Document ID: SEC-2006-0100-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: New York Stock Exchange, Inc.
Posted Date: 2006-01-26T05:00Z

[Federal Register: January 26, 2006 (Volume 71, Number 17)]
[Notices]               
[Page 4391-4394]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26ja06-84]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53152; File No. SR-NYSE-2005-75]

 
Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Granting Approval to a Proposed Rule Change Relating to Section 
802.01E of the Listed Company Manual Concerning Continued Listing of 
Companies That Fail to File Their Securities Exchange Act of 1934 
Annual Reports in a Timely Manner

January 19, 2006.

I. Introduction

    On October 26, 2005, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change relating to amendments to the 
Listed Company Manual procedures applicable to companies that fail to 
file in a timely manner their annual report required by the Act. The 
proposed rule change was published for public comment in the Federal 
Register on November 16, 2005.\3\ The Commission received four comments 
regarding the proposed rule change.\4\ On December 14, 2005, the 
Exchange submitted a response to the comments.\5\ This order approves 
the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 52760 (November 10, 
2005), 70 FR 69617.
    \4\ See comments from James J. Angel (``Angel''), Associate 
Professor of Finance, McDonough School of Business, Georgetown 
University, dated December 5, 2005 (``Angel Letter''); Steve Berman 
(``Berman''), SRIC-Atlantic Trust, dated December 6, 2005 (``Berman 
Letter''); Edward S. Knight, Executive Vice President and General 
Counsel, The Nasdaq Stock Market, Inc. (``Nasdaq''), dated December 
7, 2005 (``Nasdaq Letter''); and Mark Patterson (``Patterson''), 
Managing Director, NWQ Investment Management, LLC, dated December 7, 
2005 (``Patterson Letter'').
    \5\ See letter from Mary Yaeger, Assistant Secretary, NYSE, to 
Jonathan G. Katz, Secretary, Commission, dated December 14, 2005 
(``NYSE Response Letter'').
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II. Description of the Proposed Rule Change

    The Exchange recently amended Section 802.01E of the NYSE's Listed 
Company Manual, which codifies the Exchange's procedures relating to 
situations where companies fail to satisfy the Commission's filing 
requirements for annual reports on Forms 10-K, 10-KSB, 20-F, 40-F, or 
N-CSR in a timely manner.

[[Page 4392]]

    Section 802.01E currently provides that if a company fails to 
timely file an annual report with the SEC, the Exchange will monitor 
the company and the status of the filing. If the company fails to file 
the annual report within nine months from the filing due date, the 
Exchange may, in its sole discretion, allow the company's securities to 
be traded for up to an additional three-month trading period depending 
on the company's specific circumstances.\6\ If the company does not 
file its annual report by the end of the nine-month or 12-month period, 
as applicable, the Exchange will begin suspension and delisting 
procedures in accordance with the procedures in Section 804.00.
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    \6\ In determining whether an additional three-month trading 
period is appropriate, the Exchange considers the likelihood that 
the filing can be made during the additional three month period, as 
well as the company's general financial status based on information 
provided by a variety of sources, including the company, its audit 
committee, its outside auditors, the staff of the Commission, and 
any other regulatory body.
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    The Exchange believes that there are very rare circumstances 
involving listed companies that have a position in the market (relating 
to both the nature of their business and their very large publicly-held 
market capitalization) such that their delisting from the Exchange 
would be significantly contrary to the national interest and the 
interests of public investors, notwithstanding a delay in an annual 
report filing that extended beyond one year.
    The Exchange has proposed to amend Section 802.01E to provide that, 
in these very rare circumstances, a listed company may remain suitable 
for listing given: (1) Its continuing compliance with the NYSE's 
quantitative and qualitative listing standards; (2) its continued 
ability to meet certain debt obligations and adequately finance 
operations; (3) its progress, as reported to the Exchange, in 
completing its financial statements; (4) its public transparency on its 
status, issuing press releases regarding its progress in completing its 
financial statements and providing other information regarding its 
financial status; and (5) the reasonable expectation that the company 
will be able to resume timely filings in the future. In these 
circumstances, the Exchange may forebear from commencing suspension and 
delisting proceedings notwithstanding the listed company's failure to 
file the annual report within the time periods specified in Section 
802.01E. Under the proposal, the Exchange must advise the SEC of, and 
publish on the NYSE's Web site, any such determination. In addition, 
the Exchange will reevaluate such determination once every three months 
and, if the Exchange reaffirms its decision to allow trading to 
continue, the Exchange must advise the SEC of, and publish on the 
NYSE's Web site, that reaffirmation.
    In all such cases, the NYSE has represented that Exchange staff 
will continue to hold regular discussions and meetings with the 
company's management, directors, regulators, and advisors to monitor 
the status of the annual report filing, as well as the company's 
compliance with the NYSE's other qualitative and quantitative 
requirements, and to determine whether to allow the company to continue 
to trade despite the continued failure to file an annual report with 
the SEC. In addition, in order to provide investors with appropriate 
notice that companies have failed to file their annual reports with the 
SEC in a timely manner, the Exchange will continue to monitor and 
disseminate information on the failure of such companies to file their 
annual report with the SEC, including through appending an ``.LF'' 
indicator in the financial status field of the company's ticker symbol 
and distributing that information via the low speed ticker and through 
the data stream to market data vendors.\7\
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    \7\ The NYSE represented that it maintains an up-to-date list of 
companies that are late in filing their annual reports with the SEC 
on its Web site at http://www.nyse.com. Additionally, the NYSE represented 

that each listed company has a unique data page on the site and, 
when applicable, this page indicates that the company is considered 
a late filer.
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    With respect to all companies subject to Section 802.01E, the 
Exchange is also proposing to (1) shorten the initial monitoring period 
for companies that miss their filing due date from nine months to six 
months and (2) lengthen from three months to six months the additional 
period that the Exchange may grant companies prior to the commencement 
of suspension and delisting procedures. In addition, the Exchange is 
proposing minor amendments to Section 802.01E to clarify the type of 
information that must be included in the press release to be issued 
when the company is late in filing its annual report. Specifically, in 
addition to the status of the filing, the press release must note the 
delay and the reasons for it, as well as the anticipated filing date, 
if known. The proposal also makes some non-substantive clarifying 
changes to the rule language.

III. Comments

    The Commission received four comments on the proposal.\8\ Three 
commenters supported the proposal; \9\ one commenter opposed the 
proposal.\10\ Angel stated that the proposal seemed reasonable and 
should be approved. In his letter, however, he states that the markets 
should adopt a uniform method of alerting investors of issuers that are 
late in filing their annual reports, and expresses concern that common 
financial portals do not carry late filer identifiers appended by the 
markets. Patterson stated that he believed the proposal ``sets forth 
reasonable and workable guidelines regarding the evaluation and 
execution of the delisting process.'' Berman stated that ``[c]ompanies 
with strong financials, but for certain circumstances are involved in a 
lengthy historical restatement and re-audit process to comply with GAAP 
can be unfairly penalized by this existing rule as presently stated.'' 
The Berman Letter supports allowing some discretion under certain 
circumstances in the current delisting standard for late filers, noting 
that a hard and fast rule has the potential to cause short-term 
volatility that may be especially harmful to individual investors.
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    \8\ See supra note 4.
    \9\ See Angel Letter; Berman Letter; and Patterson Letter.
    \10\ See Nasdaq Letter.
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    Nasdaq believes that the Commission should reject the proposed rule 
change, arguing that it is ``antithetical'' to Section 6(b)(5) of the 
Act,\11\ which requires that the rules of the NYSE be designed to 
protect investors and the public interest and not be designed to permit 
unfair discrimination between issuers. According to Nasdaq, the NYSE 
proposal would allow certain issuers to trade indefinitely without 
publicly available audited financial statements and without the 
required disclosures.\12\ Nasdaq believes that ``the availability and 
integrity of financial statements is an issue that cuts across all 
markets and raises fundamental issues of investor protection.'' 
Furthermore, the proposed rule change would be available only to a 
company having a position in the market such that its delisiting would 
be significantly contrary to the national interest and the interests of 
public investors, due to the nature of its business and its ``very 
large'' publicly-held market capitalization. According to

[[Page 4393]]

Nasdaq, not only are these criteria subjective, the NYSE does not 
specifically explain how these criteria ``justify allowing an issuer to 
continue to trade when that issuer has been unable to provide required 
audited financial statements and disclosures to investors for a period 
longer than one year.'' Nasdaq further states that allowing such a 
company to continue to trade for an extended period of time ignores the 
emphasis the Commission has placed on prospective investors, who have a 
right to assume that companies meet listing requirements.
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    \11\ 15 U.S.C. 78f(b)(5).
    \12\ Nasdaq stated that, rather than shortening the total 
timeframe within which a company must file annual reports before 
being delisted, a goal articulated by the Commission in the order 
approving Section 802.01E, the NYSE's proposal would extend that 
timeframe.
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    The NYSE responded to Nasdaq's concerns by stating that it ``does 
not agree that the proposed rule change is contrary to the interests of 
investors, as there will be significant protections for investors built 
into its application.'' \13\ The NYSE pointed out specifically that the 
provision will apply only ``in circumstances where Exchange staff have 
determined that a company remains suitable for listing given its 
relative financial health and compliance with the NYSE's quantitative 
and qualitative listing standards and that there is a reasonable 
expectation that the company will be able to resume timely filings in 
the future.'' According to the NYSE, the proposal protects investors 
``by requiring the Exchange to take into consideration the relative 
transparency of the company's public disclosures relating to the status 
of its completion of its filing and its provision of other information 
regarding its financial status.'' The NYSE also noted its obligation to 
reconsider extensions every three months, to monitor the company's 
progress in compliance efforts, and to identify late filers by means of 
an ``LF'' appendage to the company's ticker symbol and Web site 
disclosure.
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    \13\ See NYSE Response Letter.
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    The NYSE does not agree that the proposed rule is ``antithetical'' 
to Section 6(b)(5) of the Act for unfairly discriminating among 
issuers. The NYSE stated that the motivation for the rule is that ``the 
effective functioning of certain companies is of particular importance 
to the national interest and that a disruption in the orderly market 
for their securities would have serious implications not just for those 
companies and their shareholders but also for the country as a whole.'' 
The NYSE asserts that the ``effect on the national interest'' and not 
merely the size of an issuer will be considered in determining whether 
to grant an exception.

IV. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange. In particular, 
the Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act, which requires an Exchange to have rules 
that are designed to promote just and equitable principles of trade, to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system and, in general, to protect 
investors and the public interest; and are not designed to permit 
unfair discrimination between customers, issuers, brokers, or 
dealers.\14\
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    \14\ In approving the proposed rule change, the Commission has 
considered its impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
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    Although the Commission believes that the goal of ensuring that 
listed companies have filed accurate, up-to-date annual reports under 
the Act is of critical importance, the Commission recognizes that there 
may be certain very rare circumstances under which the new NYSE 
delisting requirements could be too inflexible. In this regard, the 
Commission believes that the proposed rule change provides the Exchange 
with appropriately limited flexibility to allow a company that is more 
than 12 months late in filing its annual report with the Commission to 
remain listed on the NYSE. This limited discretion is available only in 
certain very rare circumstances where the company has a position in the 
market such that its delisiting would be significantly contrary to the 
national interest and the interests of public investors, due to the 
nature of its business and its very large publicly-held market 
capitalization.
    The Commission notes that the proposal has provisions that help to 
assure the availability to investors of information on which to base 
trading decisions, even in the absence of formal SEC filings. For 
instance, before the NYSE could grant an extension beyond 12 months, 
the proposal would require it to consider whether the company has been 
publicly transparent on its status, issuing press releases regarding 
its progress in completing its financial statements and providing other 
information regarding its financial status. In addition, the NYSE also 
must consider the issuer's continuing compliance with applicable 
quantitative and qualitative listing standards, its continued ability 
to meet current debt obligations and adequately finance operations, its 
progress in completing its financial statements, and whether there is a 
reasonable expectation the issuer will be able to resume timely filings 
in the future.
    The Commission emphasizes that the new standards apply only in 
certain very rare circumstances where the Exchange determines that 
delisting of the late filer would be contrary to the national interest 
and the interests of public investors, due to the late filer's position 
in the market (i.e., the nature of its business and its very large 
publicly-held market capitalization). As the NYSE noted in the NYSE 
Response Letter, the standard is meant to apply only to those companies 
where a ``disruption in the orderly market for their securities would 
have serious implications not just for those companies and their 
shareholders but also for the country as a whole.'' While the 
Commission clearly believes that information in the annual report 
required under the Act is critical to investors and our national 
markets, we believe that, under these circumstances, and subject to the 
conditions in the proposed rule change, some limited flexibility to 
allow a company to remain listed is appropriate.
    The Commission also notes the Exchange must advise the Commission 
of, and publish on the NYSE's Web site, any determination to allow a 
company that is more than 12 months late in filing its annual report 
with the Commission to remain listed on the NYSE.\15\ In addition, the 
Exchange will reevaluate such determination once every three months 
and, if the Exchange reaffirms its decision to allow trading to 
continue, the Exchange will advise the SEC of, and publish on the 
NYSE's Web site, that reaffirmation.\16\ The NYSE rules also make clear 
that, regardless of the procedures for continued listing of a late 
annual report filer under Section 802.01E of the Listed Company Manual, 
if at any time the Exchange believes it

[[Page 4394]]

is necessary in the public interest or for the protection of investors, 
it can suspend trading immediately in any security and commence 
delisting under Section 804.00 of the NYSE's Listed Company Manual. 
Indeed, the Commission expects the NYSE to suspend trading quickly and 
commence delisting proceedings immediately against any late filer 
continuing to trade under these new provisions should it be necessary 
to do so based on the facts of the particular situation. The Commission 
intends to monitor the NYSE's use of the proposed exception to its 
delisting requirement to ensure that such use is in compliance with the 
procedures and safeguards set forth in this filing.
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    \15\ As discussed above, the NYSE will continue to identify late 
filers by means of an ``LF'' appendage to the company's ticker 
symbol. The Commission continues to urge the NYSE to encourage data 
vendors and subscribers to display the indicator.
    \16\ As noted above, the NYSE states, among other things, that 
it will continue to hold regular discussions and meetings with the 
company's management, directors, regulators and advisors to monitor 
the status of the annual report filing and compliance with other 
listing standards, and to determine if continued trading should be 
permitted despite the failure of the company to file its annual 
report with the Commission. The Commission notes that despite the 
formal reaffirmation required under the rule every three months and 
the public announcement of such decision, the Commission expects the 
monitoring of such companies to take place on an on-going basis 
throughout the extended continued trading period.
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    Finally, the Commission notes that Section 802.01E of the 
Exchange's Listed Company Manual currently requires the delisting of 
the securities of any company that is nine months late in filing its 
annual report on Form 10-K, unless the Exchange determines that an 
additional three months is appropriate. The Commission believes that 
changing the initial time frame that a late filer has to be delisted 
under the rule from nine months to six months is an improvement. 
However, because in conjunction with this change, the NYSE is proposing 
to lengthen the additional period the Exchange can allow a late filer 
to continue to trade from three months to six months, the total 
specified time periods under the rule for late filers remains 12 
months. While the change will have companies reevaluated more quickly 
for delisting with no assurance the additional six months will be 
granted, the Commission continues to believe that the NYSE should 
consider shortening the total timeframes specified under Rule 802.01E 
for delisting a late filer, as well as extending such requirements to 
issuers that are late in filing their quarterly reports with the 
Commission.\17\
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    \17\ In considering shortening the time periods, the NYSE may 
want to assess whether the shortened initial six month period for 
delisting has had any noticeable impact on when later filers 
actually submit up-to-date annual reports.
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\18\ that the proposed rule change (SR-NYSE-2005-75) is approved.
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    \18\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 06-769 Filed 1-25-06; 8:45 am]

BILLING CODE 8010-01-P