NASD Opposes SEC Approval of NYSE's Anti-Competitive Amendment to Rule 500
Washington, D.C.—The National Association of Securities Dealers, Inc. (NASD®), today declared its strong opposition to the Securities and Exchange Commission’s (SEC) approval of an amendment to New York Stock Exchange (NYSE) Rule 500. Even as amended, Rule 500 continues to impede competition for NYSE listings; it is unjustifiable, is clearly not in the best interests of the marketplace, and may be a violation of the anti-trust laws.
Far from protecting investors, the approved amendment to Rule 500 is obviously intended to protect the NYSE’s hold on listed companies against fair competition by other markets. The NASD believes that the best way for markets to serve the interests of investors and companies, as well as encourage innovation in the securities markets, is to ensure a free and open opportunity for each market to compete on the merits of its structure and the services it provides. Rule 500—even as amended—prevents real competition, particularly price competition, which hurts all market participants.
"The proven benefits provided to the American economy by free and open competition should be overwhelming evidence that any barriers to competition among financial markets must be eliminated," said Frank G. Zarb, Chairman and Chief Executive Officer of the NASD. "Our nation’s markets should compete for initial and continued company listings through innovation and improvement, and by treating companies as valued customers that may freely go elsewhere for better service. The New York Stock Exchange’s Rule 500 prevents this from happening. We thought that the NYSE would do the right thing and eliminate the Rule altogether, but now that that hasn’t happened, the courts or Congress may be needed to force real reform on such an outmoded rule."
NYSE Rule 500 was adopted in 1939 after a Canadian company, Dominion Stores, sought to delist voluntarily over the objections of the NYSE. At that time, the NYSE had no specific rule and the SEC found no investor protection concerns to prevent Dominion from leaving the exchange. The NYSE then proposed a new rule, Rule 500, which was approved by the SEC, to defend the NYSE against future voluntary delistings. The most onerous provision required two-thirds of a company’s shareholders to approve a decision to delist with no more than ten percent objecting.
The amendment to Rule 500, approved by the SEC today, permits a company to delist from the NYSE if it obtains approval of its board of directors (according to applicable state law requirements on majority votes) and issues a press release informing shareholders of its intention to delist. Those two provisions, by themselves, are reasonable. But, unfortunately, the NYSE also attaches other unjustified barriers to delisting. A company seeking to delist must also:
- Obtain the approval of its audit committee.
This seemingly innocuous roadblock allows the NYSE to give a small and discrete group, which may not include company representation, undue influence in persuading the company to forgo delisting. Audit committees do not appear to have any special expertise in making listing decisions and thus this requirement appears to be included in the Amendment solely as a way to delay, and perhaps derail entirely, a delisting decision.
- Notify its 35 largest stockholders of record in writing of its intention to delist from the NYSE.
Delisting from one highly liquid, fully regulated stock market to another should not be such an extraordinary corporate decision that it requires shareholder notice. Far more important decisions are made by companies on a daily basis that do not require shareholder notice. The Nasdaq Stock Market® requires no such notice to the shareholders of its delisting issuers. Since most companies delisting from Nasdaq® or the American Stock Exchange® can move to another market promptly—usually within 48 hours or less—the notification provision sends an implicit and wrong message to shareholders that if a company delists from the NYSE it will harm shareholder interests. This again inhibits, and probably prevents, a delisting decision and is part of the pattern to thwart competition.
- Wait a minimum of 20 business days to a maximum of 60 business days before actually delisting.
This provision provides the NYSE with another extended opportunity to forestall the delisting. Requiring a company to continue trading on a market for one to three months after it has decided to leave increases risk. Investors may perceive the extended waiting period, especially when not required by other markets, as intended to provide investors with an opportunity for liquidation, which in turn may undermine stock prices. Any waiting period should be limited to the time it takes for an orderly transition. Seven to ten days is more than adequate for that purpose.
Rule 500 applies only to companies wanting to leave the NYSE and not to those coming to the NYSE from other markets. That lack of symmetry confirms that Rule 500—even in its amended form—seeks to stifle competition from other securities markets, not to protect shareholders’ interests. Anti-competitive rules do not become acceptable merely because their scope or applicable time periods are reduced. The amended rule demonstrates a clear pattern of anti-competitive behavior and cannot be ignored. Rule 500 should be abolished.
In a related matter, the NYSE also requested that the SEC approve proposed changes to its listing standards to increase the number of issuers eligible for a NYSE listing. The SEC has not yet approved or disapproved this proposal. The NYSE is thus continuing to control issuer listings, while seeking to expand the number of companies subject to its anti-competitive rules. A recent letter detailing the concerns of the NASD on these matters is attached.
The National Association of Securities Dealers, Inc. (NASD), is the largest securities-industry, self-regulatory organization in the United States. It is the parent organization of The Nasdaq-Amex Market Group, Inc., and NASD Regulation, Inc. Through The Nasdaq-Amex Market GroupSM, the NASD operates The Nasdaq Stock Market and the American Stock Exchange. Through its regulatory subsidiary, the NASD develops rules and regulations, provides a dispute resolution forum, and conducts regulatory reviews of member activities for the protection and benefit of investors. The NASD oversees the nation’s 5,600 brokerage firms and more than 600,000 registered brokers. For more information about the NASD and its subsidiaries, please visit the following Web sites: www.nasd.com; www.nasdaq-amex.com; or the Nasdaq-Amex NewsroomSM at www.nasdaq-amexnews.com.
Parent of The Nasdaq-Amex Market Group
Frank G. Zarb
Chairman and Chief Executive Officer
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549
Dear Mr. Katz:
The National Association of Securities Dealers, Inc. and The Nasdaq Stock Market, Inc. (the "NASD") appreciate the opportunity to express our views on the above-referenced rule filings ("Filings" or "Proposals"). By these filings, the New York Stock Exchange ("NYSE" or the "Exchange") proposes to amend its initial, continued listing, and delisting standards for NYSE issuers. The purpose of this letter is to reiterate and expand upon the NASD's previously stated concerns regarding the competitive impact the NYSE's proposed revisions to Rule 500 will have given these listing proposals. As outlined below, as well as in our previous submissions which are attached hereto, the NASD believes that these proposals represent the latest additions to a mosaic of anti-competitive rules, policies and practices that seek collectively to protect the NYSE from meaningful competition from the primary alternative to its market. The Commission should not approve listing standard amendments which effectively expand the scope of any of these anti-competitive practices.1 The NASD is repeating its views to assure there is no uncertainty as to the seriousness of the legal and policy issues raised by a continuation of these rules, policies and practices.
As the Commission is aware, tile NASD has steadfastly maintained that certain rules and practices of the NYSE tinfairly impede full and fair competition among U.S. equity markets for the listing and trading of corporate equity securities to the great detriment of public investors. The NASD has repeatedly urged the Commission to take action, in conformity with long-standing congressional directives, to remove NYSE's Rule 390 restrictions on off-board trading and allow brokerage firms to decide, based on market quality, the best trading venue for a company's stock. More recently, the NASD has urged the Commission to abolish NYSE Rule 500 which governs NYSE issuer delisting. To date, both rules remain in effect.
The NASD's objections to the NYSE's proposed Rule 500 modifications were fully set forth in our earlier comment letters to the Commission, which are attached.2 In short, the NASD opposes the NYSE's proposed modifications to Rule 500 on the grounds that the proposed changes continue to impose significant barriers to the free exercise of issuer choice in the selection among competing securities markets for the trading of that issuer's stock. The NASD continues to believe that the Exchange's modified proposal consisting of: a) a written notice requirement to a delisting issuer's 35 largest shareholders, b) a 20 business day waiting period, and c) mandatory audit committee approval, still unfairly impedes competition by artificially discouraging delisting from the NYSE. Although the NYSE's latest Rule 500 proposal would reduce some of its initial mandates, anti-competitive rule provisions do not become acceptable merely because their scope or applicable time periods are reduced.
The Exchange's aversion to real competition is also evident in its lack of responsiveness in the area of off-board trading restrictions. For decades, Congress and the SEC have decried the anti-competitive impact that off-board trading restrictions have on our markets, yet NYSE Rule 390 still operates to restrict the fights of NYSE member firms (many of which are also NASD members), to seek improved trading opportunities away from the Exchange floor in some of the NYSE's biggest and most active issues.3 Almost 20 years have elapsed since tile Commission, in the face of continuing NYSE procrastination, adopted Rule 19c-3 in an attempt to mitigate the anti-competitive impact of the NYSE's off-board trading prohibition.4 While a step in the right direction, Rule 19c-3 still allows the NYSE an unfair monopoly with respect to trading in many of its most active stocks. Accordingly, a reduction in standards that would allow the NYSE to not delist currently non-compliant companies would effectively expand the scope of Rule 390's anti-competitive reach.
It is against this background that the NYSE's proposed changes to its listing standards must also be viewed. The NYSE's attempts to retain unfair competitive advantages, through the operation of decades-old rules concerning the delisting of NYSE companies and restrictions on off-board trading activity by Exchange members, continues to severely hamper the ability of NASD to compete on an equal footing with a major market competitor. Through an ever-tightening web of unfair rules and practices, the NYSE continues to seek to control issuer listings and the trading of certain stocks while at the same time seeking Commission approval to alter its initial and continued inclusion standards to increase the number of large Nasdaq issuers eligible for a potential NYSE listing and to prevent issuers who currently fall below NYSE standards from moving to competing markets that may provide a trading environment better suited to the needs of that issuer. Such restrictions unjustifiably impinge on the duties and responsibilities of corporate management to make decisions in tile best interest of their shareholders unencumbered by the anti-competitive rules of the NYSE.
The NYSE's Latest Proposals
The NYSE's proposals seek to modify both its initial listing standards as well as standards related to the continued inclusion of issuer securities on its market. For initial listing, the NYSE proposes the adoption of a new "global" market capitalization standard that, in our estimation, would make additional Nasdaq issuers newly eligible for listing on the NYSE and also subject them to the anti-competitive impact of NYSE Rule 500. For continued inclusion, the NYSE similarly proposes to adopt a new approach to issuer continued listing standards emphasizing market capitalization.
The NASD notes that the Commission has in the past taken into account the anti-competitive nature of existing exchange rules when considering the adoption of new rules that could potentially increase the universe of securities coming under the ambit of a pre-existing anti-competitive rule structure.5 The NASD urges the Commission to do the same here. The NYSE should not be allowed to adopt any rule change that further increases its ability to obtain, or retain, issuer listings while Rules 500 and 390 remain in effect. To do so would contravene the express language of Section 3(f) of the Exchange Act which imposes on the Commission the obligation to consider or determine if a rule proposal by a self-regulatory organization will promote efficiency and competition. Given this standard, the NYSE's subtle but persistent attempts to degrade and control competition simply cannot be justified.
As the NYSE frankly admits in its filing, certain companies that do not meet its current standards remain listed and will become complaint if the new continuing inclusion standards are approved. While no estimate of the actual number of companies potentially subject to an NYSE delisting was provided, the universe of affected issuers may be substantial. Clearly, if the Commission declines to adopt the NYSE's new standards, a number of these issuers will be delisted from the NYSE and potentially become eligible for listing on Nasdaq without having had to endure the burdens of Rule 500. Further, to the extent that any of these potential delisted issuers were first listed on the Exchange prior to April 26, 1979, their securities would no longer be subject to NYSE off-board trading restrictions. Thus, approval of the Exchange's proposal for modifications to its continued inclusion requirements will increase the number of issuers subject to anti-competitive Rules 500 and 390 than would otherwise exist. Such an expansion of the NYSE's overreaching, anti-competitive restrictions should not be condoned by the Commission.
The same analysis applies to the NYSE's proposed adoption of a new global market capitalization standard for initial inclusion. By moving to an initial listing standard that increases the NYSE's ability to seek market transfers from some of Nasdaq's largest issuers, the NYSE dramatically improves its competitive position vis a vis Nasdaq by increasing the potential pool of Exchange listing candidates and forcing Nasdaq to incur additional costs to defend its market listings, while the NYSE continues to restrict competitive off-board trading in the exchange's largest and most active issuers.
The Commission's Role
The Exchange Act imposes a significant obligation on the Commission to ensure fair and effective competition among markets. In the NASD's view, the continuation of Rules 500 or 390 in any form directly contravenes both the letter and spirit of this mandate. Moreover, there is a serious legal question as to whether the construction of Rule 500 constitutes a blatant violation of the anti-trust laws. The Commission's acquiescence in the continuing operation of such rules should be carefully considered.
Competition has been the touchstone of Commission decision-making concerning market issues. It has guided the Commission, for example, through the adoption of the rules relating to the operation of Alternative Trading Systems ("ATS"). Through the judicious use of its regulatory authority, the Commission has repeatedly sought to remove unjustified burdens that distort the competitive process. This process is necessarily an ongoing one. To the extent that changes in the competitive and regulatory environment impact pre-existing rules and practices, it is incumbent upon the Commission to evaluate the continued application and desirability of such rules. So it is with Rules 500 and 390. As the NASD made clear in its comment letters to the Commission on the NYSE's proposed changes to Rule 500, significant improvements in investor protection and transparency have vitiated any reasonable rationale for the rule, and its continuation in today's market results in nothing more than an unfair business advantage for the NYSE. Despite congressional directives for reform of off-board trading restrictions going back over 30 years, Rule 390 continues to insulate the NYSE from competitive pressures that are the norm for other securities markets and alternative trading systems. The result is that the NASD finds itself operating under materially different competitive standards than those imposed on its competitors.
Reform of the rules-based competitive framework between the NYSE and Nasdaq is overdue. Rules 500 and 390 represent ongoing competitive threats to which the NASD must respond. As such, the NASD again respectfully requests that the Commission take action to immediately and completely eliminate these anti-competitive rules and defer any action on changes to NYSE listing standards until such time as these reforms are complete.
Frank G. Zarb
1. The NASD again in particular notes the irony of the NYSE's Rule 500 proposal wherein burdens purportedly necessary for investor protection are only imposed on issuers seeking to leave its market while the Exchange remains quite willing to accept new incoming listings without requiring those issuers to undergo the same burdensome procedures. If the Commission determines that these steps are mandated under the Exchange Act it should consider whether the NYSE's proposal should be modified to apply these protections to companies seeking to move to the Exchange.
2. See Letter from Frank G. Zarb, President and CEO of NASD, Inc. to Jonathan G. Katz, dated January 6, 1998; Letter from Joan C. Conley, Vice President and Corporate Secretary of NASD, Inc. to Jonathan G. Katz, dated January 13, 1999.
3. See S. Rep. No. 75, 94th Cong., 1st Sess., I at 18-20 (1975); H. Rep. No. 123, 94th Cong., 1st Sess., 44 (1975); Report of the Securities and Exchange Commission on Rules of National Securities Exchanges Which Limit or Condition tile Ability of Members to Effect Transactions Otherwise than on Such Exchanges (Securities Exchange Act Release No. 11628, at p. 40 (September 2, 1975); Subcommittee on Oversight and Investigations of the Committee on Interstate and Foreign Commerce, "National Market System: Five Year Status Report", 96th Cong, 2d Sess., Cornm. Print 96 at 13-14 (1980); GAO, SECURITIES TRADING: SEC ACTION NEEDED TO ADDRESS NATIONAL MARKET SYSTEM ISSUES, at 2-3, 18-32 (1990).
4. Rule 19c-3, 17 C.F.R. § 240.19c-3 (1996); see SEC Exchange Act Release No. 16888 (June 11, 1980), reprinted in [1980 Transfer Binder] Fed. Sec. L. Rep. (CCH) P82608 at 83247. ("Off-Board Trading Restrictions Release.")
5. See In re American Stock Exchange, Inc., SEC Release No. 34-13542 (May 13, 1977); 12 S.E.C. Docket 429.