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November 1, 2003

Battle Royal at SEC Over Delisting Reform

By Gregory Bresiger

The Big Board's proposed elimination of the controversial Rule 500, altering the terms of NYSE de-listing regulations, is no reform, some critics are telling the SEC. Under the proposal, the NYSE would no longer require an audit committee to approve the de-listing. Only the approval of a board that has a majority of independent directors would be required.

"In our work on the listing standards, we have seen that a majority independent board has already become the norm among many of our companies," wrote Catherine Kinney, president of the NYSE in a recent filing with the SEC. "After a currently pending governance proposal becomes final, a majority independent board will become the Exchange standard."

An NYSE spokesman wouldn't elaborate on the filing. However, several critical comment letters - charging that the NYSE has had listing standards that keep companies chained to the Big Board - have been filed with the SEC.

"The proposal places issuers in a Catch 22 situation, it is not going to solve the problem," Junius Peake, a professor of finance at University of Northern Colorado, told Traders Magazine. Peake has just sent a comment letter to the SEC, contending that the proposed reform is incomplete and that de-listed companies could be hurt by the new process.

"First," Peake writes of the NYSE's pending reform, "the issuer must apply to delist. There is nothing in the proposed rule that discusses how the application is to be made, its form or length of time before the application is accepted (or rejected?). With the NYSE both market center operator and self-regulator, what is to stop the news that an application to delist being given to a specialist in the security?"

Rule 500 has been the focus of bitter criticism for several years. The de-listing regulations are viewed as a way for the NYSE to keep companies from moving to competing exchanges.

The rule has, writes Jeffrey Harris, a professor of finance at the University of Delaware, "come to be known as the Roach Motel Rule - companies can check in, but they cannot check out." Harris was writing in an internal publication of Nasdaq, at times a bitter rival of the Big Board.

Here is part of the NYSE's proposed replacement rule: "An issuer may apply to delist a security after its board approves the action and the issuer furnishes the Exchange with a copy of a board resolution certified by the secretary of the issuer. The issuer may thereafter file an application with the Securities and Exchange Commission to withdraw the listing on the Exchange and from registration under the Securities and Exchange Act of 1934."

Rule 500 was a Great Depression measure that was designed to protect individual investors. In the period after the crash, this was a time when a delisting might leave a company without a trading venue, rendering the equity in a company worthless. Over the years the rule has been modified.

Peake, in a broadside at the regulators, also asks what happens if a de-listed company wants a Nasdaq venue?

"Nasdaq applied years ago to the Commission for designation as an exchange, but the Commission has to date failed to act on the application. The Commission has had three chairmen during that period," Peake writes. "How long does Nasdaq have to wait for that decision?"

Peake proposes that NYSE issue be allowed to delist "without conditions except notification and certification." He adds that the de-listing controversy is another reason why the NYSE's regulatory functions and trading system should be separated.

An SEC spokesman said that the commission has the proposal under review.