SEC Investor Advocate Says NYSE Listing Standards Spiraling Downwards like "Falling Leaves of the Buttonwood Tree"
Commentary by Steven Lofchie
SEC Investor Advocate Rick A. Fleming observed a downward trend in listing standards of the New York Stock Exchange.
Mr. Fleming's research found 22 "substantive adjustments" to the NYSE "quantitative listing standards," of which it was determined: "17 lowered the listing standards to allow the exchange to list more companies." In addition, the research identified 20 "substantive adjustments" to NYSE's "qualitative listing standards," of which, in the OIA's judgment: (i) 7 "will have a relatively neutral impact;" (ii) "8 of the 20 sought to raise the listing standards, although it was often in response to Congressional or [SEC] action"; and (iii) "5 of the 20 amendments resulted, on balance, in lower qualitative standards."
Mr. Fleming concluded that:
NYSE listing standards, and especially their quantitative standards, have tended to drift downward like a leaf in autumn — or, to use a more fitting analogy, like the leaf of a buttonwood tree. . . . And over time, small incremental changes can add up to a significant deterioration of the listing standards.
The Investor Advocate delivered his remarks at an SEC conference on February 19, 2016.
Commentary
Investor Advocate Fleming's conclusion is based on the premise that investors benefit from higher listing standards, i.e., an organized market in which there are fewer securities available to trade. For Mr. Fleming to support this negative conclusion, he should be able to demonstrate that the securities that the NYSE has not allowed to list as a result of the new standards have: (i) been the subject of a disproportionate amount of internal fraud, (ii) materially underperformed the market or (iii) been associated with some other negative outcome.
As one example of a degradation of listing standards, Mr. Fleming points to the NYSE allowing "certain companies" to list based on 2 1/2 years of financials, rather than three years. Perhaps this reflects a problem, but the reasoning is not obvious. Mr. Fleming should provide evidence that this change actually hurts investors. It is equally plausible that the change benefits investors by giving them greater access to the ability to trade.
It is also noteworthy that Mr. Fleming's conclusion seems to be at odds with the Congressional purpose in adopting the JOBS Act, which was to allow companies to reach the public markets more easily. Further, Sarbanes-Oxley was adopted in 2002, and that statute significantly raised the requirements for issuers to register under the Securities Exchange Act; if the standards for issuer registration under that Act were materially increased, it would, therefore, seem reasonable for exchanges to then reduce their listing requirements.
Mr. Fleming closes his remarks by asserting that his findings demonstrate that "investors have cause for concern." His study simply provides inadequate evidence to reach that conclusion. Mr. Fleming should begin again by questioning the initial premise: that higher listing standards (i.e., fewer listed companies) create inherently a good outcomes for retail investors. He should also examine the interaction between the raised issuer registration requirements of Sarbanes-Oxley and the NYSE listing standards. The outcome of such an unbiased review would then permit a conclusion as to whether the changes in listing standards have resulted in a negative outcome for retail investors.
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