of $60,000, 

subject to limited exceptions such as compensation for board service, but 

expand the specific types of compensation prohibited to include other 

types of payments and apply this financial test to the directors’ immediate 

family. For example, NASDAQ’s new rules would prohibit payments such 

as political contributions. NYSE’s new definition of director independence 

also includes a test of financial independence similar to that of Amex and 

NASDAQ with a compensation ceiling of $100,000, unless this 

compensation is related to board service. 

In addition to providing bright-line criteria to aid boards in making these 

independence determinations, NYSE’s rules also recommend that boards 

broadly consider other material relationships that might impair a director’s 

independence.88 Boards must disclose any additional standards they adopt 

and explain to investors any determination of independence for a director 

who does not meet these standards. 

Of the three SROs, NASDAQ and NYSE currently require issuers to disclose 

which directors they have designated as independent. Some market 

participants expressed concern that without this information they would 

have difficulty assessing the independence of issuers’ boards. Likewise, 

regulators might face the same difficulty. Amex officials said that they 

would consider providing this added disclosure. 

88According to NYSE, material relationships can include commercial, industrial, banking, 

consulting, legal, accounting, charitable, and familial relationships.
Page 46 GAO-04-75 SEC Oversight of SRO Listing Programs

Third, the three SROs’ new rules strengthen the role of independent 

directors on audit committees and audit committee oversight of the 

financial reporting process.89 Implementing SEC’s final rules related to 

Sarbanes-Oxley section 301 requirements, the SROs further tightened the 

definition of independence that will apply to audit committee members by 

prohibiting them from accepting any consulting, advisory, or other 

compensatory fees, unless this compensation is related to board service. 

Also, responding to SEC’s final rules, the SROs new rules mandate that 

audit committee charters require the committees to have direct 

responsibility for the retention, oversight, and compensation of the 

independent auditor, have access to and funding for any other independent 

advisers they need to complete their work, and establish procedures for 

treating accounting-related complaints and the anonymous submission of 

these complaints by employees.90 In addition to addressing the SarbanesOxley requirements, Amex, NASDAQ, and NYSE adopted other listing 

standards for audit committees. For example, NASDAQ’s rules require 

audit committees to approve all related-party transactions.91 Amex’s rules 

require that the audit committee exercise appropriate review and oversight 

89Amex, NASDAQ, and NYSE’s new rules retain a previous requirement that issuers have 

audit committees of at least three members and consist solely of independent directors. The 

new rules also continue to require that each audit committee member be “financially 

literate” and that at least one have “financial expertise,” although Amex uses the term 

“financial sophistication.” Amex and NASDAQ define financial literacy as the ability to read 

and understand financial statements. NASDAQ defines financial expertise as having past 

employment experience in finance or accounting, requisite professional certification in 

accounting, or other comparable experience. Amex defines financial sophistication in a 

similar manner. NYSE delegates the responsibility for defining financial literacy to issuers’ 

boards. NYSE specifies that the financial expert must have accounting or related financial 

management expertise, although it delegates the responsibility to boards to further define 

this expertise. Pursuant to Sarbanes-Oxley section 407, issuers are required to disclose 

whether their audit committees have at least one financial expert meeting the definition of 

financial expert provided in SEC’s rulemaking that implements section 407. Although none 

of the SROs’ definitions of financial expert meet SEC’s stricter definition, Corporation 

Finance officials stated that they expect most issuers will seek audit committee experts that 

meet SEC’s definition, rather than disclose to investors that they do not have such an expert. 

Issuers other than small business issuers must comply with this disclosure requirement in 

their annual reports for fiscal years ending on or after July 15, 2003, and for small business 

issuers, December 15, 2003.

90Amex, NASDAQ, and NYSE’s new rules retain the requirement that audit committees have 

charters that include descriptions of the committee’s scope of responsibilities and the way 

in which the committee will carry them out.

91Related-party transactions refer to financial transactions between the issuer and a director, 

director nominee, officer, significant shareholders, or the immediate family members of any 

of these.
Page 47 GAO-04-75 SEC Oversight of SRO Listing Programs

of these transactions. NYSE’s rules include a requirement that the audit 

committee meet separately with management, internal auditors, and 

outside auditors. 

Finally, the three SROs’ new rules increase independent directors’ authority 

over CEO compensation and the selection of new director nominees. Amex 

and NASDAQ’s rules allow boards to establish independent compensation 

and nominating committees or require that a majority of their independent 

directors fulfill these responsibilities.92 In contrast, NYSE’s rules require 

boards to establish independent compensation and nominating 

committees.93 According to Amex and NYSE, requiring independent 

directors to set CEO compensation will promote an objective evaluation of 

CEO performance and the design of a compensation package that fairly 

reflects that performance and includes appropriate incentives. NASDAQ 

stated that such a requirement helps to ensure that appropriate incentives 

are in place, consistent with the board’s responsibility to maximize 

shareholder value. Similarly, the three SROs stated that giving independent 

directors responsibility for nominating new directors will help ensure the 

quality and independence of nominees. 

Amex issuers must comply with the new rules increasing the role of 

independent directors by their first annual shareholders’ meeting after 

March 15, 2004, or by October 31, 2004, whichever is earlier.94 NASDAQ and 

NYSE issuers have until their first annual shareholders’ meeting after 

January 15, 2004, or October 31, 2004, whichever is earlier.95 However, 

92Amex’s rules require the independent compensation committee or a majority of 

independent directors to determine, or recommend to the board for determination, the 

compensation of the CEO. NASDAQ has a similar requirement for determining the 

compensation of the CEO and all other executives. 

93NYSE’s rules require the independent compensation committee to determine and approve 

the CEO’s compensation either alone or with the rest of the independent directors.

94Certain types of Amex issuers have different implementation schedules for the new listing 

standards. For example, Amex foreign private issuers and small business issuers have until 

July 31, 2005, to comply with the rules increasing the role of independent directors.

95As with Amex issuers, certain types of NASDAQ and NYSE issuers also have different 

implementation schedules for the new listing standards. For example, NASDAQ foreign 

private issuers and small business issuers (issuers that, among other things, generate less 

than $25,000,000 in revenues) have until July 31, 2005, to comply with the rules increasing 

the role of independent directors. NYSE foreign private issuers have until July 31, 2005, to 

comply with Sarbanes-Oxley-related audit committee listing standards. 
Page 48 GAO-04-75 SEC Oversight of SRO Listing Programs

NASDAQ issuers had until January 15, 2004, to comply with NASDAQ’s new 

rule related to audit committee approval of related-party transactions. 

New Rules Extended Corporate Governance Disclosures 

Amex, NASDAQ, and NYSE’s new rules require issuers to adopt a code of 

conduct and ethics that is applicable to all directors, officers, and 

employees.96 Amex and NASDAQ require that these codes address conflicts 

of interest, compliance with laws and regulations, and enforcement of the 

codes. NYSE’s rules recommend that the codes address these and other 

topics. All three SROs require issuers to disclose their codes and any 

waivers granted to officers and directors.97 NYSE’s rules further require 

boards to adopt and disclose corporate governance guidelines addressing 

such topics as director qualifications and responsibilities, management 

succession, and annual performance evaluations. According to NYSE, 

increased corporate governance disclosures should enhance investors’ 

understanding of issuers’ corporate governance policies and procedures 

and promote adherence to them by directors and management. In addition, 

NYSE’s rules require audit committees to disclose their charters and 

nominating and compensation committees to adopt and disclose charters 

that address their purpose and responsibilities, among other things. The 

three SROs also adopted rules implementing disclosure requirements for 

foreign private issuers (foreign issuers) listed on their markets.98 Amex and 

NYSE’s rules require that foreign issuers disclose significant differences 

between their corporate governance practices and those required by the

96NASDAQ uses the term “code of conduct” instead of “code of conduct and ethics.” 

97SEC enacted a rule pursuant to Sarbanes-Oxley section 406 that requires disclosure of (1) 

whether issuers have adopted a code of ethics that applies to the company’s principal 

executive, financial, and accounting officers or other persons performing such functions 

and, if not, the reasons why not; (2) any code that is adopted; and (3) waivers from the code 

granted to any of the aforementioned officers. Issuers must comply with the code of ethics 

disclosure requirements in their annual reports for fiscal years ending on or after July 15, 

2003. 

98While Sarbanes-Oxley applies generally to both U.S. and foreign issuers, SEC’s section 301 

rules are flexible and include various exemptions. In particular, foreign issuers may, in 

specified circumstances, be exempt from section 301’s independence requirements for, and 

specified duties of, audit committees.
Page 49 GAO-04-75 SEC Oversight of SRO Listing Programs

SROs.99 NASDAQ requires foreign issuers to disclose any exemptions 

granted by NASDAQ to its corporate governance rules and describe any 

alternative measures taken by the issuer.100

Amex issuers have until June 1, 2004, to adopt and disclose a code of 

conduct and ethics, and NASDAQ issuers have until May 4, 2004, to do so. 

Foreign issuers listed on Amex or NASDAQ must begin disclosing any 

differences between their corporate governance practices and those 

required by the SRO beginning on or after January 1, 2004, respectively. 

NYSE issuers must comply with the new disclosure requirements by their 

first annual meeting after January 15, 2004, or by October 31, 2004, 

whichever is earlier. 

New Rules Expand Shareholder Oversight of Equity Compensation 

Plans

Finally, the three SROs have implemented rules expanding requirements 

that issuers obtain shareholder approval of certain equity compensation 

plans.101 In addition to maintaining previous requirements that 

shareholders approve equity compensation plans involving directors and 

99Amex’s new rules state that foreign issuers seeking relief from its corporate governance 

rules should provide written certification from independent counsel of the issuer’s home 

country stating that the issuer’s corporate governance practices are not prohibited by home 

country law. NYSE requires a written certification stating that the issuer’s corporate 

governance practices comply with home country law and the rules of the principal 

securities market for the issuer’s stock.

100NASDAQ’s rules permit foreign issuers to request an exemption from NASDAQ’s 

corporate governance rules if the NASDAQ rule is contrary to a law, rule, or regulation in 

their home country or is contrary to generally accepted business practices in that country. 

101SEC approved NASDAQ and NYSE’s proposals related to shareholder approval of equitybased compensation plans on June 30, 2003. (Self-Regulatory Organizations; New York 

Stock Exchange, Inc. and National Association of Securities Dealers, Inc.; Order Approving 

NYSE and NASDAQ Proposed Rule Changes and NASDAQ Amendment No. 1 and Notice of 

Filing and Order Granting Accelerated Approval to NYSE Amendments Nos. 1 and 2 and 

NASDAQ Amendments Nos. 2 and 3 Thereto Relating to Equity Compensation Plans, 68 Fed. 

Reg. 39995 (July 3, 2003).) SEC approved Amex’s related proposals on October 9, 2003. (SelfRegulatory Organizations; Notice of Filing and Order Granting Accelerated Approval of a 

Proposed Rule Change Amendment Nos. 1, 2, and 3 Thereto by the American Stock 

Exchange LLC Relating to Shareholder Approval of Stock Option Plans and Other Equity 

Compensation Arrangements, 68 Fed. Reg. 59650, (Oct. 16, 2003).) SEC approved an 

amendment to Amex’s new rules on December 3, 2003. (Self-Regulatory Organizations; 

Notice of Filing and Order Granting Accelerated Approval to a Proposed Rule Change and 

Amendment No. 1. Thereto by the American Stock Exchange LLC Relating to Broker Voting 

on Equity Compensation Plans, 68 Fed. Reg. 69092 (Dec. 11, 2003).)
Page 50 GAO-04-75 SEC Oversight of SRO Listing Programs

officers, the new rules include requirements that shareholders approve 

plans offered to employees and material modifications to all plans subject 

to shareholder approval.102 According to NASDAQ, while the use of equity 

compensation plans can align director, officer, and employee interests with 

those of shareholders and assist in recruiting and retaining employees, they 

can also dilute the value of existing shares. For example, many equity 

compensation plans award an employee (or director or officer) stock 

options, or the rights to purchase a certain number of shares of the issuer’s 

stock at a predetermined price for a fixed period. If the market value of the 

stock rises above the predetermined price, the option holders can profit by 

exercising their options to buy the stock at the predetermined price and 

then selling the stock at the higher market price.103 As option holders 

exercise their options, the issuers would deliver to them newly issued 

stock or previously issued treasury stock, thus increasing the supply of 

outstanding shares.104 Any company earnings would then be spread among 

the existing and the new shareholders, thereby reducing the earnings of 

existing shareholders. According to NYSE, broadening the approval 

requirements for equity compensation plans provides shareholders a 

means of protecting their economic interests. NASDAQ stated that the new 

rules provide shareholders a greater voice in the use of equity 

compensation. 

Amex and NYSE’s new rules also preclude their broker-dealer members 

from voting on behalf of shareholders when the issuers seek shareholder 

approval of equity compensation plans, unless the shareholders have first 

given the broker-dealer voting instructions. Amex required issuers to seek 

shareholder approval in accordance with these rules after October 9, 2003, 

and NASDAQ and NYSE began doing so after June 30, 2003. 

102The three SROs do not require shareholder approval of inducement awards to new 

employees; certain grants, plans, and amendments related to mergers and acquisitions; and 

certain specific types of plans, such as those that are already regulated under Internal 

Revenue Code and Treasury regulations. All three SROs require that the independent 

compensation committee or a majority of the independent directors approve the use of an 

inducement exemption and promptly disclose it thereafter. Amex and NASDAQ further 

exempt warrants or rights issued generally to all shareholders or stock purchase plans 

available on equal terms to all shareholders. 

103If the market value of the stock falls below the predetermined price specified in the equity 

compensation plan, the stock options could expire worthless.

104Treasury stock is stock that has been bought back by the issuer and is available for 

retirement or resale; the stock is issued but not outstanding. 
Page 51 GAO-04-75 SEC Oversight of SRO Listing Programs

Market Participants Supported 

the SROs’ Efforts but Had 

Differing Views on Whether 

Board Independence Should Be 

Further Enhanced 

Market participants expressed support for Amex, NASDAQ, and NYSE’s 

efforts to improve corporate governance through listing standards. 

However, some said that more could be done to further enhance corporate 

governance, particularly board independence. Of these market 

participants, several told us that boards should be required through listing 

standards to adhere to higher standards of independence; others said that 

boards should be encouraged to voluntarily adopt stricter standards. 

According to one market participant, more time was needed to fully 

implement and assess the impact of the SROs’ many new corporate 

governance standards before determining whether further changes were 

warranted. 

First, several market participants said that stricter standards of 

independence should be applied to independent directors than are included 

in Amex, NASDAQ, and NYSE’s new rules. For example, these rules leave 

in place standards that preclude an independence finding when a board 

interlock involves the compensation committee.105 Some market 

participants would go further and preclude an independence finding when 

any interlocking board relationship exists, reasoning that any relationship 

directors have with the CEO on another board could impair their 

independence. Others said that the definitions adopted by the three SROs 

do not sufficiently address financial conflicts of interest for independent 

directors who are not audit committee members. They said that, similar to 

the Sarbanes-Oxley requirements for audit committee members, boards 

should not be able to designate directors as independent if they receive any 

compensation from the issuer that is not related to board service. One 

market participant told us that the definition of director independence 

should also prohibit financial relationships between the director and any 

executive officer.106 However, others noted limitations to defining director 

independence through bright-line criteria. Three market participants said 

that bright-line criteria may impede independently minded individuals from 

serving on boards. For example, one market participant said that an 

independently minded person who has a financial relationship valued at 

105Board interlocks occur when an issuer’s director is employed as an executive officer of 

another company and that second company’s board employs as a director any of the issuer’s 

current executive officers. For example, a compensation committee interlock occurs when 

an issuer’s director is employed as an executive officer of another company and that 

company’s compensation committee employs any of the issuer’s current executive officers.

106For example, under this approach, a director that provided legal services to the CEO for 

personal matters would not be considered independent.
Page 52 GAO-04-75 SEC Oversight of SRO Listing Programs

$61,000—$1,000 over the compensation limit NASDAQ has established—

would not be able to serve as an independent director. Another market 

participant told us that no independence definition could be structured to 

control all possible conflict-of-interest scenarios, particularly indirect 

relationships. This market participant said that indirect relationships, 

which include social relationships, can compromise a director’s 

independence as much as direct financial relationships with issuers. Amex, 

NASDAQ, and NYSE officials told us that it was difficult to establish brightline criteria that might signal conflicts of interest for all directors. NYSE 

officials said that for this reason, they decided to require issuers to disclose 

more information on their independence determinations and thus allow 

investors to make their own assessments of a board’s independence. 

Second, some market participants stated that boards should comprise a 

supermajority (two-thirds or three-fourths) of independent directors, 

rather than the simple majority that the three SROs’ new rules require. 

According to one market participant, having a supermajority of 

independent directors would reassure investors that the board was 

independent and represented their interests. Several market participants 

said, however, that smaller issuers are having a harder time recruiting 

enough qualified independent directors to meet the majority independent 

director requirement because of the costs involved in searching for and 

retaining them. Amex officials said that for this reason, their SRO did not 

propose requiring a supermajority of independent directors. Two market 

participants told us that many boards continued to look for independent 

directors among CEOs. According to them, many qualified, willing, and less 

costly candidates are available for independent director positions among 

the ranks of professionals just below CEO, such as chief financial officers 

and chief operating officers. Officials from the American Institute of 

Certified Public Accountants told us that they have compiled a database 

with contact information on financial and other business professionals who 

are interested in serving as independent directors. NASDAQ officials said 

that they have not seen any evidence that supports requiring a 

supermajority of independent directors through a listing standard and that 

their goal of independent board decision making is achieved through their 

standard requiring a majority of independent directors. NYSE officials told 

us that they debated a supermajority of independent directors requirement, 

but said that a consensus did not exist in its favor. According to these 

officials, time is needed to first implement and evaluate the effect of the 

majority independent director requirement before assessing whether a 

supermajority of independent directors is needed. 
Page 53 GAO-04-75 SEC Oversight of SRO Listing Programs

Finally, several market participants recommended separating the positions 

of CEO and chairman. In the United States, many companies are under the 

leadership of a combined CEO/chairman, in contrast to companies in other 

countries where these roles tend to be separated, such as in the United 

Kingdom.107 However, market participants expressed concern that this 

combined role can provide the potential for conflict, because CEOs are 

part of the management team that the board oversees. According to a 

January 2003 report by The Commission on Public Trust and Private 

Enterprise, a 12-member body sponsored by The Conference Board and 

comprising leaders from business, finance, and academia, in many of the 

corporate scandals of the recent past strong CEOs appeared to have 

exerted a dominant influence over their boards, often stifling the efforts of 

directors to perform the oversight needed to ensure a healthy system of 

corporate governance. The report further stated that boards have often 

lacked the structure and information needed to perform their roles 

properly or have abdicated their responsibility to provide the oversight 

required of them, and that, in such circumstances, boards cannot properly 

oversee the CEO’s performance. Several market participants agreed with 

the Commission’s recommendation for strengthening board independence 

and leadership by separating the role of CEO and chairman and providing 

that the chairman be independent or, as an alternative, providing for 

leadership of the independent directors by establishing an independent 

lead or presiding director.108 According to one market participant, it is 

important that an independent director, whether an independent chairman, 

lead director, or presiding director, lead board meetings and have control 

over meeting agendas, meetings schedules, and the flow of information 

107UK issuers listed on the London Stock Exchange are required to disclose the extent to 

which they comply with the Combined Code on Corporate Governance, the United 

Kingdom’s official corporate governance code, and the reasons for any noncompliance. The 

code recommends separating the roles of CEO and chairman. According to a 2002 study 

commissioned by the UK Department of Trade and Industry, over 90 percent of UK issuers 

disclosed compliance with this provision. See Derek Higgs, Review of the Role and 

Effectiveness of Non-executive Directors, January 2003.

108The report discussed three alternative structures from which boards could choose to 

balance the powers of the CEO and independent directors. Under the first alternative, the 

CEO and chairman positions are separated, with the chairman position filled by an 

independent director. Under the second alternative, the CEO and chairman positions are 

separated, but if the chairman is not an independent director, the position of lead 

independent director is established. Under the third alternative, if the CEO and chairman 

positions are combined, a presiding director is established. See The Conference Board 

Commission on Public Trust and Private Enterprise, Findings and Recommendations Part 

2: Corporate Governance and Part 3: Audit and Accounting, January 2003.
Page 54 GAO-04-75 SEC Oversight of SRO Listing Programs

from management to the other independent directors. Two market 

participants said that NYSE’s new rule requiring boards to disclose the 

name of or process for selecting a director to preside over executive 

sessions was a step toward encouraging this independent leadership, 

although the new rule did not assign this individual specific 

responsibilities.

Other market participants opposed separating the positions of CEO and 

chairman of the board. One market participant said that the SROs’ rules 

requiring that independent directors meet regularly in executive session is 

adequate to ensure board independence. According to this market 

participant, CEOs are very responsive to directors because they view the 

board as their boss. Others said CEOs may lose authority if the position is 

too weakened. Amex, NASDAQ, and NYSE officials told us that they had 

considered requiring the separation of CEO and chairman in developing 

their corporate governance rule proposals, but that they determined it was 

not appropriate to require all issuers to have this particular leadership 

structure at all times. According to NASDAQ and NYSE officials, an issuer 

may benefit from having a combined CEO and chairman under some 

circumstances, such as when the company is undergoing a merger. These 

officials said that in the case of a merger, the combined CEO and chairman 

position could provide the company the strong, unified leadership needed 

to guide the company through a difficult transition period. 

In prior work, we expressed the view that SEC, in conjunction with the 

SROs, should consider using listing standards to further strengthen board 

independence by requiring a supermajority of independent directors and 

separating the positions of CEO and chairman. Although such practices do 

not guarantee that boards will be well managed, greater board 

independence could promote board decision making that is aligned with 

shareholders’ interests, thereby enhancing board accountability. While 

board independence does not require eliminating all nonindependent 

directors, we have taken the position in previous work that it should call 

for a supermajority of independent directors.109 Our prior work also 

recognized that independent leadership of the board is preferable to ensure 

some degree of control over the flow of information from management to 

109U.S. Comptroller General David M. Walker, Integrity: Restoring Trust in American 

Business and the Accounting Profession, (document based on author’s speech to the 

American Institute of Certified Public Accountants), November 2002. See also U.S. General 

Accounting Office, Mutual Funds: Assessment of Regulatory Reforms to Improve the 

Management and Sale of Mutual Funds, GAO-04-533T (Washington, D.C.: Mar. 10, 2004).
Page 55 GAO-04-75 SEC Oversight of SRO Listing Programs

the board, scheduling of meetings, setting of board agendas, and holding 

top management accountable. The board has a clear responsibility to hold 

the CEO accountable for results. However, this system of checks and 

balances can be undermined when the positions of CEO and chairman are 

combined. A chairman who is also the CEO can have a significant impact 

on the direction of the company as well as on the role and composition of 

the board. For example, such individuals can have undue influence over 

who is asked to join or leave the board. For these reasons, we have 

supported the separation of the positions of CEO and chairman.

OCIE Plans to Work with the 

SROs to Ensure That Processes 

Are Developed to More 

Thoroughly Assess Compliance 

with the New Standards 

SRO officials told us that they are revising the processes they use for 

assessing issuers’ compliance with corporate governance listing standards, 

including issuers’ self-certifications and reviews of public information. 

According to SRO officials, self-certifications are a means of holding 

issuers accountable for complying with their corporate governance 

standards, recognizing that the SRO cannot independently verify 

compliance with each individual standard. For example, these officials said 

that it would be difficult to independently determine compliance with some 

standards, such as those requiring independent directors to meet in 

executive sessions, nominate other independent directors, and determine 

CEO compensation, unless they were actually in the boardroom. 

SRO officials said that as part of their efforts to ensure compliance with 

corporate governance listing standards, they have extended their historical 

use of issuer self-certifications of compliance with audit committee 

requirements to many of the new standards.110 NASDAQ, for example, has 

updated its self-certification form and now requires issuers to certify 

compliance with its new audit committee composition, audit committee 

charter, executive sessions, and code of conduct standards. According to 

NASDAQ officials, issuers are not required to certify compliance with 

standards for which NASDAQ can independently determine compliance, 

such as the standard requiring a majority of independent directors. Amex 

and NYSE’s new self-certification forms address their new rules relating to 

the composition and responsibilities of the board and audit, nominating, 

and compensation committees and their new disclosure requirements. As 

part of its new rules, NYSE further requires that CEOs annually certify that 

they are not aware of any violations of NYSE’s corporate governance 

standards and that issuers disclose these CEO certifications in their annual 

reports. According to NYSE, requiring CEO certifications will focus the 

110NYSE calls its self-certification form a “written affirmation.”
Page 56 GAO-04-75 SEC Oversight of SRO Listing Programs

CEO and senior management’s attention on the issuer’s compliance with 

corporate governance listing standards. Amex and NASDAQ officials said 

that they did not consider requiring CEO certifications necessary to 

ensuring compliance with corporate governance listing standards. 

In addition to requiring self-certifications of compliance with corporate 

governance standards, the three SROs require their issuers to notify them 

upon becoming noncompliant with corporate governance standards. Amex, 

NASDAQ, and NYSE have each used their corporate governance listing 

standards to implement SEC’s new rule directing the SROs to require their 

issuers to promptly notify them when an executive officer becomes aware 

of any material noncompliance with the Sarbanes-Oxley-mandated audit 

committee requirements. All three SROs apply the notification requirement 

to all of their corporate governance listing standards, not just the SarbanesOxley-related listing standards. NYSE designated the CEO responsible for 

this notification. 

Officials from the three SROs said that they have expanded their current 

process of reviewing periodic SEC filings, such as proxy statements, to 

include information that might indicate an issuer is noncompliant with the 

new corporate governance standards. For example, NASDAQ officials said 

that they review the financial disclosures in proxy statements to determine 

whether directors designated as independent have prohibited relationships 

with the issuer. Also, NYSE officials said that they review proxy statements 

to determine whether members of the management team are listed as 

members of the audit committee, which would be a violation of NYSE’s 

listing standards. Officials of all three SROs said that they conduct manual 

reviews of required SEC filings, including proxy statements. They also said 

that they have automated systems that flag potential corporate governance 

issues for review and that they are enhancing these systems to allow them 

to better assess compliance with their new corporate governance 

requirements. Additionally, they said that they will continue to monitor 

other public disclosures, such as press releases, and the financial press for 

information that could indicate noncompliance with corporate governance 

standards. For example, NASDAQ officials said that news that an audit 

committee member had retired would lead to an inquiry about whether the 

issuer had filled the position, if the retirement would cause the audit 

committee to become noncompliant with NASDAQ’s rules, and whether the 

person filling the position met the SRO’s independence standards. 

OCIE officials said that they will work with the SROs to ensure that 

effective processes are in place to more thoroughly assess compliance with 
Page 57 GAO-04-75 SEC Oversight of SRO Listing Programs

the new standards. These officials told us that while the SROs can use 

information available in public disclosures to assess whether issuers 

comply with some of the new standards, such as whether directors satisfy 

the definition of independence, these disclosures do not contain 

information that would help assess compliance with other standards. For 

example, the new rules require that audit committee charters address the 

audit committees’ responsibility to hire, compensate, and oversee outside 

auditors. OCIE officials said that while the SROs are able to determine 

whether the audit committee members satisfied the new audit committee 

independence standards by reviewing public disclosures, they would not 

be able to determine whether audit committees were actually providing 

independent oversight of the outside auditors using the same information. 

They said that a similar challenge exists with respect to rules requiring that 

independent directors determine executive compensation and nominate 

new directors. According to OCIE officials, sources of information are 

available that the SROs could use in helping to assess compliance with 

their new standards. For example, they said that the SROs could consider 

reviewing board and committee meeting agendas and minutes to assess 

whether independent directors may have discussed matters pertaining to 

the outside auditor without management present. They said that while it 

would not be practical for SROs to conduct such detailed compliance 

reviews for all issuers, conducting them on a sample basis could further 

promote compliance with the listing standards. 

In addition to issues related to assessing compliance with corporate 

governance standards, the SROs have considered what sanctions should be 

imposed on issuers that do not comply with these standards. Concerned 

about the range of options available, in December 2003 and November 

2003, respectively, Amex and NYSE each adopted a rule under which they 

reserve the right to issue public reprimand letters to issuers that do not 

comply with their corporate governance standards.111 Amex and NYSE 

officials said that the only sanction otherwise available is delisting the 

issuer, a step that they said could, in certain circumstances, be perceived as 

more harmful to investors than the issuer’s noncompliance. NYSE officials 

said that their experience to date has been that companies genuinely wish 

to comply with corporate governance standards; however, some of the 

standards have subjective elements, and a company may dispute a view by 

NYSE that it failed to comply with the standards and extend negotiations 

longer than acceptable. According to these officials, potential public 

111Amex calls its public reprimand letter a “public warning” letter. 
Page 58 GAO-04-75 SEC Oversight of SRO Listing Programs

announcement of noncompliance might be a useful tool in such 

circumstances. According to Amex and NYSE officials, the SROs would, if 

necessary, delist an issuer that did not, after receiving the public reprimand 

letter, return to compliance with the market’s listing standards. In contrast, 

NASDAQ officials opposed the lesser sanction, stating that they did not 

want issuers to knowingly violate corporate governance rules with the 

expectation that the only consequence would be a letter of reprimand. 

They said that part of ensuring a fair and transparent marketplace is to 

consistently apply and enforce listing standards and that if a requirement is 

significant enough to be a listing standard, then issuers that do not comply 

with the standard should be subject to delisting. According to these 

officials, the penalty of delisting is a more effective means of achieving 

issuer compliance, and thereby protecting investors, than a lesser sanction. 

SEC Has Taken Steps to Further 

Increase Director Accountability 

SEC has taken steps to revise regulations that have allowed issuers to 

exclude disclosures regarding shareholder director nominees in the issuer’s 

proxy statement. For at least 60 years, shareholders have sought greater 

access to the issuer’s proxy as a means of replacing ineffective or 

unresponsive directors and improving board accountability to 

shareholders.112 In April 2003, the Commission directed Corporation 

Finance to formulate possible changes in the rules and regulations 

governing director elections, including SEC’s Rule 14a-8, which addresses 

shareholder access to the proxy statement.113 Responding to Corporation 

Finance’s recommendations,114 SEC proposed a rule in October 2003 that 

creates a mechanism for including, in issuer proxy material, disclosures of 

112For example, SEC held hearings on shareholders’ access to the director nominating 

process in 1943. See Securities and Exchange Commission Proxy Rules: Hearings on H.R. 

1493, H.R. 1821, and H.R. 2019 Before the House Committee on Interstate and Foreign 

Commerce, 78th Cong., 1st Sess., at 17-19 (1943); testimony of Chairman Ganson Purcell.

113SEC’s Rule 14a-8 governs shareholder access to the issuer’s proxy statement for the 

inclusion of shareholder proposals. Shareholders can conduct their own proxy contest, 

sending out proxy materials to other shareholders in accordance with applicable rules and 

regulations. According to market participants, proxy contests are prohibitively expensive 

for shareholders as they must prepare and pay for the dissemination of proxy materials at a 

potential cost of hundreds of thousands or even millions of dollars. Shareholders can 

nominate directors at the annual shareholder meeting, but because most shareholders vote 

through a proxy before the meeting, such nominees have little chance of being elected. 

According to market participants, other alternatives available to shareholders seeking to 

replace directors, such as shareholder litigation, are also costly and conflict-intensive.

114SEC Division of Corporation Finance, Staff Report: Review of the Proxy Process 

Regarding the Nomination and Election of Directors (July 2003).
Page 59 GAO-04-75 SEC Oversight of SRO Listing Programs

director nominees made by long-term shareholders, or groups of long-term 

shareholders, with significant holdings.115 Specifically, the proposed rule 

includes triggers that, when activated, require disclosure in an issuer’s 

proxy materials of shareholder director nominees. For example, under one 

proposed trigger, this disclosure would be required when more than 35 

percent of the shareholders who cast votes at the annual shareholders’ 

meeting oppose at least one of the issuer’s director nominees. The issuer is 

then required to include disclosure regarding shareholder director 

nominees in the proxy materials within the next two annual shareholders’ 

meetings provided, among other things, that the nominees meet all 

applicable independence and eligibility requirements. Also, in response to 

the staff report, SEC adopted rules that strengthen disclosure requirements 

related to an issuer’s nomination of directors and to shareholders’ 

communication with directors.116 According to SEC, the enhanced 

disclosures are intended in part to provide shareholders with additional 

information for use in evaluating the board of directors and nominating 

committees of the companies in which they invest. 

SEC officials told us that they plan to review disclosure requirements 

regarding potential director and director nominees’ conflicts of interest. 

Items 401 and 404 of SEC’s Regulation S-K describe certain background 

information that an issuer must disclose in its proxy statement about its 

executive officers, directors, and director nominees, as well as certain 

relationships and transactions between the issuers and these individuals. 

These disclosure requirements focus on employment, family, and business 

relationships between the director or director nominees and the issuer or 

executive officers. In December 2001, the American Federation of Labor 

and Congress of Industrial Organizations (AFL-CIO) filed a petition with 

SEC requesting that it consider a rulemaking to amend Regulation S-K to 

require additional conflict-of-interest disclosures. In its rule-making 

petition, the AFL-CIO stated that it discovered after Enron’s collapse that 

several directors considered independent by the Enron board, including 

two who served on the audit committee, had relationships with Enron or its 

senior executives that could have interfered with their ability to exercise 

independent judgment. One, for example, was president of a not-for-profit 

115Proposed Rule: Security Holder Director Nominations, SEC Release Nos. 34-48626 and IC26206, File No. S7-19-03 (Oct. 14, 2003).

116Final Rule: Disclosure Regarding Nominating Committee Functions and Communications 

Between Security Holders and Boards of Directors, SEC Release Nos. 33-8340 and IC-26262, 

File No. S7-14-03 (Nov. 24, 2003).
Page 60 GAO-04-75 SEC Oversight of SRO Listing Programs

organization that received contributions from Enron. Regulation S-K does 

not currently require disclosure of this relationship. The AFL-CIO and other 

market participants who shared its views said that increased disclosure of 

conflicts of interest would allow investors to better assess the 

independence of a board. Other market participants, however, told us that 

the current disclosure requirements in Regulation S-K were adequate for 

investors and that further requirements would only make the proxy 

statement bulkier and harder to read. Corporation Finance officials told us 

that they plan to review Regulation S-K disclosure requirements under 

items 401 and 404. 

At SEC’s Request, the Three 

Largest SROs Began 

Evaluating Their Own 

Corporate Governance 

In a March 2003 letter, the SEC Chairman asked Amex, NASDAQ, and 

NYSE to review their governance, including board structures, policies, and 

practices, to ensure that it serves the public well. In these letters, the 

Chairman asked the SROs to discuss how their governance practices 

compare with the standards for issuers they proposed in the rules 

submitted to SEC. According to the Chairman, the SROs should serve as 

models of good governance. As such, he said they should adhere to the 

same high standards of governance they were requiring of the issuers listed 

on their markets. The three SROs provided reports to SEC in May 2003 that 

include varying amounts of information. 

Amex reported that its board’s governance structure and practices were 

consistent with the listing standards in effect before its new standards were 

implemented. The report did not discuss the extent to which Amex’s 

governance conformed with its new listing standards, such as those 

requiring a majority of independent directors, or whether Amex would 

consider imposing higher standards on itself than it had on issuers, for 

example, by separating the positions of CEO and chairman as NASDAQ and 

NYSE have done (discussed below). The report stated that as Amex’s 

corporate governance listing standards for issuers evolve, Amex would 

assess whether changes to its governance structure and practices were 

warranted. Amex officials told us that because NASD and Amex have 

recently agreed that Amex would become an independent entity, Amex 

planned to delay assessing and making changes to its governance structure 

until its separation from NASD was complete.

NASDAQ’s May 2003 report stated that its board met NASDAQ’s new 

corporate governance listing standards to the fullest extent permissible
Page 61 GAO-04-75 SEC Oversight of SRO Listing Programs

under NASDAQ’s by laws.117 Although NASDAQ’s new listing standards 

require issuers to establish either a nominating committee composed 

entirely of independent directors to nominate new directors or provide that 

a majority of the independent directors carry out this function, NASDAQ’s 

by laws prevent it from complying with this listing standard. That is, 

NASDAQ’s by laws require its nominating committee to include individuals 

who are not NASDAQ directors. As a result, NASDAQ’s nominating 

committee currently consists entirely of individuals who are not serving on 

the board, although they meet NASDAQ’s definition of director 

independence. NASDAQ reported that it could revise its by laws so that a 

new committee of the board consisting of independent directors nominates 

directors and that it will discuss this change with SEC. Under NASDAQ’s by 

laws, the board can choose whether to combine or separate the positions 

of CEO and chairman. NASDAQ reported that it was in the process of 

separating these positions—a separation that was completed later that 

month. NASDAQ officials said that this action complimented larger 

structural changes to NASDAQ’s governance that took place in April 2000, 

when NASD members voted to sell a substantial part of NASD’s ownership 

in NASDAQ. One of the goals of this restructuring was to minimize the 

potential for conflicts of interest associated with NASD’s responsibility for 

both the business operations and regulation of NASDAQ. 

Concurrent with the submission of its May 2003 report to SEC describing 

its governance structure, NYSE announced that its board had appointed a 

committee, called the Special Committee on Governance, to review and 

develop recommendations for improving NYSE’s governance. On June 5, 

2003, the NYSE board adopted the initial recommendations of the 

committee, including those allowing only nonindustry directors to serve as 

audit committee and compensation committee members and requiring, to 

the extent feasible, that the NYSE audit committee comply with applicable 

standards prescribed by NYSE for issuer audit committees.118 NYSE also 

implemented a recommendation prohibiting all its employees from serving 

on the boards of business corporations. According to NYSE, following the 

adoption of the recommendation, the NYSE chairman and other senior 

executives agreed to resign from directorships on issuers’ boards, effective 

117By laws are the rules and practices governing the management of an organization. 

Pursuant to section 19(b)(1) of the Exchange Act, SROs must file a proposed rule change 

with SEC for any changes to their by laws.

118Nonindustry directors, as defined in the NYSE constitution, represented listed companies 

or the investing public. Industry directors represented NYSE members.
Page 62 GAO-04-75 SEC Oversight of SRO Listing Programs

at the respective companies’ next annual shareholder meeting, unless the 

companies could find directors to replace them sooner. 

The NYSE board also adopted recommendations that would result in 

disclosures consistent with those included in NYSE’s new corporate 

governance listing standards, including disclosures of compensation for 

the chairman, directors, and executive officers. In August 2003, the NYSE 

board disclosed that the compensation package of the CEO, also chairman 

of the board, was worth $139.5 million, including accrued savings and 

incentives. In a September letter to the chairman of NYSE’s governance and 

compensation committees, the SEC Chairman stated that approval of the 

CEO compensation package raised serious questions regarding the 

effectiveness of NYSE’s governance structure and called for further 

information about the procedures and considerations that governed the 

award of the pay package. The controversy prompted the September 2003 

resignation of the CEO/chairman. According to NYSE, shortly thereafter, 

two directors who served on the committee that approved the 

compensation package resigned. 

In December 2003, SEC approved a NYSE rule proposal that is intended to 

enhance NYSE’s governance structure.119 The new rule amends NYSE’s 

constitution, creating an independent board of directors and a board of 

executives as an advisory body. The new board of directors consists of 

individuals who are independent from NYSE management, members, 

member organizations, and listed companies (with the exception of the 

CEO); and the board has responsibility for corporate governance, 

executive compensation, internal controls, and regulatory supervision.120

Although the board of directors can choose whether to combine or 

separate the positions of CEO and chairman, NYSE decided to separate 

them after consultations with SEC.121 The board of executives includes 

representatives of broker-dealers, institutional investors, large public 

funds, and listed companies. Although SEC has approved NYSE’s proposal, 

public debate has continued as to the adequacy of its governance reforms. 

119NYSE Rulemaking: Order Approving Proposed Rule Change Relating to the Amendment 

and Restatement of the Constitution of the Exchange to Reform the Governance and 

Management Architecture of the Exchange, 68 Fed. Reg. 74678 (Dec. 24, 2003).

120NYSE’s revised constitution also created the position of chief regulatory officer, who is 

responsible for the management and administration of regulatory functions and reports 

directly to the board’s Regulatory and Oversight Committee. 

121In December 2003, NYSE’s board of directors announced the appointment of a new CEO.
Page 63 GAO-04-75 SEC Oversight of SRO Listing Programs

The SEC Chairman and Market Regulation also sent letters to other SROs 

requesting that they review their governance, and, according to Market 

Regulation officials, they have received written responses from each 

SRO.122 Market Regulation officials said that the Chairman’s letters to the 

SROs and their written responses were the first steps of a comprehensive 

review by SEC of SRO governance. These officials said that the recently 

approved changes to NYSE’s governance structure could be instructive as 

they continue their review of Amex, NASDAQ, and the other SROs’ 

governance. Further, these officials said that the new governance standards 

in place at Amex, NASDAQ, and NYSE for listed issuers could serve as a 

benchmark for SRO governance.

Other Countries Also Have 

Taken Steps to Enhance 

Board Independence

Private or public institutions in the United Kingdom, France, Germany, and 

Japan reviewed the corporate governance practices of issuers in 2002 and 

2003. Although differences exist between the roles, responsibilities, and 

characteristics of managers, directors, and shareholders and the regulation 

of corporate governance in these countries, their issuers were encouraged 

to increase the role and authority of independent directors on their boards 

of directors. The United Kingdom, Germany, and France have promoted 

sound corporate governance by encouraging issuers to disclose in their 

annual reports the extent of their compliance with codes of corporate 

governance, explaining to investors the reasons for any areas of 

noncompliance. These codes include provisions encouraging greater board 

independence. Recent changes to Japan’s corporate law allows issuers to 

choose a governance structure similar to that found in the United States by 

placing independent directors in key roles on boards. 

The United Kingdom UK issuers are required by the listing rules of the Financial Services 

Authority to describe in a narrative statement in their annual reports how 

they apply the principles set out in the Combined Code on Corporate 

122The SEC Chairman sent letters to the other eight securities exchanges in March 2003 

asking them to review their governance. Market Regulation officials told us that in May 2003 

they sent a similar letter to the following eight securities industry SROs that operate 

clearinghouses: the Boston Stock Exchange Clearing Corporation, Depository Trust 

Company, Emerging Market Clearing Corporation, Fixed Income Clearing Corporation, 

National Securities Clearing Corporation, Options Clearing Corporation, Pacific Clearing 

Corporation/Pacific Stock Exchange, and the Stock Clearing Corporation/Philadelphia 

Stock Exchange. A clearinghouse is an organization that handles the clearance and 

settlement of transactions. Clearance and settlement in the securities markets involves 

comparing the details of the transaction between buyer and seller (or their brokers) and 

exchanging the securities for cash payment. 
Page 64 GAO-04-75 SEC Oversight of SRO Listing Programs

Governance (Combined Code) and explain any deviations from them. 

According to the Secretary of State for Trade and Industry, the merit of the 

“comply or explain” approach is that it recognizes that circumstances exist 

in which it is not sensible or appropriate for a company, especially a 

smaller one, to meet every Combined Code principle, but it requires issuers 

to explain the reason for any noncompliance to shareholders. 

In 2002, the Secretary of State for Trade and Industry and the Chancellor of 

the Exchequer commissioned a review of the role and effectiveness of 

nonexecutive directors,123 and the Coordinating Group on Accounting and 

Audit commissioned a simliar review of audit committees.124 As a result of 

these reviews, the Combined Code was revised to include provisions 

recommending, among other things, that half of the issuer’s board—

including the chairman, all of the members of the audit and compensation 

committees, and a majority of the members of the nominating committee—

meet a tightened definition of independence. In addition, the Combined 

Code’s new provisions address the qualifications of audit committee 

members and the committee’s authority over the outside auditor. Before 

these revisions, the code generally called for fewer independent directors 

on these committees and the board. 

Germany In September 2001, the German Federal Minister of Justice appointed the 

Government Commission on the German Corporate Governance Code to 

develop an official corporate governance code for Germany, which it 

completed in February 2002. The German code includes corporate 

governance-related statutes that were already in effect at the time the code 

was published and with which issuers must comply as well as corporate 

governance practices that are recommended but not required. A 

requirement that issuers annually disclose their reasons for deviating from 

the code’s recommendations was enacted in July 2002.

According to the commission, unlike boards in the United Kingdom and 

United States, German issuers have a two-tier board structure, consisting 

of a management board that is responsible for managing the issuer and a 

supervisory board that appoints, supervises, and advises the members of 

the management board. The new German code recommends, among other 

123Derek Higgs, Review of the Role and Effectiveness of Non-executive Directors, January 

2003.

124Sir Robert Smith, Audit Commitees Combined Code Guidance, January 2003.
Page 65 GAO-04-75 SEC Oversight of SRO Listing Programs

things, that the supervisory board establish an audit committee and that the 

committee chairman not be a former member of the management board. 

Further, the code recommends charging the audit committee with hiring 

and compensating the outside auditor as well as ensuring the auditor’s 

independence. 

France In 2002, the Association of French Private Sector Companies and 

Association of Major French Corporations (in French, AFEP-AGREF) and 

the French Business Confederation,125 convened a private working group to 

produce a code of corporate governance known as the Bouton report.126

French issuers are not required by law to disclose compliance with the 

corporate governance principles outlined in this report; however, the 

report recommends that issuers include a discussion of the extent to which 

they have complied with the report’s recommendations in their annual 

reports. Among other things, the Bouton report recommends that at least 

half of the issuer’s board consist of independent directors, an increase 

from the one-third recommended by a similar report previously published 

by AFEP-AGREF and the French Business Confederation. Further, the 

Bouton report recommends that two-thirds of the audit committee consist 

of independent directors, also an increase from the one-third previously 

recommended. 

Japan According to the Japanese Association of Corporate Directors, in Japan, 

corporate governance structures more closely resembling those of the 

United States were introduced in May 2002 under laws that made sweeping 

revisions to the country’s Commercial Code. Before these revisions, boards 

of directors managed issuers through a member vested with the authority 

to carry out the board’s directives, and shareholders were required to elect 

outside auditors to monitor the boards’ management. Revisions to the 

Commercial Code in 2001 strengthened the statutory auditor system by, 

among other things, requiring outside auditors to be independent. 

According to the Japanese association, under the 2002 revisions to the 

Commercial Code, large Japanese issuers can choose from among three 

corporate governance structures—the traditional structure described 

125AFEP-AGREF and the French Business Confederation are two leading French business 

associations.

126Daniel Bouton, Promoting Better Corporate Governance in Listed Companies,

September 2002.
Page 66 GAO-04-75 SEC Oversight of SRO Listing Programs

above and two other structures under which independent directors are 

involved in overseeing management. Under one of the two new options, 

boards would appoint a CEO who, similar to CEOs in the United States, 

would be responsible for managing the company’s business operations, and 

a separate board of directors that would oversee the CEO and hold the 

CEO accountable to shareholders. Issuers that choose this structure must 

establish audit, nominating, and compensation committees consisting of a 

majority of independent directors. Under the other new option, an asset 

committee would be established within the board. This committee would 

have the authority to make decisions related to the transfer and disposal of 

major company assets and to make other management decisions. The 

board would oversee the asset committee and would have at least one 

independent director. 

Conclusions Investors need timely and ongoing information on the listing status of 

issuers for use in making investment decisions. In the absence of such 

information, they might logically but incorrectly assume that all issuers 

comply with the listing standards of their markets. Although NYSE has 

taken steps to address OCIE’s recommendation to provide early and 

ongoing public notification of issuers’ noncompliance with quantitative 

continued listing standards by introducing symbol indicators, investors 

may be unaware of the availability of the information transmitted by the 

indicators. Existing plans for distributing the information to the print 

media have not been fully implemented and distribution to investors 

through the Internet is limited. Further, although the indicator is displayed 

on NYSE’s Web site with the stock symbol, the indicator is not sufficiently 

visible to investors. As a result, investors that do not independently learn of 

the indicator’s availability may not become aware of its existence when 

they visit the Web site. 

Although NASDAQ and Amex have discussed transmitting an indicator in a 

manner similar to NYSE for noncompliance with their quantitative 

continued listing standards, we are concerned about the hesitancy of both 

SROs to voluntarily provide the public early notification of an issuer’s 

noncompliant status. We are also concerned that the distribution issues 

affecting the NYSE indicator would be applicable to the NASDAQ and 

Amex indicators. Corporation Finance’s proposed revisions to SEC’s Form 

8-K would, if approved, ensure that investors receive early notification of 

issuers’ noncompliance with quantitative and qualitative continued listing 

standards. Also, finalizing the revised filing requirement would 

complement OCIE and Market Regulation’s efforts by providing investors a 
Page 67 GAO-04-75 SEC Oversight of SRO Listing Programs

source of information on the facts surrounding an issuer’s noncompliant 

status. Further extension of OCIE’s recommendation to qualitative listing 

standards, including corporate governance standards, could be valuable to 

investors and is an objective worthy of further OCIE and Market Regulation 

exploration with the SROs. In the absence of voluntary action by the SROs, 

further SEC action is warranted to ensure that the public receives early and 

ongoing notice of an issuer’s noncompliance with its market’s listing 

standards. 

OCIE’s reluctance to routinely use SROs’ internal review reports in 

planning and conducting inspections is inconsistent with the standards of 

organizations with functions similar to OCIE’s. The development of a 

comprehensive policy regarding the use of SROs’ internal review reports as 

part of SRO inspections would be valuable because these reports could aid 

OCIE in determining the objectives and scope of inspections designed to 

assess the SROs’ effectiveness in fulfilling their oversight responsibilities. 

SEC recognized the importance of the internal review function to the 

quality of SRO oversight when it recommended that NASDAQ and NYSE 

strengthen this function to address weaknesses SEC identified. Reviewing, 

among other things, internal review objectives, scope, findings, 

recommendations, and resulting corrective actions would provide SEC 

insights into the quality of the function and at least one indicator of the 

effectiveness of the SROs.

SEC acted within its authority and followed its applicable regulations in 

allowing rules to remain in effect that implemented a 3-month enforcement 

moratorium on NASDAQ’s continued listing standards for bid-price and 

market value of publicly held shares as well as subsequent changes to 

NASDAQ’s bid-price standard. While data are not available from which to 

determine the full effect of the moratorium and subsequent rule changes on 

the listing status of NASDAQ issuers, the rules met their objective of 

allowing noncompliant issuers more time to trade. SEC also acted within 

its authority and followed applicable regulations in approving another 

NASDAQ rule that allowed SCM issuers to continue trading up to 2 years

while noncompliant with the bid-price standard as part of a pilot program. 

NASDAQ’s study on the effects of the pilot program will provide essential 

information to the Commission for use in evaluating whether the rule 

should be allowed to become permanent. However, 2 years is a long time to 

allow a noncompliant issuer to continue trading in the absence of a means 

of providing the public early and ongoing notification of the issuer’s listing 

status. 
Page 68 GAO-04-75 SEC Oversight of SRO Listing Programs

Amex, NASDAQ, and NYSE have adopted changes to their corporate 

governance standards that when implemented should promote stronger 

board oversight and greater accountability. Independent directors play a 

key role in these governance reforms; however, of the three largest SROs 

only Amex does not require that issuers disclose the names of all their 

independent directors, hampering the ability of investors and regulators to 

assess the independence of these directors. While the SROs have 

strengthened their corporate governance listing standards, opportunities 

exist to further strengthen board independence by revising listing 

standards to require a supermajority of independent directors and the 

separation of the positions of CEO and chairman. We recognize that issuers 

would require a reasonable amount of time to implement any such reforms; 

for example, a 2-year implementation period would not be unrealistic. 

OCIE’s plans to work with the SROs to ensure that they have effective 

processes in place for evaluating issuers’ compliance with their new 

corporate governance standards could be central to ensuring compliance 

with the standards and merit prompt action. Also, through its inspection 

process, OCIE could assess the SROs’ oversight of issuers’ compliance with 

the new standards and ensure that the standards are meeting their intended 

purpose. Corporation Finance’s proposed changes to rules governing 

shareholders’ access to the director nomination process and its plans to 

review issuers’ disclosures of conflicts of interest in the proxy statement 

complement the SROs’ efforts to improve their corporate governance 

standards and could result in further enhancements to board accountability 

to shareholders. As a result, they deserve timely attention. 

Finally, given the SROs’ role as standard setters for corporate issuers, the 

public has the right to expect the SROs to serve as models of strong 

governance. Market Regulation continues to assess the self-evaluations of 

corporate governance that the three largest SROs prepared, as well as the 

practices of 16 other SROs, including 8 securities exchanges and 8 

clearinghouses. These reviews have resulted in actions by NASDAQ and 

NYSE to improve board independence and transparency of decision 

making and could result in additional changes when Market Regulation 

completes its assessment. Although SEC will need to consider the 

applicability of the changes made at NASDAQ and NYSE to the other SROs, 

action by NASDAQ and NYSE to split the position of CEO and chairman is 

one that could, where appropriate, enhance the governance of other SROs. 

Further, once any changes are in effect, OCIE, through its inspection 

process, could also ensure that the SROs have implemented proposed 
Page 69 GAO-04-75 SEC Oversight of SRO Listing Programs

changes to their own corporate governance, determine that these changes 

are having their intended effect, and identify other appropriate changes. 

Recommendations for 

Executive Action

To restore investor confidence in the markets, further strengthen the listing 

standards of the SROs, and improve SEC listing program oversight, we 

recommend that the Chairman, SEC, take the following 12 actions: 

• 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;

• 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;

• 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;

• work with Amex, NASDAQ, and NYSE to assess the feasibility of 

providing early and ongoing public notification of issuers’ 

noncompliance with qualitative listing standards;

• ensure the development and implementation of a policy requiring OCIE 

staff to routinely use SRO internal review reports in planning and 

conducting SRO inspections;

• work with Amex to ensure that issuers disclose the names of those 

directors that they have designated as independent;

• 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;
Page 70 GAO-04-75 SEC Oversight of SRO Listing Programs

• work with the SROs to ensure that they have established effective 

processes for ensuring issuers’ compliance with corporate governance 

listing standards;

• ensure that OCIE conducts timely inspections of the three largest SROs 

to assess their oversight of issuers’ compliance with corporate 

governance standards; 

• 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; 

• ensure that Market Regulation places a high priority on establishing and 

meeting time frames for completing its reviews of the SROs’ selfevaluations 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; and 

• 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 Comments and 

Our Evaluation

We received written comments on a draft of this report from SEC, Amex, 

NASDAQ, and NYSE that are reprinted in appendixes V-VIII, respectively. 

As discussed below, SEC generally agreed with our recommendations and 

is taking or plans to take actions to address them. Also as discussed below, 

Amex and NYSE expressed concerns about our recommendations related 

to providing the public early and ongoing notification of issuers’ 

noncompliance with their markets’ listing standards, and Amex and 

NASDAQ discussed their concerns about our recommendation related to 

enhancing 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. 

SEC and the three SROs also provided technical comments that have been 

incorporated into the report where appropriate. 
Page 71 GAO-04-75 SEC Oversight of SRO Listing Programs

SEC commented that it will continue working with the SROs to ensure that 

the goal of providing investors early and ongoing notice of issuers’ 

noncompliance with their markets’ listing standards is met. NYSE 

responded that it has fully addressed OCIE’s related recommendation as is 

pertains to quantitative listing standards and that SEC would need to 

impose any additional requirements related to the dissemination of 

indicators on information vendors. Our view, consistent with OCIE’s, 

continues to be that until the dissemination issue is resolved, NYSE’s use of 

indicators does not meet the intent of OCIE’s recommendation. For this 

reason and because the satisfactory resolution of the distribution issue is 

pivotal to the acceptability of using indicators to address OCIE’s 

recommendation, SEC and NYSE have a mutual interest in working 

together and with information vendors to resolve the issue. Also, a joint 

SEC and NYSE effort could enhance the likelihood of voluntary action by 

information vendors. Finally, if Amex and NASDAQ should provide OCIE 

with proposals for using indicators that are otherwise acceptable, SEC may 

wish to involve them in resolving the information distribution issue. 

NASDAQ expressed a willingness to change its procedures for notifying the 

public of issuers’ noncompliance with the market’s listing standards and to 

work with OCIE to implement its recommendation. Amex affirmed that 

transparency with respect to an issuer’s compliance with listing standards 

is important but reiterated reservations expressed in the report that neither 

the indicator nor the symbol modifier is an appropriate or necessary 

method for providing such transparency. Amex also said that, 

notwithstanding its views, issues related to the use of indicators will be reexamined by the Amex Board of Governors at its April 2004 meeting. 

Consistent with SEC’s view, we continue to believe that achieving early and 

ongoing public notification of issuers’ noncompliance with listing 

standards is important to investors’ decision making. Accordingly, we 

support SEC’s commitment to working with the SROs to achieve this goal, 

whether through implementation of modifiers, indicators, or another 

alternative. 

Although SEC, NASDAQ, and Amex did not specifically comment on how 

early notification of noncompliance with issuers’ listing standards would 

be achieved in conjunction with symbol modifiers or indicators, SEC said 

that Corporation Finance’s proposed revisions to the Form 8-K were to 

ensure early public notice of an issuer’s noncompliant status. Consistent 

with our recommendation, the Commission has approved Corporation 

Finance’s proposed revisions, as modified based on public comment. The 

final rule, approved on March 11, 2004, requires issuers to file the Form 8-K 
Page 72 GAO-04-75 SEC Oversight of SRO Listing Programs

within 4 business days of being notified by the SRO of their noncompliance 

with either a quantitative or qualitative listing standard. Because the 

approved rule addresses our recommendation that the Form 8-K filing 

provide for early public notification, we believe that using the filing as the 

trigger for transmitting the indicator is warranted. Doing so would provide 

consistency across the markets and enhance the complementary 

relationship between the indicator as a mechanism for providing ongoing 

public notification and the Form 8-K as a source of more detailed 

information on the nature of the issuer’s deficient status. 

SEC also commented that the SROs should provide investors timely 

notification not only when issuers are noncompliant with financial listing 

standards, but also when they are noncompliant with corporate 

governance standards. Accordingly, SEC said that it would discuss with the 

SROs the feasibility of appending a modifier to or transmitting an indicator 

with the symbol of an issuer that is noncompliant with corporate 

governance standards. NYSE expressed concern about extending the use 

of indicators to qualitative listing standards, such as corporate governance 

standards, elaborating that the indicator is not an appropriate or effective 

method of conveying more complex, “less binary” information. NYSE 

explained that a large number of qualitative standards exist, with some 

situations of noncompliance being more serious than others and some 

matters being potentially easier to correct than others. NYSE said that 

using an indicator for all the standards would “homogenize” the 

information, which could lead the public to ignore the indicator as a 

conveyor of useful information. NYSE also noted that the present 

dissemination mechanism is limited as to the number of different 

indicators that can be used, so that the cost of employing additional 

indicators would likely be significant. Amex also expressed concern about 

the feasibility of addressing all “significant factors” with an indicator, 

stating that many are inherently subjective and not susceptible to an 

objective determination of whether the “triggering event” has occurred. 

Amex also said that using many different types of indicators would be 

confusing to investors and the marketplace. Nonetheless, the use of 

indicators for noncompliance with qualitative standards is among the 

topics that Amex expects to address at its April 2004 Board of Governors 

meeting. We agree that use of modifiers or indicators may not be 

appropriate for noncompliance with all qualitative listings standards. 

However, as NASDAQ has demonstrated through its use of a symbol 

modifier for issuers that have not filed required SEC reports and as we have 

recommended, early and ongoing public notification of noncompliance 
Page 73 GAO-04-75 SEC Oversight of SRO Listing Programs

with additional qualitative standards may be appropriate and should be 

explored further. 

SEC commented that it recognizes that SRO internal audit reports may be a 

useful tool in the inspection process. In response to our recommendation, 

SEC said that it will implement a formal written policy concerning the 

selection and review of SRO internal audit reports during inspections.

Regarding our recommendation that Amex ensure that issuers disclose the 

names of those directors that they have designated as independent, SEC 

noted that Amex responded on February 23, 2004, by filing a rule change 

that requires this disclosure and that the rule change became effective on 

filing. Amex also cited the rule change in its comments.

Amex said that while our recommendation related to requiring issuers, 

through listing standards, to establish a supermajority of independent 

directors and separate the positions of CEO and chairman, warrants 

further consideration, issuers, the markets, and SEC need more time to 

adjust to the various new requirements that have already been imposed on 

the markets and assess their impact. NASDAQ similarly commented that 

time is needed for the numerous new governance changes to take effect 

and their results assessed. NASDAQ said that mandating a supermajority of 

independent directors might prove unduly burdensome, particularly for 

smaller issuers, and that insufficient information is available to determine 

if it would provide greater benefits than a simple majority. NASDAQ also 

said that separating the positions of CEO and chairman might enhance the 

governance of some companies but that concerns exist that mandating the 

separation could make boards more inefficient and lead to unnecessary 

conflict. NASDAQ also said that insufficient information is available to 

justify taking the step at this time and that other steps it has taken, such as 

requiring a majority of independent directors, will significantly reduce the 

concerns associated with a combined CEO/chairman. NYSE commented 

that it is not opposed to companies adopting requirements for a separate 

CEO and chairman or a supermajority of independent directors, if they 

choose to do so. 

Recognizing that a reasonable amount of time would need to be allowed for 

issuers to establish a supermajority of independent directors and separate 

the positions of CEO and chairman, we continue to believe that in the 

absence of voluntary action by issuers, SEC should, working with the 

SROs, seriously consider mandating such requirements through listing 

standards. SEC’s January 2004 proposals that would require boards of 
Page 74 GAO-04-75 SEC Oversight of SRO Listing Programs

mutual funds to comprise 75 percent (a supermajority) independent 

directors and have an independent board chairman are consistent with our 

recommendation. Although the conflicts of interest between the boards of 

directors and management of mutual funds may be more apparent than 

such conflicts at other publicly traded companies, we believe that the 

rationale behind SEC’s proposals is equally applicable to publicly traded 

companies, regardless of whether they manage financial or physical assets. 

As SEC has noted, and we agree, with a supermajority of independent 

directors and an independent board chairman, independent directors will 

set the board agenda as well as have the power to control the outcome of 

board votes. Although SEC and we recognize that such actions do not 

guarantee effective management, we both agree that greater board 

independence could promote board decision making that is aligned with 

shareholders’ interests, thereby enhancing board accountability. As SEC 

has stated, these proposals, along with others in its January 2004 rulemaking package, would bolster the effectiveness of independent directors 

and enhance the role of the board as the primary advocate for 

shareholders. We acknowledge, however, that some issuers would not be in 

a position to immediately implement these best practices and that any 

improvements, therefore, would likely be best accomplished on an 

incremental basis. In this regard, we encourage SEC and the SROs, as 

industry leaders, to reach out to issuers and use their leverage to assist in 

the process of transitioning issuers’ governance structures into models of 

corporate responsibility. 

Regarding our recommendation related to ensuring that OCIE conducts 

timely inspections of the three SROs to assess their oversight of issuers’ 

compliance with corporate governance standards, SEC said that it expects 

to continue to conduct timely inspections of the SROs’ programs and 

procedures for ensuring that issuers comply with corporate governance 

requirements and to enhance its review to include the new corporate 

governance standards. We believe that OCIE’s efforts will be important to 

ensuring the successful implementation of the new standards and 

enhancing SRO oversight of the markets, particularly if OCIE shares any 

best practices that it identifies with the SROs.

Regarding our recommendations related to reviewing the SROs’ selfevaluations of their own corporate governance and following up with 

inspections of the SROs, SEC commented that it is currently conducting a 

comprehensive review of SRO governance that will take into consideration 

the new corporate governance standards. SEC also said that when 

appropriate and after any changes or new requirements are implemented at 
Page 75 GAO-04-75 SEC Oversight of SRO Listing Programs

the SROs, it will inspect the SROs to determine whether they have 

effectively implemented their own enhanced governance standards. SEC’s 

ongoing and proposed actions are consistent with our recommendations 

and should enhance the quality of SRO governance, particularly if, as noted 

above, the best practices identified are shared with all the SROs. 

In response to our recommendation that Market Regulation work with 

Amex to further enhance its board independence by giving serious 

consideration to separating the position of CEO and chairman, Amex 

commented that draft changes to the Amex constitution are being 

considered in connection with NASD’s proposed sale of its interest in Amex 

to the Amex Membership Corporation. Amex said that the proposed 

changes provide that if Amex’s CEO is also the chairman of the Amex 

Board of Governors, a “lead governor”—designated by the Board of 

Governors from among the independent governors—would preside over 

executive sessions. Amex noted that the proposed changes are subject to 

various approvals, including by SEC and Amex members. Amex’s proposals 

are consistent with NASDAQ’s by laws and NYSE’s constitution, which also 

retain the option of having the same person serve as CEO and chairman. 

However, we believe that the unique role of the SROs as standard setters 

suggests that absent compelling reasons to the contrary, SEC should ensure 

that Amex opts for separating these positions as NASDAQ and NYSE have 

done. 

As agreed with your offices, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies of this report to the Chairmen 

and Ranking Minority Members of the Senate Committee on Banking, 

Housing, and Urban Affairs and its Subcommittee on Securities and 

Investment; the Chairman, House Committee on Energy and Commerce; 

the Chairmen of the House Committee on Financial Services and its 

Subcommittee on Capital Markets, Insurance, and Government Sponsored 

Enterprises; and other interested congressional committees. We will send 

copies to the Chairmen of SEC, Amex, NASDAQ, and NYSE and to other 

interested parties. We also will make copies available to others upon 

request. In addition, the report will be available at no charge on the GAO 

Web site http://www.gao.gov.
Page 76 GAO-04-75 SEC Oversight of SRO Listing Programs

If you have any further questions, please contact me at (202) 512-8678, 

hillmanr@gao.gov, or Cecile Trop at (312) 220-7600, tropc@gao.gov. 

Additional GAO contacts and staff acknowledgments are listed in appendix 

IX.

Richard J. Hillman

Director, Financial Markets and 

 Community Investment
Page 77 GAO-04-75 SEC Oversight of SRO Listing Programs

Appendix I

Scope and Methodology ApApenednxidexiIs

To report on the status of the Securities and Exchange Commission’s (SEC) 

Office of Compliance Inspections and Examinations’ (OCIE) 

recommendations to the three largest self-regulatory organizations (SRO) 

for improving their markets’ equity listing programs, we reviewed OCIE’s 

inspection reports on the American Stock Exchange (Amex), Nasdaq Stock 

Market, Inc. (NASDAQ), and the New York Stock Exchange (NYSE) listing 

programs and related workpapers and correspondence. We also obtained 

information from OCIE, Amex, NASDAQ, and NYSE on OCIE’s listing 

program inspection report findings and recommendations, and the SROs’ 

efforts to address the recommendations. Further, we obtained data, in 

documentary form, from the three SROs on the number of noncompliant 

issuers trading during 2003 and their trading status as of December 31, 

2003. In addition to these steps, in reviewing the effectiveness of NYSE’s 

actions to address OCIE’s recommendation intended to ensure early and 

ongoing notification of issuers’ noncompliance with continued listing 

standards, we contacted a nonprobability (nonrandom) sample of 11 

vendors. This sample included broker-dealers, vendors that supply 

information to the print media, and vendors that supply information 

through the Internet, either on their own Web sites or through third-party 

vendors, to determine whether they were distributing the information on 

issuers’ noncompliance with NYSE’s quantitative continued listing 

standards that NYSE transmits by its indicator. Our selection of the 11 

vendors was based on a list from NYSE of the largest vendors of quotation 

data, a list from NYSE of recommended contacts, and our own research on 

vendors that supply quotation information over the Internet. Ultimately, we 

interviewed eight information vendors between August and November 2003 

to determine whether they were publicizing the information and were 

successful in contacting six of these vendors in February and March 2004 

for followup interviews. We also attempted to contact three additional 

vendors by telephone, but were unsuccessful. As a result, we visited their 

Web sites in September 2003 and again in February 2004 to determine 

whether they were publicizing the information transmitted by NYSE’s 

indicator. Because we did not conduct a random sample of all vendors that 

receive quotation data from NYSE, our findings regarding the use of NYSE’s 

indicator cannot be generalized to the entire population of vendors. To 

determine whether a Web site visitor could locate the indicator and the list 

of noncompliant NYSE issuers, we visited the NYSE Web site and 

independently searched for this information. 

To report on the extent to which OCIE uses SROs’ internal review reports 

in its inspection process, we obtained information from OCIE on its policy 

for reviewing internal review reports as part of its inspections and 
Appendix I

Scope and Methodology

Page 78 GAO-04-75 SEC Oversight of SRO Listing Programs

examinations, and information from Amex, NASDAQ, the National 

Association of Securities Dealers, Inc., and NYSE on the purpose and scope 

of their respective internal review functions. We reviewed the Government 

Auditing Standards, also called the Yellow Book, to identify best practices 

for using internal review reports in oversight inspections such as those 

conducted by OCIE. We also reviewed the examination policies of the 

Federal Deposit Insurance Corporation, the Federal Reserve Board, the 

Office of the Comptroller of the Currency, and the Office of Thrift 

Supervision to determine the extent to which bank and thrift examiners are 

required to use internal review reports as part of their examinations. In 

addition, we obtained information from officials representing the 

Inspectors General of the Commodity Futures Trading Commission and the 

Department of the Treasury on the extent to which they use internal review 

reports as part of their inspections and examinations. Further, we reviewed 

selected SRO internal review reports on their listing programs and 

discussed the contents of other reports with SRO officials. We did not 

review OCIE’s entire inspection process because SEC was doing a review 

of the agency’s operations during the time we did our work. 

To report on SEC’s oversight of NASDAQ’s moratorium and subsequent bidprice rule changes and the listing status of the issuers directly affected by 

these changes, we reviewed relevant NASDAQ proposed and final rules and 

discussed their purposes with NASDAQ officials. We also obtained 

information from SEC officials on their review of these proposals. In 

addition to these steps, in reporting on the listing status of firms directly 

affected by the NASDAQ moratorium and subsequent rule changes, we 

analyzed data generated between September 26, 2001, and February 28, 

2003, from NASDAQ’s Web Issuer Support Services System, NASDAQ’s 

primary source of data for monitoring compliance with NASDAQ’s listing 

standards. Our data begin with September 26, 2001, rather than September 

27, 2001, the date the moratorium was imposed, because NASDAQ stopped 

tracking compliance with the bid-price and market value of publicly held 

shares listing standards on the date the moratorium was imposed and, 

therefore, no data were available on September 27, 2001. Based on our 

analysis, we determined the listing status of the issuers NASDAQ identified 

as having received direct relief through the moratorium (moratorium 

issuers) as of January 2, 2002, the day the moratorium was lifted. We could 

not determine the number of issuers that might have received indirect 

relief, because, as previously discussed, NASDAQ stopped tracking 

individual issuers’ compliance with the bid-price and market value of 

publicly held shares continued listing standards during the moratorium. As 

a result, we could not determine the total number of issuers that might 
Appendix I

Scope and Methodology

Page 79 GAO-04-75 SEC Oversight of SRO Listing Programs

have become noncompliant with these standards in the absence of the 

moratorium, the number of noncompliant issuers that would have returned 

to compliance in the absence of the moratorium, or the number of issuers 

approaching noncompliance that actually became noncompliant. We 

determined the listing status of the moratorium issuers as of February 28, 

2003, approximately 1 year after NASDAQ implemented its 

postmoratorium rule change, because by this date issuers that were 

affected by the moratorium would have had an opportunity to go through 

NASDAQ’s deficiency process. Examining this period also allowed us to 

determine the listing status of issuers affected by the first postmoratorium 

bid-price rule change. We discussed the results of our data analysis with 

NASDAQ officials. Although we did not independently verify the accuracy 

of the NASDAQ data, we performed internal checks to assess the data’s 

reliability and concluded that they were reliable for the purposes of this 

report.

To report on the actions the three largest SROs have taken to strengthen 

corporate governance for issuers and themselves, we reviewed relevant 

legislation, GAO and other testimony to Congress, testimony to SROs, 

corporate governance studies, investigative reports on the collapse of 

major U.S. corporations, SEC’s proposed and final rulemakings related to 

shareholder access to the director nomination process, and SEC’s 

qualitative corporate disclosure requirements for issuers. We also reviewed 

the three SROs’ proposed and final (new) corporate governance rules for 

issuers as well as the rules they have replaced. Additionally, we obtained 

information from SRO officials on the purpose of the new rules and the 

SROs’ plans for ensuring compliance with them. We also obtained 

information from SEC on its review of these rules and its plans to review 

qualitative corporate disclosure requirements. Further, we obtained an 

assessment from a nonprobability sample of 14 market participants 

representing the investor, legal, business, and financial communities on the 

adequacy of the SROs’ new rules and SEC’s qualitative corporate disclosure 

requirements. Because we did not conduct a random sample of all market 

participants, the views expressed in this report on the corporate 

governance rules of the three SROs cannot be generalized to the entire 

population of market participants. In addition, we attended a forum that 

GAO sponsored on corporate governance and accountability issues and 

attended corporate governance conferences given by organizations in the 

public and private sectors. We also reviewed the three largest SROs’ selfevaluations of their own corporate governance, including board structures, 

policies, and practices. Finally, we reviewed publicly available information 

to identify actions that private and public institutions took in the United 
Appendix I

Scope and Methodology

Page 80 GAO-04-75 SEC Oversight of SRO Listing Programs

Kingdom, Germany, France, and Japan between January 2002 and June 

2003 to strengthen corporate governance. This included a review of the 

new or revised corporate governance codes used in the United Kingdom, 

Germany, and France, and descriptions by Japanese corporate associations 

of recent revisions to Japanese corporate law. Due to limitations on the 

scope of our inquiry, we may not have identified all of the actions taken 

over this period. Also due to these limitations, we did not discuss in the 

report the corporate or regulatory structure of the countries or the 

respective roles, responsibilities, and characteristics of shareholders, 

corporate managers, and boards.

We did our work in accordance with generally accepted government 

auditing standards between April 2002 and March 2004. We performed our 

work in Chicago, Ill.; New York City, N.Y.; and Washington, D.C.
Page 81 GAO-04-75 SEC Oversight of SRO Listing Programs

Appendix II

Quantitative Listing Standards for Domestic 

Issuers of the Three Largest Markets ApendxiI

Table 3: The American Stock Exchange’s Quantitative Standards for Initial Listing of Domestic Issuers

Source: The American Stock Exchange.

Notes:

While data provided in the table reflect information from the American Stock Exchange, the definitions 

provided in the following notes are from David L. Scott, Wall Street Words (1997).

a

A company must meet all of the minimum requirements under option 1, 2, 3, or 4. 

b

Stockholders’ equity is the stockholders’ interest in the assets of a business. It includes the amount 

invested by the stockholders in the enterprise plus the profits (or minus the losses).

c

Not applicable.

d

Market capitalization is the total value of all of a firm’s outstanding shares, calculated by multiplying 

the price of a stock by the total number of shares outstanding. 

e

A company may also meet the total market capitalization standard with $75 million each in total assets 

and total revenue in the most recent fiscal year or in 2 of the last 3 fiscal years. 

f

Companies can meet the pretax income requirement either in the last fiscal year or in 2 of the last 3 

fiscal years.

g

Price is the dollar amount at which a share of common stock trades. Amex’s standards specify that a 

company must satisfy the share price requirement for a reasonable period of time but do not define 

“reasonable.”

Standard

Minimum requirementsa

Option 1 Option 2 Option 3 Option 4

Stockholders’ equityb $4 million $4 million $4 million N.A.c

Market capitalizationd N.A. N.A. $50 million $75 millione

Pretax incomef $750,000 N.A. N.A. N.A.

Operating history N.A. 2 years N.A. N.A.

Distribution One of the following: 

1. 800 public 

shareholders and 

500,000 publicly held 

shares,

2. 400 public 

shareholders and 1 

million publicly held 

shares, or

3. 400 public 

shareholders, 500,000 

publicly held shares, 

and average daily 

trading volume of 

2,000 shares in the 

previous 6 months.

One of the following: 

1. 800 public 

shareholders and 

500,000 publicly held 

shares,

2. 400 public 

shareholders and 1 

million publicly held 

shares, or

3. 400 public 

shareholders, 500,000 

publicly held shares, 

and average daily 

trading volume of 

2,000 shares in the 

previous 6 months.

One of the following: 

1. 800 public 

shareholders and 

500,000 publicly held 

shares,

2. 400 public 

shareholders and 1 

million publicly held 

shares, or

3. 400 public 

shareholders, 500,000 

publicly held shares, 

and average daily 

trading volume of 

2,000 shares in the 

previous 6 months.

One of the following: 

1. 800 public 

shareholders and 

500,000 publicly held 

shares,

2. 400 public 

shareholders and 1 

million publicly held 

shares, or

3. 400 public 

shareholders, 500,000 

publicly held shares, 

and average daily 

trading volume of 

2,000 shares in the 

previous 6 months.

Priceg $3 $3 N.A. $3

Market value of publicly 

held sharesh

$3 million $15 million $15 million $20 million
Appendix II

Quantitative Listing Standards for Domestic 

Issuers of the Three Largest Markets

Page 82 GAO-04-75 SEC Oversight of SRO Listing Programs

h

According to the American Stock Exchange, market value of publicly held shares is the price of a 

stock multiplied by the number of outstanding shares held by investors that are not officers, directors, 

and 10 percent or greater shareholders.

Table 4: The American Stock Exchange’s Quantitative Standards for Continued 

Listing of Domestic Issuers

Source: The American Stock Exchange.

Notes:

a

The stockholders’ equity requirement is $2 million if the issuer has sustained losses from continuing 

operations or net losses in 2 of its 3 most recent fiscal years, $4 million if the issuer has sustained 

losses from continuing operations or net losses in 3 of its 4 most recent fiscal years, and $6 million if 

the issuer has sustained losses from continuing operations or net losses in 4 of its 5 most recent fiscal 

years.

b

Delisting will be considered if the issuer does not meet the $1 million minimum requirement for market 

value of publicly held shares for more than 90 consecutive calendar days. 

Standard Minimum requirements 

Stockholders’ equity $2 million, $4 million, or $6 milliona

One of the following: 

1. publicly held shares,

2. number of public shareholders, or

3. market value of publicly held shares.

1. 200,000, 

2. 300, or 

3. $1 millionb
Appendix II

Quantitative Listing Standards for Domestic 

Issuers of the Three Largest Markets

Page 83 GAO-04-75 SEC Oversight of SRO Listing Programs

Table 5: The NASDAQ National Market’s Quantitative Standards for Initial Listing of 

Domestic Issuers

Source: Nasdaq Stock Market, Inc.

Notes:

While data provided in the table reflect information from the Nasdaq Stock Market, Inc., the definitions 

provided in the following notes are from David L. Scott, Wall Street Words (1997), unless otherwise 

indicated.

a

A company must meet all of the requirements under option 1, 2, or 3. 

b

According to the Nasdaq Stock Market, Inc., market value of listed securities is the price per share 

multiplied by the total number of shares outstanding held by the public, officers, directors, and 

beneficial owners.

c

A company can meet the income from continuing operations requirement in either the latest fiscal year 

or in 2 of the last 3 fiscal years. 

d

According to the Nasdaq Stock Market, Inc., publicly held shares, also referred to as public float, are 

the total shares outstanding less any shares held by officers, directors, or beneficial owners of 10 

percent or more. 

e

According to the Nasdaq Stock Market, Inc., bid price is the price a buyer is willing to pay for a 

security.

f

Round-lot shareholders hold 100 shares or a multiple thereof. 

g

According to the Nadsaq Stock Market, Inc., market makers are firms or individuals that maintain a 

firm bid and offer price in a given security by standing ready to buy or sell at publicly quoted prices.

Standard

Minimum requirementsa

Option 1 Option 2 Option 3

Stockholders’ equity $15 million $30 million N.A.

One of the following:

1. market value of 

listed securitiesb

 or 

2. total assets and 

total revenue.

N.A. N.A.

1. $75 million or 

2. $75 million and 

$75 million.

Income from 

continuing operations 

before income taxesc

$1 million N.A. N.A.

Publicly held sharesd 1.1 million 1.1 million 1.1 million

Market value of 

publicly held shares

$8 million $18 million $20 million

Bid pricee $5 $5 $5

Round-lot 

shareholdersf

400 400 400

Market makersg 3 3 4

Operating history N.A. 2 years N.A.
Appendix II

Quantitative Listing Standards for Domestic 

Issuers of the Three Largest Markets

Page 84 GAO-04-75 SEC Oversight of SRO Listing Programs

Table 6: The NASDAQ National Market’s Quantitative Standards for Continued 

Listing of Domestic Issuers

Source: Nasdaq Stock Market, Inc.

Notes:

While data provided in the table reflect information from the Nasdaq Stock Market, Inc., the definitions 

provided in the following notes are from David L. Scott, Wall Street Words (1997).

a

An issuer must meet the requirements under option 1 or 2. 

b

Total assets include all property and items of value owned by the company.

c

Total revenue is the inflow of assets that results from the sales of goods and services and earnings 

from dividends, interest, and rent. 

Standard

Minimum requirementsa

Option 1 Option 2

Stockholders’ equity $10 million N.A.

One of the following: 

1. market value of listed 

securities or

2. total assetsb

 and total 

revenue.c

N/A

1. $50 million or

2. $50 million and $50 million.

Publicly held shares 750,000 1.1 million

Market value of publicly 

held shares

$5 million $15 million

Bid price $1 $1

Round-lot shareholders 400 400

Market makers 2 4
Appendix II

Quantitative Listing Standards for Domestic 

Issuers of the Three Largest Markets

Page 85 GAO-04-75 SEC Oversight of SRO Listing Programs

Table 7: The NASDAQ SmallCap Market’s Quantitative Standards for Initial Listing of 

Domestic Issuers

Source: Nasdaq Stock Market, Inc.

Table 8: The NASDAQ SmallCap Market’s Quantitative Standards for Continued 

Listing of Domestic Issuers

Source: Nasdaq Stock Market, Inc.

Standard Minimum requirements

One of the following:

1. stockholders’ equity, 

2. market value of listed securities, or

3. net income from continuing operations.

1. $5 million, 

2. $50 million, or 

3. $750,000.

Publicly held shares 1 million

Market value of publicly held shares $5 million

Bid price $4

Round-lot shareholders 300

Market makers 3

One of the following: 

1. operating history or 

2. market value of listed securities.

1. 1 year or

2. $50 million.

Standard Minimum requirements

One of the following:

1. stockholders’ equity, 

2. market value of listed securities, or 

3. net income from continuing operations.

1. $2.5 million,

2. $35 million, or 

3. $500,000.

Publicly held shares 500,000

Market value of publicly held shares $1 million

Bid price $1

Round-lot shareholders 300

Market makers 2
Appendix II

Quantitative Listing Standards for Domestic 

Issuers of the Three Largest Markets

Page 86 GAO-04-75 SEC Oversight of SRO Listing Programs

Table 9: The New York Stock Exchange’s Quantitative Standards for Initial Listing of 

Domestic Issuers

Source: The New York Stock Exchange.

Notes:

The New York Stock Exchange introduced a pilot program, effective January 29, 2004, through July 29, 

2004, that amends certain of its minimum quantitative standards for initial listing. While data provided 

in the table reflect information from the New York Stock Exchange, the definitions provided in the 

following notes are from David L. Scott, Wall Street Words (1997), unless otherwise indicated.

a

For this alternative standard and related requirements, the average monthly trading volume is 

calculated over the most recent 6 months.

b

According to the New York Stock Exchange, volume is the number of shares or contracts traded in a 

security or an entire market during a given period and is normally considered on a daily basis, with a 

daily average being computed for longer periods.

c

For this alternative standard and related requirement, the average monthly trading volume is 

calculated over the most recent 12 months.

d

The $60 million minimum requirement applies to companies that listed through initial public offerings, 

as a result of spin-offs, or under the affiliated companies requirement. The minimum requirement is 

$100 million for other companies.

e

A company must achieve the $10 million aggregate pretax earnings requirement for the last 3 fiscal 

years, with at least $2 million in each of the most recent 2 fiscal years, and being profitable in all 3 

years. 

f

The New York Stock Exchange has revised this standard under the pilot program.

g

Aggregate operating cash flow is the cash generated from the operations of a company. Generally, it is 

defined as net income adjusted for noncash charges and income.

h

A company’s 3-year total for aggregate operating cash flow must equal $25 million and the company 

must report a positive amount each year.

i

According to NYSE, global market capitalization includes all domestic and foreign companies and all 

domestic and foreign shares. 

Standard Minimum requirements

One of the following:

1. round-lot shareholders,

2. total stockholders and average monthly 

trading volume,a, b

3. total stockholders and average monthly 

trading volume,c

 or

4. publicly held shares.

2,000;

2,200 and 100,000 shares, respectively;

500 and 1 million shares, respectively; or

1.1 million. 

Market value of publicly held shares $60 million or $100 milliond

One of the following: 

1. aggregate pretax earnings,

2. aggregate operating cash flowg and global 

market capitalization and revenue, or

3. global market capitalizationi

 and revenue.

1. $10 million,e,f

2. $25 million,h $500 million, and $100 

million, respectively; or

3. $750 millionf

 and $75 million,f

respectively.
Appendix II

Quantitative Listing Standards for Domestic 

Issuers of the Three Largest Markets

Page 87 GAO-04-75 SEC Oversight of SRO Listing Programs

Table 10: The New York Stock Exchange’s Quantitative Standards for Continued 

Listing of Domestic Issuers

Source: The New York Stock Exchange.

Notes: 

The New York Stock Exchange introduced a pilot program, effective January 29, 2004, through July 29, 

2004, that amends certain of its minimum quantitative standards for continued listing. While data 

provided in the table reflect information from the New York Stock Exchange, the definitions provided in 

the following notes are from David L. Scott, Wall Street Words (1997), unless otherwise indicated.

a

An issuer is out of compliance with the price standard if the average price is below the minimum 

standard over a 30-consecutive-day trading period.

b

An issuer is out of compliance with the trading volume standard if the average monthly trading volume 

is below the minimum requirement in the most recent 12-month period and total stockholders are less 

than 1,200. 

c

According to NYSE, global market capitalization includes all domestic and foreign companies and all 

domestic and foreign shares. An issuer is out of compliance with the global market capitalization 

standard if average global market capitalization is below the minimum standard for a 30-consecutivetrading-day period. 

d

The New York Stock Exchange has revised this standard under the pilot program.

e

The New York Stock Exchange has added this standard under the pilot program.

Standard Minimum requirements

Pricea $1

Both of the following:

1. total stockholders and

2. total stockholders and trading volume.b

1. 400 and

2. 1,200 and 100,000, respectively.

Publicly held shares 600,000

For those companies that listed pursuant to 

the aggregate pretax earnings standard:

1. global market capitalizationc

 and total 

stockholders’ equity or 

2. global market capitalization. 

1. $75 milliond and $75 million,d

respectively, or

2. $25 million.d

For those companies that listed pursuant to 

the aggregate operating cash flow, and 

global market capitalization and revenue 

standards:

1. global market capitalization and total 

revenues or

2. global market capitalization.

1. $250 millione and $20 million,e 

respectively, or

2. $75 million.e

For those companies that listed pursuant to 

the global market capitalization and revenue 

standard:

1. global market capitalization and total 

revenues or 

2. global market capitalization.

1. $375 milliond

 and $15 million,d

respectively, or

2. $100 million.d
Page 88 GAO-04-75 SEC Oversight of SRO Listing Programs

Appendix III

Deficiency and Hearing Processes for 

Domestic Issuers Listed on the Three Largest 

Markets ApendxiI

After a domestic company is listed on the American Stock Exchange 

(Amex), Nasdaq Stock Market, Inc. (NASDAQ), or the New York Stock 

Exchange (NYSE), it must comply with the market’s quantitative continued 

listing standards (see app. II). If a domestic issuer does not maintain 

compliance with one or more of these standards, the SRO’s rules generally 

require that its deficiency, or delisting, process begins. If an SRO decides to 

delist a noncompliant issuer, the issuer may request a review of the 

delisting decision through the SRO’s hearings process. The deficiency and 

hearings processes for domestic issuers listed on Amex, NASDAQ, and 

NYSE are described below.

The Amex Deficiency 

and Hearing Processes 

for Domestic Issuers

Amex’s procedures require the SRO to send an issuer a deficiency letter 

within 10 business days of determining that the issuer is deficient with one 

or more continued listing standards. The letter offers the issuer an 

opportunity to submit a compliance plan detailing definitive actions the 

issuer has taken or will take to return to compliance with Amex’s continued 

listing standards. If Amex accepts the issuer’s plan, the issuer will be 

granted a compliance period for up to 18 months, during which time it will 

have the opportunity to regain compliance with the continued listing 

standards (see fig. 2). The issuer must issue a press release within 5 

business days disclosing that it does not meet Amex’s continued listing 

standards and that its listing is being continued pursuant to an extension.
Appendix III

Deficiency and Hearing Processes for 

Domestic Issuers Listed on the Three Largest 

Markets

Page 89 GAO-04-75 SEC Oversight of SRO Listing Programs

Figure 2: Key Points in Amex’s Deficiency Process for Domestic Issuers

Notes: 

All days are calendar days, unless otherwise indicated.

a Amex has 45 days to review an issuer’s proposed compliance plan. If Amex rejects the plan, or if the 

issuer does not submit a plan within 30 days, Amex is to send the issuer a delisting letter.

b

The issuer must issue a press release within 5 business days disclosing that it does not meet Amex’s 

continued listing standards and that its listing is being continued pursuant to an extension; we have 

converted the 5 business days to 7 calendar days for purposes of this figure.

c

The compliance period begins on the day that Amex sends an issuer a deficiency letter. Under its 

rules, Amex can grant issuers a compliance period of up to 18 months. 

d

See figure 3. 

Under Amex procedures, the SRO is to send an issuer a delisting letter if it 

does not regain compliance within the compliance period granted, Amex 

rejects its proposed compliance plan, or it does not submit a plan within 30 

calendar days. The delisting letter explains the basis for Amex’s decision to 

begin delisting proceedings against an issuer and informs the issuer of its 

right to a hearing (see fig. 3). The issuer must issue a press release 

announcing the initiation of delisting proceedings and the basis for the 

delisting decision within 7 calendar days of receiving the delisting letter. 

The Amex hearing panel may decide to uphold the delisting decision or 

allow the issuer to remain listed if it determines that the delisting decision 

was erroneous. Normally, trading in an issuer’s securities will continue 

pending a decision by the Amex hearing panel. If the hearing panel upholds 

the delisting decision, trading in the issuer’s securities will be suspended. 

30

days

82

days

75

days

18

months

18-month compliance periodc Continued listing

possible if issuer

requests a hearingd

Issuer fails to comply with one or more continued listing 

standards and must submit a compliance plan within 30 days

Issuer still 

noncompliant

Source: Amex.

Amex sends deficiency letter

Amex sends delisting letter

Issuer submits

compliance plan

Amex accepts compliance plana

Issuer must issue press release disclosing noncomplianceb
Appendix III

Deficiency and Hearing Processes for 

Domestic Issuers Listed on the Three Largest 

Markets

Page 90 GAO-04-75 SEC Oversight of SRO Listing Programs

The issuer may request a review by the Committee on Securities, appointed 

by the Amex Board of Directors, which can uphold the delisting decision or 

reinstate the issuer’s securities for trading. 

Figure 3: Key Points in Amex’s Hearing Process for Domestic Issuers

Notes:

All days are calendar days, unless otherwise indicated.

a

The Amex hearing panel must hold a hearing within 45 days of receiving an issuer’s request to review 

the delisting decision. According to an Amex official, the Amex hearing panel issues a decision within 5 

calendar days of holding the hearing. 

The NASDAQ 

Deficiency and Hearing 

Processes for 

Domestic Issuers 

NASDAQ’s procedures require the SRO to send a deficiency letter when an 

issuer becomes deficient in one or more of its continued listing standards. 

The deficiency process differs depending on the listing standard. An issuer 

with a deficiency in the equity, total assets and total revenue, publicly held 

shares, and/or round-lot shareholders standards has 10 business days from 

the date of the letter to comply with the applicable standard or submit a 

compliance plan (see fig. 4). 

7

days

57

days

72

days

Amex holds hearing and issues decision within 50 days of issuer's requesta

Issuer must request a review of delisting decision within 7 days

Issuer must issue press release 

within 7 days of delisting decision

Amex hearing panel upholds delisting 

decision or allows issuer to remain listed 

under an exception to listing standards

Issuer has 15 days to

request review of hearing 

panel decision to 

uphold delisting decision

Committee on Securities 

upholds delisting or 

reinstates the issuer's 

securities for trading

Source: Amex.

Continued listing possible

pending decision by

Committee on Securities

Issuer receives delisting letter from Amex
Appendix III

Deficiency and Hearing Processes for 

Domestic Issuers Listed on the Three Largest 

Markets

Page 91 GAO-04-75 SEC Oversight of SRO Listing Programs

Figure 4: Key Points in NASDAQ’s Equity, Total Assets and Total Revenue, Publicly Held Shares, and/or Round-Lot Shareholders 

Deficiency Process for Domestic Issuers

Notes:

All days are calendar days, unless otherwise indicated.

a An issuer with a deficiency in the equity, total assets and total revenue, publicly held shares, and/or 

round-lot shareholders standards has 10 business days from the date of the letter to comply with the 

applicable standards or submit a compliance plan; we have converted the 10 business days to 14 

calendar days for purposes of this figure. 

b

NASDAQ takes up to 63 calendar days to review an issuer’s compliance plan. If NASDAQ rejects the 

plan, the issuer does not submit a plan within 10 business days, or the issuer does not regain 

compliance within the compliance period, NASDAQ is to send the issuer a delisting letter. 

c

NASDAQ procedures allow the SRO to accept an issuer’s compliance plan and grant a short 

extension period during which the issuer must meet certain milestones to regain compliance. Upon 

receipt of a delisting letter, an issuer may request a hearing to remain listed under a short-term 

exception to the listing standards. 

d

See figure 8. 

Issuers that fail to meet the market value of listed securities and market 

maker standards for 10 consecutive business days are granted an automatic 

compliance period during which they have the opportunity to regain 

compliance with the applicable standard (see fig. 5).

14

days

77

days

Compliance periodc

Issuer fails to meet equity, total assets and total revenue, publicly held shares, and/or 

round-lot shareholders standards and has 14 days to submit a compliance plana

NASDAQ accepts

compliance planb

Source: NASDAQ.

Continued listing

possible if issuer

requests a hearingd

Issuer complies 

with standards 

or submits 

compliance plan

NASDAQ sends deficiency letter
Appendix III

Deficiency and Hearing Processes for 

Domestic Issuers Listed on the Three Largest 

Markets

Page 92 GAO-04-75 SEC Oversight of SRO Listing Programs

Figure 5: Key Points in NASDAQ’s Market Value of Listed Securities and Market Makers Deficiency Process for Domestic Issuers

Notes:

All days are calendar days, unless otherwise indicated.

a

See figure 8. 

Issuers that do not meet the market value of publicly held shares and bidprice standards for 30 consecutive business days are granted automatic 

compliance periods during which they have the opportunity to regain 

compliance with the applicable standard. Figure 6 describes the key points 

in the deficiency process for issuers deficient in the market value of 

publicly held shares standard, and figure 7 describes the key points in the 

deficiency process for issuers deficient in the NASDAQ National Market 

(NNM) and SmallCap (SCM) bid-price standards. 

30

days

Continued listing

possible if issuer

requests a hearinga

Issuer still 

noncompliant

Source: NASDAQ.

30-day compliance period

Issuer fails to meet market value of listed securities or market makers standard 

for 10 consecutive business days and is granted a 30-day compliance period

NASDAQ sends deficiency letter

NASDAQ sends delisting letter
Appendix III

Deficiency and Hearing Processes for 

Domestic Issuers Listed on the Three Largest 

Markets

Page 93 GAO-04-75 SEC Oversight of SRO Listing Programs

Figure 6: Key Points in NASDAQ’s Market Value of Publicly Held Shares Deficiency Process for Domestic Issuers

Notes:

All days are calendar days, unless otherwise indicated.

a

See figure 8.

90

days

Continued listing

possible if issuer

requests a hearinga

Issuer fails to meet market value of publicly held shares standard for 30 

consecutive business days and is granted a 90-day compliance period

Issuer still 

noncompliant

Source: NASDAQ.

90-day compliance period

NASDAQ sends deficiency letter

NASDAQ sends delisting letter
Appendix III

Deficiency and Hearing Processes for 

Domestic Issuers Listed on the Three Largest 

Markets

Page 94 GAO-04-75 SEC Oversight of SRO Listing Programs

Figure 7: Key Points in NASDAQ’s SCM and NNM Bid-Price Deficiency Process for Domestic Issuers 

Notes:

All days are calendar days, unless otherwise indicated.

a

An SCM or NNM issuer must meet all of its market’s initial listing standards, except for bid price, to 

take advantage of the second 180-day bid-price compliance period; if the issuer does not meet these 

standards, NASDAQ is to send the issuer a delisting letter. 

b

If an NNM issuer has not regained compliance with the bid-price standard 45 days before the 

expiration of the second NNM 180-day compliance period, NASDAQ is to send a letter notifying the 

issuer of its noncompliance, the pending expiration of the compliance period, and its right to request a 

hearing. 

c

NNM issuers that do not regain compliance at the end of the second 180-day compliance period may 

elect to transfer to the SCM provided that they meet all of the SCM continued listing standards, except 

for bid price, and other requirements; if the issuer does not meet all the SCM continued standards and 

requirements or elects not to transfer to the SCM, NASDAQ is to send the issuer a delisting letter.

d

An issuer must meet all initial SCM listing standards, except for bid price, to take advantage of the 

additional compliance period; if the issuer does not meet these standards, NASDAQ is to send the 

issuer a delisting letter.

e

If the issuer meets all initial SCM listing standards, except for bid price, it will be provided with an 

additional compliance period up to its next shareholder meeting scheduled to occur within the next 370 

days, provided the issuer commits to seeking shareholder approval of a reverse stock split to address 

the bid-price deficiency at that meeting. If the issuer does not meet all the initial standards or fails to 

timely propose, obtain approval of, or promptly execute the reverse stock split, NASDAQ is to send the 

issuer a delisting letter.

f

See figure 8.

180

days

360

days

730

days

180-day compliance period Additional 180-day

compliance period

Continued listing possible if issuer requests a hearingf

1–370 dayse

Issuer fails to meet bid-price 

requirement for 30 consecutive 

business days and receives 

deficiency letter granting it a 

180-day compliance period

Issuer still noncompliant–granted 

second 180-day 

compliance perioda

Issuer still 

noncompliant

Source: NASDAQ.

Issuer still noncompliant–granted 

additional compliance 

periodb,c,d

315

days

NASDAQ sends bid-price deficiency letter

NASDAQ sends compliance period extension letter

NASDAQ sends delisting letter
Appendix III

Deficiency and Hearing Processes for 

Domestic Issuers Listed on the Three Largest 

Markets

Page 95 GAO-04-75 SEC Oversight of SRO Listing Programs

If NASDAQ rejects an issuer’s compliance plan, if the issuer does not 

submit a plan, or if an issuer does not regain compliance within the 

applicable compliance period, NASDAQ is to send the issuer a delisting 

letter. Upon receipt of a delisting letter, the issuer has 7 calendar days to 

issue a press release announcing receipt of the delisting letter and the basis 

for the delisting decision. It may also within this time frame request a 

hearing to remain listed under an exception to the listing standards (see fig. 

8).1

 Before the hearing, issuers are asked to submit a compliance plan for 

the NASDAQ Hearing Panel’s review. If the NASDAQ Hearing Panel 

determines that the issuer will be able to implement in the short term a plan 

of compliance that will likely enable the issuer to achieve and sustain longterm compliance, the NASDAQ Hearing Panel may allow the issuer to 

remain listed under a temporary exception to the listing standards. 

Normally, trading in an issuer’s securities will continue pending a decision 

by the NASDAQ Hearing Panel. If the NASDAQ Hearing Panel determines 

that it is unlikely that the issuer will be able to achieve and sustain longterm compliance, the issuer’s securities will be delisted. An issuer may 

appeal the NASDAQ Hearing Panel decision to the NASDAQ Listing and 

Hearing Review Council, which can uphold the delisting decision or 

reinstate the issuer’s securities for trading. 

1

For all deficiencies, if an issuer chooses not to request a hearing following receipt of a 

delisting letter, the issuer is to be delisted in 7 calendar days. In addition, rather than request 

a hearing or delist, NNM issuers have the opportunity to transfer to the SCM, provided they 

meet all SCM continued listing standards, except for bid price. An issuer that wishes to 

transfer from NNM to SCM must submit an application, a copy of the SCM Listing 

Agreement, and pay the applicable entry fee.
Appendix III

Deficiency and Hearing Processes for 

Domestic Issuers Listed on the Three Largest 

Markets

Page 96 GAO-04-75 SEC Oversight of SRO Listing Programs

Figure 8: Key Points in NASDAQ’s Hearing Process for Domestic Issuers

Notes: 

All days are calendar days, unless otherwise indicated.

a

The delisting letter at the end of the compliance period triggers the requirement for the press release.

b

An issuer may appeal a delisting decision to the NASDAQ Listing and Hearing Review Council. 

The NYSE Deficiency 

and Hearing Processes 

for Domestic Issuers

NYSE has different deficiency procedures for price and nonprice 

deficiencies. If an issuer’s average closing price over a 30-day trading 

period is less than $1, NYSE must send a deficiency letter to the issuer 

within 10 business days, stating that the issuer has the later of 6 months or 

its next annual meeting of shareholders (should the company determine 

that its action to cure the price deficiency requires shareholder approval) 

to bring the share price and average share price back above $1 (see fig. 9). 

NYSE transmits an indicator on the consolidated tape 5 business days 

following notification to the issuer that it is below the $1 share-price 

requirement. In addition, the issuer is required to issue a press release 

within 45 calendar days of notification from NYSE that it is below the $1 

share-price requirement. NYSE may initiate delisting proceedings before 

the expiration of the compliance period, by shortening the period, if it 

appears likely that the issuer will be unable to regain compliance due to an 

abnormally low price.

7

days

82

days

NASDAQ Hearing Panel holds hearing and issues decision within 75 days of issuer's request

Issuer must request a review of delisting decision within 7 days

Issuer must issue press release within 7 days of delistinga

NASDAQ Hearing Panel upholds 

delisting decision or allows issuer 

to remain listed under an exception 

to listing standardsb

Source: NASDAQ.

Continued listing

under exception to

listing standards

Issuer receives delisting letter from NASDAQ
Appendix III

Deficiency and Hearing Processes for 

Domestic Issuers Listed on the Three Largest 

Markets

Page 97 GAO-04-75 SEC Oversight of SRO Listing Programs

Figure 9: Key Points in NYSE’s Price Deficiency Process for Domestic Issuers

Notes:

All days are calendar days, unless otherwise indicated.

a

NYSE issues a press release disclosing the issuer’s listing status and the basis for its delisting 

decision. 

b

According to NYSE officials, continued listing during a hearing is rare in cases of a price deficiency. 

See figure 11.

NYSE must send an issuer a deficiency letter within 10 business days of 

determining that the issuer is deficient with one or more nonprice 

continued listing standards. The letter provides the issuer an opportunity to 

submit a compliance plan to NYSE detailing definitive actions the issuer 

has taken or is taking to return to compliance with the continued listing 

standards. NYSE transmits an indicator on the consolidated tape 5 business 

days following notification to the issuer that it is not in compliance with 

NYSE nonprice continued listing standards. In addition, the issuer is 

required to issue a press release within 45 calendar days of notification 

from NYSE that it is not in compliance with NYSE nonprice continued 

listing standards (see fig. 10). If NYSE accepts the issuer’s plan, the issuer 

will be granted a compliance period, during which time it will have an 

opportunity to regain compliance with the standards. This compliance 

period is subject to quarterly monitoring of the goals outlined in the issuer’s 

plan, and NYSE may, subject to approval, initiate delisting proceedings 

before the expiration of the compliance period if the issuer fails to meet a 

goal or if it appears likely that the issuer will be unable to regain 

compliance. 

45

days

6

months

6-month compliance period

Issuer fails to maintain an average price of $1 over a 30-day 

trading period and is granted a 6-month compliance period

Issuer still

noncomplianta Issuer must issue press release disclosing noncompliance

Source: NYSE.

Continued listing 

possible if issuer

requests hearingb

NYSE sends deficiency letter

NYSE sends delisting letter
Appendix III

Deficiency and Hearing Processes for 

Domestic Issuers Listed on the Three Largest 

Markets

Page 98 GAO-04-75 SEC Oversight of SRO Listing Programs

Figure 10: Key Points in NYSE’s Nonprice Deficiency Process for Domestic Issuers

Notes:

All days are calendar days, unless otherwise indicated.

a

NYSE has 45 days to review an issuer’s proposed compliance plan. If NYSE rejects the plan, or if the 

issuer does not submit a plan within the 45-day time frame, NYSE is to send the issuer a delisting 

letter.

b

NYSE issues a press release disclosing the issuer’s listing status and the basis for its delisting 

decision. 

c

See figure 11. 

Under NYSE procedures, the SRO is to issue a press release and send an 

issuer a delisting letter if the issuer does not regain compliance within the 

6-month compliance period for price deficiencies or the 18-month 

compliance period for nonprice deficiencies, NYSE rejects the issuer’s 

proposed compliance plan, the issuer does not submit a plan within the 45-

calendar-day time frame, or the issuer fails to meet a quarterly milestone. 

The press release and the delisting letter explain the basis for NYSE’s 

decision to begin delisting proceedings against an issuer and inform the 

issuer of its right to a hearing by a committee of the board of directors (see 

fig. 11). Generally, trading in an issuer’s securities will continue pending a 

decision by the committee. The committee may decide to uphold the 

delisting decision or allow the issuer to remain listed. 

45

days

90

days

18

months

18-month compliance period

Issuer fails to comply with one or more nonprice-related continued 

listing standards and must submit a compliance plan within 45 days

Source: NYSE.

Continued listing

possible if issuer

requests hearingc

Issuer still

noncompliantb

NYSE accepts compliance plana

Issuer submits compliance plan; issuer must issue press release disclosing noncompliance

NYSE sends deficiency letter

NYSE sends delisting letter
Appendix III

Deficiency and Hearing Processes for 

Domestic Issuers Listed on the Three Largest 

Markets

Page 99 GAO-04-75 SEC Oversight of SRO Listing Programs

Figure 11: Key Points in NYSE’s Hearing Process for Domestic Issuers

Notes:

All days are calendar days, unless otherwise indicated.

a

The issuer must request a review of the delisting decision within 10 business days; we have converted 

the 10 business days to 14 calendar days for purposes of this figure. 

b

According to a NYSE official, a committee of the board of directors holds a hearing within 70 days of 

the issuer’s request and issues a decision within 1 day of holding a hearing. 

14

days

85

days

NYSE committee of the board of directors holds hearing and issues decision within 71 days after issuer’s requestb

Issuer must request a 

review of delisting 

decision within 14 daysa

NYSE committee of the board of 

directors upholds delisting 

decision or reinstates the 

issuer's securities for trading

Source: NYSE.

Issuer receives delisting letter from NYSE
Page 100 GAO-04-75 SEC Oversight of SRO Listing Programs

Appendix IV

Market Participants Contacted During This 

Review ApendxiIV

As part of our review of the actions the three largest SROs have taken to 

strengthen corporate governance for issuers and themselves, we 

interviewed market participants representing the following 14 investor, 

legal, business, and professional organizations: 

American Federation of Labor and Congress of Industrial Organizations

American Institute of Certified Public Accountants

Association for Investment Management and Research

The Business Roundtable

California Public Employees’ Retirement System

The Corporate Library

Council of Institutional Investors

Institute of Internal Auditors

Institutional Shareholder Services

Investment Company Institute

National Association of Corporate Directors

Securities Industry Association

Teachers Insurance and Annuity Association–College Retirement Equities 

Fund

Weil, Gotshal, & Manges LLP
Page 101 GAO-04-75 SEC Oversight of SRO Listing Programs

Appendix V

Comments from the Securities and Exchange 

Commission ApendxiV
Appendix V

Comments from the Securities and Exchange 

Commission

Page 102 GAO-04-75 SEC Oversight of SRO Listing Programs
Appendix V

Comments from the Securities and Exchange 

Commission

Page 103 GAO-04-75 SEC Oversight of SRO Listing Programs
Page 104 GAO-04-75 SEC Oversight of SRO Listing Programs

Appendix VI

Comments from the American Stock 

Exchange ApendxiVI
Appendix VI

Comments from the American Stock 

Exchange

Page 105 GAO-04-75 SEC Oversight of SRO Listing Programs
Appendix VI

Comments from the American Stock 

Exchange

Page 106 GAO-04-75 SEC Oversight of SRO Listing Programs
Page 107 GAO-04-75 SEC Oversight of SRO Listing Programs

Appendix VII

Comments from the Nasdaq Stock Market, 

Inc. ApendxiVI
Appendix VII

Comments from the Nasdaq Stock Market, 

Inc.

Page 108 GAO-04-75 SEC Oversight of SRO Listing Programs
Appendix VII

Comments from the Nasdaq Stock Market, 

Inc.

Page 109 GAO-04-75 SEC Oversight of SRO Listing Programs
Appendix VII

Comments from the Nasdaq Stock Market, 

Inc.

Page 110 GAO-04-75 SEC Oversight of SRO Listing Programs
Appendix VII

Comments from the Nasdaq Stock Market, 

Inc.

Page 111 GAO-04-75 SEC Oversight of SRO Listing Programs
Page 112 GAO-04-75 SEC Oversight of SRO Listing Programs

Appendix VIII

Comments from the New York Stock 

Exchange ApendxiVI
Appendix VIII

Comments from the New York Stock 

Exchange

Page 113 GAO-04-75 SEC Oversight of SRO Listing Programs
Appendix VIII

Comments from the New York Stock 

Exchange

Page 114 GAO-04-75 SEC Oversight of SRO Listing Programs
Appendix VIII

Comments from the New York Stock 

Exchange

Page 115 GAO-04-75 SEC Oversight of SRO Listing Programs
Appendix VIII

Comments from the New York Stock 

Exchange

Page 116 GAO-04-75 SEC Oversight of SRO Listing Programs
Appendix VIII

Comments from the New York Stock 

Exchange

Page 117 GAO-04-75 SEC Oversight of SRO Listing Programs
Page 118 GAO-04-75 SEC Oversight of SRO Listing Programs

Appendix IX

GAO Contacts and Staff Acknowledgments ApendxiIX

GAO Contacts Richard Hillman, (202) 512-8678

Cecile Trop, (312) 220-7600

Staff 

Acknowledgments

In addition to those named above, Rachel DeMarcus, Stefanie Jonkman, 

Marc Molino, Josephine Perez, Carl Ramirez, Barbara Roesmann, and Cory 

Roman made key contributions to this report.

(250075)
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