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January 1, 1999

The GAO's Probe of Nasdaq Small-Cap Stock Standards

By Jeffrey L. Winograd

The General Accounting Office (GAO) is wrapping up a study of how well the Securities and Exchange Commission and Nasdaq are fulfilling GAO recommendations for improving listing standards for small-cap stocks trading on Nasdaq.

The GAO was working on the outlines last month, aiming for completion of the study by as early as this month, a GAO spokesman said.

The probe was triggered last August by Rep. John Dingell (D-Mich.) on the heels of a progress report he received from the SEC's Office of Compliance Inspections and Examinations (OCIE). This came six months after the GAO issued the recommendations.

Outlining its recommendations, the GAO report had earlier said there was room for improvement in Nasdaq's listing standards for small-cap stocks traded under the SmallCap Listing Qualification Program.

Federal Oversight

In a response to the OCIE report, Dingell, who chaired the Commerce Committee before Democrats lost the House in 1995, said he was not satisfied with federal regulatory oversight of the listings program.

The OCIE's report in August stated in part that "Nasdaq has agreed to comply with all the

recommendations," and that "staff also recently viewed Nasdaq's new automated risk-scoring system."

Dingell, who is the ranking minority member of the House Commerce Committee, complained to the GAO that the OCIE letter "does not disclose the SEC recommendations, the status of Nasdaq's compliance with those recommendations, or the results of the review of Nasdaq's risk-scoring system."

Dingell was irritated too by a letter he received from Alfred Berkeley, president of Nasdaq, on progress towards achieving the GAO recommendations.

Berkeley's letter pointed out that "eight matters" were referred to the SEC in the first eight months of 1998. Nasdaq had delisted 37 small-cap issuers based on its new listing standards, and 101 other small-cap issuers were being scrutinized.

Dingell demanded the GAO match Nasdaq's performance against all of the GAO's previous recommendations.

Finally, Dingell asked the GAO to uncover any OCIE reports to the SEC on "open significant" recommendations from previous self-regulatory-organization examinations, and to include a Nasdaq management report on its Listing Qualification Department.

Small Volume

Nasdaq's SmallCap Market accounts for about 2.2 percent of its total market value of issues.

In September 1997, Nasdaq announced new listing requirements, applying them retroactively to issuers that filed for listings starting on March 3, 1997.

The new standards include a $1 minimum bid price for common and preferred stock; an increase in "quantitative" requirements; adoption of a peer-review program; addition of a market-capitalization alternative test; and detailed corporate-governance requirements.