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August 31, 1999

Zarb: NYSE Delisting Amendment Unfair

By William Hoffman

The New York Stock Exchange has amended its controversial Rule 500, making it easier for companies listed on the NYSE to de-list and shop around for a new home.

But the National Association of Securities Dealers is not happy.

"We thought the NYSE would do the right thing and eliminate the rule altogether, but now that [it] hasn't happened, the courts or Congress may be needed to force real reform on such an outmoded rule," said NASD Chairman Frank Zarb, protesting the Securities and Exchange Commission's approval of the NYSE's amendment.

Rule 500, which dates from the Great Depression, required that Big Board-listed companies win a two-thirds majority vote of their shareholders, with no more than 10 percent dissenting, to de-list from the exchange.

The amended rule allows a Big Board firm to de-list by simple majority vote of its board, approval by its audit committee, and written notice to at least 35 of the company's largest shareholders.

So the controversy smolders on.

"I think the SEC has once again failed to live up to its congressional charter," argued Junius W. Peake, professor of finance at the University of Northern Colorado in Greeley, Colo.

"The rule has been amended but it hasn't been fixed. I don't know why you have one set of rules to get [listed on the NYSE] and another set of rules to get out," said Peake, a former governor at the NASD.

Peake noted that no other exchange raises such a high bar to keep member firms from de-listing.

Lawrence Harris, a finance and economics professor at the University of Southern California in Los Angeles, disagreed.

"Listed companies don't care about these things," said Harris, himself a former governor at the NASD. "They only care about trading in a liquid market."

More Competitive

Despite Zarb's protestations, Harris said the amended Rule 500 should make exchanges more price competitive with one another and more service attentive to their members.

The "stock market for the next hundred years" can be expected to intensify its NYSE poaching program, he predicted; turncoat managers from NYSE-listed companies may get comfy director positions at NASD, he added. "There will be attractive enticements of various sorts," Harris said.

Patrick Healy, president of The Issuer Network in Chevy Chase, Md., said the result over the next 12-to-18 months will probably be a draw: "I think the net effect [on Nasdaq] will be 50 [companies] in, and 50 out."

Healy, whose firm has consulted for many of the big firms that switched from Nasdaq to the NYSE, believes mid-sized companies will be tempted away from the Big Board, while large caps at Nasdaq may migrate to the NYSE.

It only makes sense, said Healy, who in a previous career held an executive position at the NASD. NYSE specialists buy and sell out of their own accounts only as a last resort, he noted, while Nasdaq market makers have been more aggressive about keeping their members trading.

NASD has built a reputation as a persuasive marketer, Healy said, and will win some early, likely high-profile, converts. But many NYSE firms like their exchange's higher listing standards, he added, while the loosened Rule 500 strings could weaken the pull Nasdaq has used to keep its own members in line.

The bottom line, these observers agreed, is that the change won't affect traders on either exchange except to the extent that member firms jump ship. No one predicted a wave of ship-jumping. And Harris discounted the possibility of the courts or Congress intervening in a dispute between organizations that have hitherto jealously protected their privileges of self-regulation.