Hence, the presence in Nasdaq of non-complying securities could have a serious deceptive effect.”

		SEC’s Statutory Oversight Responsibilities

SEC’s statutory oversight responsibilities regarding Nasdaq’s listing requirements include its authority to (1) review and approve or deny SRO-proposed rule changes, (2) inspect SROs, and (3) review listing decisions either on appeal or by its own initiative. SEC Approved Two Nasdaq Rule Changes

In 1991, and again in 1997, NASD proposed, and SEC approved, rule changes that made listing and maintenance requirements more restrictive for the SmallCap Market. Before OCIE established new procedures, SEC depended primarily on subsequent inspections to follow up on its inspection recommendations. Because SEC had not followed up on its 1986 recommendations until 1997, this disagreement continued for 11 years, and Nasdaq believed it had addressed the issues SEC raised. OCIE officials told us that the reason the Nasdaq Listing Department had not been inspected since 1986 was because SEC must inspect a wide range of exchange programs with limited resources, and SEC had no inspection cycle for listing departments until 1996. However, these procedures do not involve Commissioners, the agency’s highest authorities. Nasdaq Followed Its Listing Requirements for Comparator, but SEC Found the Continued Listing Inappropriate

Although Comparator occasionally had problems complying with Nasdaq’s listing and maintenance requirements, Nasdaq never granted Comparator any exceptions. In May 1996, Nasdaq staff notified the company it was not current in its filings. SEC Criticized Nasdaq’s Handling of Comparator

After its 1997 inspection of Nasdaq’s Listing Department, SEC criticized Nasdaq’s handling of Comparator. SEC recognized that Nasdaq has taken significant steps to address several of its recommendations to improve the Listing Department and the SmallCap Market. Nasdaq Has Taken Actions to Improve Its Listing Department

Nasdaq officials disagreed with some of SEC’s findings, but they generally recognized the merits of SEC’s recommendations and stated their commitment to respond and continue to improve the quality of the SmallCap Market. During the same period the Department identified 972 deficiencies in 640 SmallCap companies. Before 1995, frequent and regular inspections were SEC’s primary method of following up to ensure its recommendations were implemented. We share SEC’s concern that the deficiencies identified in Nasdaq’s Listing Department operations could have had the effect of misleading investors who are entitled to assume that the stocks listed on the Nasdaq SmallCap Stock Market meet the listing and maintenance requirements of that marketplace. Recommendations

We recommend that the Chairman, SEC, require OCIE to periodically report the status of all open, significant recommendations to the Commissioners; and require NASD to develop management reports based on overall program statistics that demonstrate its Listing Department’s operating results, such as the number of companies granted exceptions to listing and maintenance requirements along with their ultimate disposition, and to submit this data periodically to the Commissioners for review. On December 19, 1997, the Director, Office of Compliance Inspections and Examinations for SEC, provided written comments. Comments From the Securities and Exchange Commission

Comments From the NASDAQ Stock Market, Inc.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the National Association of Securities Dealers' (NASD) automated quotation (NASDAQ) SmallCap Stock Market and the events surrounding the listing of Comparator Systems Corporation stock.

What GAO Found

GAO noted that: (1) the Securities Exchange Commission (SEC) has taken actions to meet its oversight responsibilities with respect to the NASDAQ Stock Market Listing Qualifications Department by approving two NASDAQ requests for rule changes to tighten listing standards in 1991 and 1997 and by inspecting the Department's operations in 1979, 1983, 1986, and 1997; (2) it did not follow up on its 1986 recommendations to improve Listing Department operations until 1997, 11 years later; (3) when it did follow up in 1997, SEC reported that some of the same deficiencies it had found in 1986 still existed, and it found additional deficiencies as well; (4) NASDAQ disagreed and stated that it had responded to SEC's 1986 inspection report and that for 11 years it believed it had addressed the issues SEC raised; (5) before the Office of Compliance Inspections and Examinations (OCIE) established new procedures, SEC used subsequent and follow-up inspections as its primary method for ensuring that its recommendations were implemented; (6) this did not provide systematic recommendation followup when constraints such as limited resources or changing priorities caused long periods of time between inspections, as occurred for the NASDAQ Listing Department; (7) OCIE has instituted a number of procedures to provide more systematic recommendation followup, but these procedures do not involve SEC's Commissioners, who have the authority to require self-regulatory organizations to comply with OCIE's recommendations; (8) the Listing Department followed its listing and maintenance requirements for Comparator and had never granted the company any exceptions to those requirements; (9) SEC criticized NASDAQ's handling of Comparator because the Department had failed to investigate assets that appeared questionable on the company's financial statements; (10) SEC subsequently proved that Comparator officials had inflated those assets to continue the company's NASDAQ listing and facilitate the sale of its stock; (11) SEC made several recommendations to improve NASDAQ's Listing Department operations, which NASDAQ has begun to implement; (12) since the May 1996 run-up in trading of Comparator, NASDAQ has improved its Listing Department operations in response to its own inquiry as well as SEC's; and (13) NASDAQ monitors individual company requests for exceptions to its listing and maintenance requirements through reviews and approvals by the NASDAQ and NASD boards of directors and through information by Listing Department staff.