Summary

The stock of Comparator Systems Corporation, which was listed on the SmallCap Stock Market from 1990 to 1996, typically traded at between three and six cents a share. However, in May 1996, the stock's price soared to nearly $2 before plummeting to 56 cents a share. The National Association of Securities Dealers (NASD) halted trading of Comparator stock and launched an investigation that raised questions about the validity of the company's financial statements, including the value of Comparator's assets. The Securities and Exchange Commission (SEC) brought charges of securities law violations against Comparator, alleging that company officers sought to retain the stock's listing on the SmallCap Stock Market to make it easier to sell stock to the public. Later revelations that Comparator's assets had no value raised serious questions about how the company was able to meet the SmallCap Market's listing requirements. This report answers the following questions: What has SEC done to meet its oversight responsibilities regarding the Nasdaq SmallCap Market's listing requirements? Did Nasdaq follow its listing and maintenance requirements with respect to Comparator? What steps has Nasdaq taken to improve its operations since the May 1996 run-up in trading of Comparator stock? How does Nasdaq monitor the effectiveness of its policies on granting exceptions to its listing and maintenance requirements?

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.