Skip to main content
May 31, 2005

Different exchange, different rules

Brendan Sheehan looks at the consequences of missing a filing date – and discovers major differences between exchanges

It seems barely a week goes by without another company announcing a restatement or delay in filing its financial statements. Almost without exception the blame is placed at the feet of Sarbanes-Oxley Section 404. It is certainly true that the exchanges are focusing greater attention on timely filing of all financial reports than they were three years ago. And it is not just annual reports that cause problems.
 
So, besides upsetting the SEC and your shareholders, does it really matter if you file late? The answer depends on which exchange your company is listed with – because the approach to disciplining delinquent filers at the two major US stock exchanges couldn’t be more different. 

The likelihood of getting de-listed comes down to whether your company has a Nasdaq or NYSE listing, with the former striking off nearly ten times as many issuers as the latter for failure to file during the past two years. 

‘Nasdaq has the strictest de-listing standards of all the US exchanges,’ explains a Nasdaq spokesperson. The exchange has a very clear process for de-listing a company that has fallen behind on its reporting requirements, as many firms will testify. No prior warning is given to a firm that it is at risk of missing the filing and, if it does miss it, a de-listing notification is immediately issued. 

‘All our companies know exactly when they have to file and in the event of delinquency they are automatically notified,’ adds the spokesperson. ‘The company ticker and name then has an ‘e’ attached to notify investors of the delinquent status.’ 

Protecting the shareholder

The step of adding an ‘e’ designation to company names is intended to inform shareholders in the firm that a suspension of listing is pending. The idea is that the investors will then have time to assess their options as far as continued ownership is concerned. 

A firm has seven days from the date of notification to file an appeal against de-listing. ‘Staff members have no discretion as to whether a notice is sent following a delinquency – a note is always sent,’ says the Nasdaq official. 

One company that narrowly avoided de-listing is Red Robin. It missed its April 1 filing deadline and a de-listing note was sent, meaning the company could be de-listed as of April 8. Red Robin appealed the decision and was able to file its report on April 6. The company explained that there was no problem; it simply needed more time to comply due to changes in the way it must account for its leases.
 
The Nasdaq official says stringent requirements for continued listing are vital to adequately protect investors. Others feel that such a strict regime fails to provide sufficient time for the market to respond, and does not take into account that companies may have a legitimate reason for missing a filing date. 

Glenn Tyranski, VP of financial compliance at the NYSE, emphasizes that the exchange does not subscribe to a ‘shoot first, ask questions later’ approach. ‘The process for de-listing a firm from the NYSE is a very consultative affair,’ Tyranski explains. ‘The first step in the event of a late filing is to post that fact to the NYSE web site and the wire services.’ 

Once this has happened the process begins. ‘We spend significant time establishing the reasons for the delinquency and taking appropriate steps to get the firm in question to file as quickly as possible,’ Tyranski continues. ‘There is no hard and fast rule as to when and why a company will be de-listed. We take into account all contributing factors and then make a
decision based on all available information.’
 
However, the company in question does need to sit down with NYSE officials and accurately explain the problems and the plan for regaining compliance. 

A matter of timing

Generally, a company has 120 days to file its annual report. In the event this does not happen, it has up to nine months to file before explicit action is taken. A meeting is then arranged with NYSE officials and, depending on the circumstances, a 90-day extension may be granted. 

At Nasdaq things happen a lot faster. Once the firm requests an appeal, a hearing is set for the earliest possible date. ‘If a company files for appeal it has to present its case to the Nasdaq Listing Hearing Review Council as to why it has been unable to file,’ comments an official. ‘The hearing panel is able to offer an extension of typically between 60 days and 90 days.’ 

The end result of failure to file on time is the same at both exchanges – but the time frames are remarkably different. Some NYSE companies have remained delinquent for more than a year, a situation that would almost certainly be impossible at Nasdaq.

Delinquency doubles

One point that neither exchange argues is that there has been a significant increase in delinquent filers since the introduction of Sox. ‘Late filings are double that of last year and we feel this is exclusively because of Sox and Section 404 in particular,’ Tyranski says. ‘We are also seeing a record number of refilings. The NYSE expects this trend to be ongoing as companies continue to come to terms with the new disclosure regime and adapt their internal processes.’

Nasdaq has also noted this trend. ‘We have seen a considerable increase in the number of delinquent filers in 2005, and this may be, at least in part, a direct result of Section 404,’ says the spokesperson.

As of May 10 there were 35 companies listed as not meeting Nasdaq’s continued listing standards because of delinquent filing. 

In most cases it is the 10K that is in question. Five of these firms, however, are on the list for multiple reasons.Delinquent filing accounts for a quarter of all Nasdaq non-compliant companies (the total number of non-compliant firms is 137). If history is any guide, almost half the companies listed as delinquent will be suspended or de-listed: in 2004 Nasdaq de-listed 14 companies for filing failures.

The NYSE has removed far fewer. In fact, in the past two years only three companies have been de-listed from the NYSE for failure to file. The current number of firms on the NYSE’s delinquent list stands at 29, and it is possible that all of these firms will escape the punishment of being de-listed or suspended.
 
For delinquent filers, the choice of which exchange it’s preferable to be listed with seems clear. The situation for shareholders of listed companies may turn out to be somewhat less obvious.

Brendan Sheehan

Brendan Sheehan is the former Executive Editor at Corporate Secretary magazine, and is a leading expert in public company governance and compliance. He regularly lectures on cutting edge governance, risk and compliance issues and is a regular...