TheCorporateCounsel.net

A month ago, I blogged about Nasdaq seeking to delist companies that had filed disclaimed internal control attestations. Recently, Cray Supercomputers announced that the Nasdaq Listing Qualifications Department had reversed a prior determination that its 10-K was deficient and concluded that Cray was in compliance with all Nasdaq listing requirements. So Cray’s appeal was dismissed as moot.

As I understand it, the determination by the SEC and Nasdaq as to whether any particular company’s 10-K is deficient is very dependent on that company’s facts and circumstances – so it is difficult to draw guidance from the disposition of any particular situation. For the limited number of companies with disclaimed attestations that still face delisting procedures, the SEC and Nasdaq must have looked at their particular facts and circumstances to come to the conclusion that their 10-Ks were deficient.

After reviewing Cray’s Item 9A disclosures and the disclaimed attestation, I can see why the SEC and Nasdaq found no cause to delist Cray. Cray identifies eight material weaknesses -but notes the clean opinion on its financial statements. The disclaimed audit opinion resulted because, as Cray discloses, “management performed an incomplete review of financial applications and general computer controls and tax controls and did not perform a formalized entity-level risk assessment.”

Cray noted that several financial managers left during the 4th quarter of 2004 and 1st quarter of 2005: the CFO, financial reporting manager and head of the IT department. Although Cray hired an Operations Controller and Director of Internal Audit/Sarbanes-Oxley Compliance during those periods, I assume that the personnel transition made it difficult for Cray to perform the 404 testing procedures timely.

Here is a list of companies facing delisting by Nasdaq – for disclaimed attestation reasons as well as many others. The list describes the delisting rationale for each company – but note that for the companies with rationales described as a 404 problem, many of those companies didn’t file a 404 attestation at all. So this list doesn’t enable you to know how many – and which – companies have disclaimed attestation problems. Read the next item for more about the Nasdaq delisting procedures.

NYSE’s Codified Delisting Procedures for Delinquent SEC Filings (And a Battle Over Differing Procedures)

Last week, the SEC approved a NYSE rule change that codifies existing procedures for companies that fail to timely file their annual reports. Under these rules, a company that fails to timely file an annual report will receive a written notice from the NYSE – then, the company has five days to contact the NYSE and issue a press release disclosing the status of the filing.

If a company fails to file its annual report within 9 months, the NYSE can decide to suspend trading and commence delisting procedures (which the NYSE can decide to do at anytime, even before the 9 months have lapsed) – or allow the company’s securities to be traded for up to an additional 3 months. These new rules apply immediately.

Of particular interest are pages 5-6 of the SEC’s adopting release, which describe how these codified NYSE procedures differ from an outstanding Nasdaq proposal that would impose more stringent hearing procedures on Nasdaq-listed companies than those faced by NYSE companies. And pages 6-7 describe a NYSE rebuttal to a February 4th Nasdaq comment letter submitted on the NYSE’s procedures.

To understand more about this battle over the SRO’s potentially differing delisting procedures, here are some comment letters submitted on the Nasdaq proposal – in particular, you should note David Donohoe’s letter, who is former Chief Counsel of Nasdaq’s Office of Listing Qualification Hearings. Since the deadline for this proposal has been extended, it’s not too late for you to weigh in!

Adopting Release for Regulation NMS Posted

Yesterday, two months from the time that the Commission approved it (see my April 11th blog), the SEC finally posted the 523-page adopting release for Regulation NMS rules, as well as two amendments to the joint industry plans for disseminating market information. In addition to redesignating the national market system rules previously adopted under Section 11A of the ’34 Act, Regulation NMS includes new substantive rules that are designed to modernize and strengthen the regulatory structure of the US equity markets.

Interestingly, the release includes a lengthy “Response to Dissent” (see Section XII, pages 403-433 of the release) to respond to a 44-page dissent from Commissioners Glassman and Atkins. The effective date is 60 days after publication of the release in the Federal Register – but the compliance date for some aspects of the rules are delayed, as spelled out in Section VII of the release (see pages 305-307).