NASD Opposes SEC Approval of NYSE's Anti-Competitive Amendment to Rule 500

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; www.nasdr.com; or the Nasdaq-Amex NewsroomSM at www.nasdaq-amexnews.com.