U.S. regulators cut 1,000 slacker firms more slack

THIS three-month extension the U.S. Securities and Exchange Commission (SEC) has been forced to give companies so that they can become eligible for the Direct Registration System makes you wonder what else is slipping through the cracks at America’s public companies.

After all, it’s not as if companies weren’t given adequate notice of the need to comply with the rule by January 1, 2008. Indeed, look at the following alerts NASDAQ sent to its listed companies last year, starting in February.

Here’s the complete text of the first one:

February 7, 2007 Issuer Alert #2007- 001

New Rules Require NASDAQ-Listed
Companies To Be Eligible For A Direct
Registration Program By January 2008

Please Route To: NASDAQ-Listed Companies

What You Need to Know:
• New rules will require NASDAQ-listed securities to be eligible for a Direct Registration Program.
• Companies listed before January 1, 2007 have until January 1, 2008 to comply.
• As you prepare for your company’s annual meeting of shareholders in 2007, you may wish to consider whether your company needs to take any actions that require shareholder approval to be eligible for a Direct Registration Program.

On August 8, 2006, the Securities and Exchange Commission approved amendments to NASDAQ Rule 4350(l), which requires securities listed on NASDAQ to be eligible for a Direct Registration Program operated by a clearing agency registered under Section 17A of the Exchange Act, such as the one offered by The Depositary Trust Corporation (“DTC”).1 A Direct Registration Program permits an investor’s ownership to be recorded and maintained on the books of the issuer or the transfer agent without the issuance of a physical stock certificate. Investors receive annual statements from the issuer indicating their holdings.

The rule change does not require issuers to actually participate in a Direct Registration Program or to eliminate physical stock certificates (“dematerialization”). However, the change requires that the listed securities are eligible for such a program. To be eligible, an issuer is required to use a transfer agent that meets DTC’s requirements for direct registered securities.2 Further, the transfer agent must instruct DTC to designate the company’s securities as “direct registered eligible securities.” A list of transfer agents that meet the DTC requirements can be found on the DTC website. If your transfer agent is not on this list, they can contact DTC to discuss requirements.

Compliance Deadlines
NASDAQ recognizes that some issuers may need to amend their governing documents, such as their by-laws, to be permitted to issue securities that are not represented by certificates. Therefore, companies that were listed on NASDAQ before January 1, 2007, as well as new classes of securities issued by these companies and companies that transfer the listing of their securities from another registered U.S. securities exchange, have until January 1, 2008 to comply. As you prepare for your company’s annual meeting of shareholders in 2007, you may consider whether your company needs to take any actions that require shareholder approval to be eligible for a Direct Registration Program.
The Rule does not apply to non-equity securities which are book-entry-only.

Additional Information
For more detailed information, please see the following:
• SEC Order approving NASDAQ’s rule change – http://nasdaq.complinet.com/file_store/pdf/rulebooks/SR-NASDAQ-2006-008_Approval.pdf
• List of transfer agents that meet the DTC requirements for direct registration –https://login.dtcc.com/dtcorg/binary/19247DRS_Limited.pdf
• Securities Industry Association’s Immobilization & Dematerialization Guide – http://www.sia.com/stp/pdf/SIADematerializationImpGuide.pdf
• Information regarding the Direct Registration System – https://login.dtcc.com/dtcorg/prod-serv/page18938.html
• NASDAQ Issuer Bulletin, March 7, 2005 – http://www.complinet.com/file_store/pdf/rulebooks/NASDAQ-2006-008_bulletin.pdf
If you have any questions, please contact your Listing Qualifications Analyst or your Relationship Manager.
________________
1 NASDAQ previously provided information about this change in a March 7, 2005, Issuer Bulletin.
2 If an issuer acts as its own transfer agent, it also needs to meet these requirements.

Around five months later, NASDAQ followed up with issuers who had still not complied. I’ve abstracted the top portion of that alert below :

Note: This Alert was sent to those issuers that NASDAQ understands were not eligible for a Direct Registration Program as of June 26, 2007.

June 29, 2007 Issuer Alert #2007- 001a

Action Required: New Rules Require NASDAQ-Listed Companies to be eligible for a Direct Registration Program by January 2008

Action Required:
• New rules require that by January 1, 2008, NASDAQ-listed securities must be eligible for a Direct Registration Program.
• NASDAQ’s records indicate that your company does not yet evidence compliance with these new rules.
• If you are not yet eligible for a Direct Registration Program, you must contact your transfer agent to assure compliance.

And then less than three months after that…

September 13, 2007 Issuer Alert #2007- 001B
Third Notice: New Rules Require NASDAQ-Listed Companies To Be Eligible For A Direct Registration Program By January 2008

Please Route To: NASDAQ-Listed Companies

URGENT: ACTION REQUIRED – Third Notice

What You Need to Know:
• NASDAQ rules require that by January 1, 2008, listed securities must be eligible for a Direct Registration Program.
• NASDAQ’s records indicate that your company does not yet evidence compliance with these new rules.
• You must contact your transfer agent to assure compliance.

In August 2006, NASDAQ and the other major exchanges adopted rules requiring that listed securities be eligible for a Direct Registration Program operated by a clearing agency registered under Section 17A of the Exchange Act, such as the one offered by The Depositary Trust Corporation (DTC). A Direct Registration Program permits an investor’s ownership to be recorded and maintained on the books of the issuer or the transfer agent without the issuance of a physical stock certificate. These rules will become fully effective January 1, 2008.
Based on information provided to us by DTC, it appears that your company does not yet evidence compliance with this upcoming requirement. To be eligible, issuers must use a transfer agent that meets DTC’s requirements for direct registered securities.

And then on November 2, 2007, a threat of being delisted…

November 2, 2007 Issuer Alert #2007- 001C

Fourth Notice: Only Two Months Remaining to Comply with Direct Registration Program Requirements

Please Route To: NASDAQ-Listed Companies [that do not evidence compliance]

URGENT: IMMEDIATE ACTION REQUIRED NOW – Fourth Notice

What You Need to Know:

• NASDAQ rules require that by January 1, 2008, listed securities must be eligible for a Direct Registration Program.
• DTC’s records indicate that your company does not yet evidence compliance with these new rules. Failure to comply will result in NASDAQ issuing a notice of non-compliance to your company, which must be disclosed in a press release and on a Form 8-K.
• You must contact your transfer agent to assure compliance.

According to the most recent information provided by the Depositary Trust Corporation (“DTC”), it appears that your company does not evidence compliance with NASDAQ’s Direct Registration Program requirement.1 To be eligible, your company must use a transfer agent that meets DTC’s requirements for direct registered securities and your transfer agent needs to specifically instruct DTC to designate your company’s securities as “direct registered eligible.” To ensure compliance, you must contact your transfer agent now and ask whether they meet DTC’s requirements, and, if they do, tell them to contact DTC immediately to have your company’s securities designated.

If your company fails to evidence compliance by January 1, 2008, you will receive a letter from us advising of this deficiency, which notice is required to be disclosed both in a press release and on an SEC Form 8-K. The company will also be identified as non-compliant by third-party data providers as well as on our website. After we issue this notice, the company may be eligible for a short extension of time to become complaint, but we cannot grant any relief from these disclosure requirements and, if the company is unable to comply within any extension that is granted, it will be subject to being delisted.

If you believe you are already in compliance with this requirement and are receiving this communication in error or have any questions, please contact your NASDAQ Relationship Manager or your NASDAQ Listing Qualifications Analyst.

However, by December 14, 2007 around 1,000 companies had still not gotten their acts together, prompting the exchanges to hurriedly ask the SEC, on Boxing Day no less, to approve a last-minute three-month extension for companies to comply.

In its application seeking SEC approval on an accelerated basis, NASDAQ noted that “granting accelerated approval will reduce the number of companies that will need to disclose non-compliance with a listing rule, and the concomitant investor confusion, when the company has substantially completed the steps necessary to achieve compliance, or when the non-compliance is beyond the company’s control.”

The way I read it, the exchanges basically were asking the SEC to help them shield investors from learning that a huge number of the companies that have been allowed to sell stock to the public have obvious compliance issues.

Two days later, the SEC approved the extension (PDF 47KB, 7 pages), thus avoiding embarrassment for non-compliant companies.

And investors? Well, almost none of them have a clue that any of this happened.

So I ask, shouldn’t investors know which companies ignored all of those alerts from the exchanges? As an investor, wouldn’t that be useful to know?

I think so. If a company can ignore four official notices from a regulator, what else is it ignoring? Surely companies like these have no place being listed or public. And why are regulators making excuses for them?

(Note, to save myself the hassle of writing proper links to each PDF file, I haven’t linked to the NASDAQ Issuer Alerts. However, you can find them here. )

Update: The Depository Trust & Clearing Corporation’s website has a list of companies and transfer agents that are DRS participants. This is a step above companies that are eligible to be participants. I haven’t been able to find a list of eligible issuers. If you know of one, please let me know.

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