Tuesday, February 23, 2016

SEC’s Investor Advocate Warns of Downward Drift in Exchange Listing Rules

By Jacquelyn Lumb

In remarks at the Practising Law Institute’s SEC Speaks conference, Investor Advocate Rick Fleming warned about a downward drift in the exchanges’ listing standards since they became for-profit businesses. He said there is little public participation when rule proposals open for comment, which is troubling, but it is also somewhat expected given the large number of rule filings filled with thousands of pages of complex jargon. The Office of the Investor Advocate was created, in part, to supplement the public comment process and to provide a voice for investors. Fleming’s office analyzes the impact the proposals may have on investors, such as last year’s NYSE proposal that he said would lower a listing standard. Fleming filed his first recommendation that the SEC disapprove an SRO rule proposal in response to the NYSE proposal.

NYSE proposal. The NYSE proposal appeared relatively minor in isolation, according to Fleming. It exempted early stage companies from the requirement to seek shareholder approval before issuing up to 20 percent of their outstanding shares to certain related parties as long as the audit committee or a comparable board committee approved the transaction. The proposal reflected an incremental step in what Fleming sees as a race to the bottom by the exchanges to attract more listings.

The NYSE proposal led Fleming’s staff to examine changes to the exchange’s standards since 2005 when it began the conversion from a mutualized exchange to a for-profit business. He said the research suggests that the NYSE’s listing standards have deteriorated since that time, particularly with respect to its quantitative listing standards—those that establish the thresholds a company must meet to list on the exchange. The qualitative standards have been more mixed, he reported. The detailed analysis is posted on the Investor Advocate’s website.

Incremental changes. Fleming encouraged the Commission and the staff to consider proposed changes to the listing standards in the broader context. In his view, the approval process could be improved by following trends and the cumulative impact of incremental changes.

Fleming also urged the exchanges to refrain from engaging in a race to the bottom. He cited the NYSE’s own rule book which notes that companies that list on the NYSE have achieved “maturity and front-rank status” in their industry in terms of assets, earnings, and shareholder interest. That makes it all the more troubling, he said, to see the NYSE justify many of its rule changes by pointing to its competitors even though they have traditionally appealed to different types of companies.

Reexamine role of SROs. Fleming also suggested that it may be time to examine whether it makes sense for a for-profit business to be entrusted with regulatory responsibilities, since for-profit exchanges have an inherent conflict between the interests of investors and their own bottom lines. Based on the evidence he has seen to date, Fleming said investors have cause for concern.

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