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November 1, 1998

Are NYSE Companies Hostages of Rule 500? Nasdaq Fights for Footing in Battle for New Listings

By Michael L. O'Reilly

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  • Are NYSE Companies Hostages of Rule 500? Nasdaq Fights for Footing in Battle for New Listings

A New York Stock Exchange rule is again at the center of a controversy over the strict requirements companies face to voluntarily delist from the exchange.

Despite a proposal to ease NYSE Rule 500 last November, the Big Board has drawn repeated criticism from both Nasdaq and the Securities and Exchange Commission on the requirements.

Prodded in part by the criticism, the NYSE last month voted to further ease the delisting restrictions, originally proposed last year but never implemented by the Big Board.

But the National Association of Securities Dealers, Nasdaq's parent, has asserted that even the proposed amendments fall short of eliminating the rule's anticompetitive nature.

"The proposed rule represents a barrier to issuers' ability to choose freely among equity markets," said NASD Chairman and Chief Executive Frank Zarb, in a letter to employees dated October 1. "Boards of directors should have the right to fire a market when it does not perform. The revised NYSE Rule 500 continues to limit a board's right to terminate a market."

The NYSE declined to comment.

For its part, the NASD says that the rule effectively prevents Nasdaq from approaching NYSE companies to delist to Nasdaq. The NYSE, on the other hand, has long courted Nasdaq companies to transfer the trading of their shares to the Big Board.

In 1996, 96 Nasdaq companies left the exchange for the NYSE. Last year, 91 companies transferred. But only 44 Nasdaq companies had moved to the Big Board through the end of September this year well below the pace of delistings in recent years.

All told, 564 companies delisted from Nasdaq through August this year, while 392 issues were added to the exchange. On the NYSE, 169 companies were added to the Big Board's listings through October. NYSE delistings for 1998 were unavailable.

Earlier this year, before the majority of 1998 listings and delistings took place, Nasdaq had 5,487 listings with a market capitalization of $1.8 trillion. By contrast, the NYSE had 3,044 listings valued at $9.4 trillion.

How Rule Works

Currently, Rule 500 requires among other things that a listed company gain a two-thirds majority vote of shareholders to voluntarily delist from the exchange. A vote is nullified if at least ten percent of voters object to the delisting.

The vote is virtually impossible to meet, and only one company in the history of the NYSE overcame the weighty restrictions to delist its shares.

In November of 1997, the NYSE board of directors voted to revise Rule 500. Under the proposed revision, a company needed only majority approval of its board of directors and approval of its audit committee to delist from the Big Board. The proposal stated that a company also needed to notify all of its shareholders in writing of its plans to voluntarily delist. The company then had to wait up to 60 days before delisting.

But after approval of the proposal from its board of directors and a filing with the SEC, the NYSE rule revision was delayed.

After reviewing the NYSE filing, the SEC urged the Big Board to eliminate the written notification requirement, and instead have a company issue a public announcement to shareholders.