Stock Exchanges Cracking Down On Chronic Late Filers

The Nasdaq Stock Market recently proposed a new rule with the Securities and Exchange Commission that would impact serial late filers trading on the OTC Bulletin Board. Under the proposal, OTCBB issuers that file late periodic reports three times—or are removed for filing delinquency two times in a 24-month period—will be ineligible for OTCBB quotation for one year. The proposal is just one of several moves made by the major exchanges to crack down on late filers amid increased analyst scrutiny.

NASDAQ is hoping to make the rule amendment effective for filings with a period ending on or after June 1, 2005. If approved, the rule would not be retroactive; no issuer would be made immediately ineligible from continued quotation on the OTCBB.

“This change was proposed to help further the original goal of the Eligibility Rule, which is to protect the public interest by ensuring that timely financial information is routinely available to investors,” Nasdaq said in a statement.

The OTCBB is a quotation service that provides data on over-the-counter equity securities, which generally are not listed or traded on a national securities exchange like Nasdaq or the New York Stock Exchange. As of the end of May, there were 3,310 securities traded on the OTC Bulletin Board.

Typically, these companies are penny stocks, trading for well under $1 dollar each; many trade at fractions of a penny. In addition, the OTCBB does not impose listing standards, so companies listed are not considered the most liquid or transparent.

Nasdaq Moves

The exchange decided to propose tougher rules for late filers after a study found more than 3,000 late or incomplete filings by 1,806 companies in the two years ending last August, according to a report. In fact, 1,067 of those companies are still quoted on the OTCBB.

“Given the high number of companies that have been late in the past with absolutely no consequences, I'm glad to see a step towards enforcement,” says Leah Townsend, a research analyst at Glass Lewis who tracks and analyzes late filers. “As always, each circumstance would need to be evaluated individually.”

In fact, in her most recent analysis of first-quarter late filers whose market caps exceed $100 million, 77 companies filed for extensions compared to 36 companies in the first quarter of 2004. In addition, 282 companies missed their annual report deadline. What’s more, of the companies that filed late at the end of the March three-month period, 40 companies—including BearingPoint and The Interpublic Group of Companies—were repeat offenders from recent filing deadlines, according to the Glass Lewis report.

The OCTBB proposal comes on the heels of changes to Nasdaq's own procedures for reviewing listing determinations, which were modified last year.

In general, if a Nasdaq-listed company is delinquent in a periodic filing, it is informed by exchange that it will be delisted and have an "E" appended to its symbol. A company can request to have a hearing with Nasdaq to explain how it will regain compliance with the reporting rule in a timely fashion. A delinquent company will remain listed until a hearing is scheduled.

If the company presents what Nasdaq considers to be a viable plan to regain compliance in a reasonable period of time, Nasdaq will allow it to remain listed. If the plan is not considered viable, Nasdaq can delist the company, at which time it can be quoted on the OTCBB or the Pink Sheets. When a company becomes current in its filings, the "E" is removed from the stock symbol. If it becomes current and it meets all of Nasdaq’s other initial listing criteria, it can apply for a listing on Nasdaq.

Since 2000, 99 companies have been delisted from Nasdaq for filing late. This includes 18 this year (as of May 31); 14 companies were delisted last year.

NYSE Changes

Similar late filing initiatives are underway at the NYSE, as well. The Big Board is expected to implement rules “soon” that were approved on June 2 by the Securities and Exchange Commission.

Under the rules, the NYSE can suspend late filers at any time.

In practice, the Big Board will likely give companies nine months from the filing due date, after which a NYSE committee would decide whether to grant more time. Essentially, the exchange takes the position that a company should complete one year's annual report before it moves on to the next.

Just five companies in the past three years have needed to go past the end of the year to file their annual reports. For example, Catalina Marketing and Freddie Mac needed an extra six or seven weeks; however, they were able to avert a delisting. Nortel Networks and Hollinger filed their 2003 results in January 2005, and avoided getting kicked off the exchange. And in late March, $912.1 million metal-based specialty products maker OM Group finally got around to issuing its 2003 results, also averting a delisting.

On April 8, however, the NYSE suspended the shares of Key Energy Services, Inc. due to the “overall uncertainty surrounding the completion of the company’s current financial statement filing requirements.” The stock now trades on the Pink Sheets electronic quotation service.

The company acknowledged in a press release that it will be traded on the Pink Sheets until “it is current with its SEC financial filings and can re-apply for listing on the New York Stock Exchange.”

Earlier this year, MSC Software also was kicked off the Exchange and now trades on the Pink Sheets. Only two other U.S.-based companies have been suspended by the NYSE in the past few years—Interpool and Footstar. Interpool, however, successfully re-listed in January 2005 after completing catching up.

The Big Board's new rule “strongly encourages companies to provide ongoing disclosure on the status of the annual report filing” through press releases. The exchange will take the frequency and detail of such information into account in determining whether an additional three-month trading period is appropriate. The NYSE will also require companies to stay in contact with the exchange, which will monitor the process and speak with individuals at the highest levels—the CEO, CFO and chairman of the audit committee.

If the NYSE determined that additional time—up to a three-month trading period—was appropriate and the company still failed to file its annual report by the end of the additional period, suspension and delisting procedures would begin. Until now, companies just needed to announce that they will be late and not issue updates on the status of the filing.