Latin American Capital Markets

DEMUTUALIZATION OF EXCHANGES 281that securities listed on NASDAQ or designated as "national market system securities"would be exempt from state blue-sky registration requirements. 16Corporate governance in the United States is primarily a matter of state corporationlaw. 17 Therefore, exchange listing standards have been critical in the developmentof national corporate governance standards. The SEC has used disclosurerequirements for their prophylactic effect of regulating corporate governance. In addition,the SEC has broad powers under the Exchange Act to regulate exchanges andsecurities traded in the national market system. It has used this power to persuadeexchanges to mandate audit committees with a majority of independent directors forlisted companies. 18 Nevertheless, when the SEC tested the limits of its authority indictating corporate governance standards for listed companies, attempting to enforcea one share, one vote exchange listing standard, the D.C. Circuit Court held this wasbeyond the SECs power 19NASDAQ has demutualized, but not yet made a public offering of its shares.The NYSE's plans to demutualize have been on hold for a few years.The decisions todemutualize and to go public and list are separate. A regulatory rebalancing betweenSRO listing requirements and governmental oversight of listing standards may not becomeessential until an exchange self-lists. In any event, NASDAQ was not requiredto address this issue in connection with its demutualization. Another aspect of thisproblem is the development of ATSs. If markets of the future are competing ECNsinstead of floor-based exchanges, which serve as a price discovery mechanism forlisted companies, listing may diminish in importance and exchanges may not have thesame leverage to enforce listing standards as they have had in the past. New powerto formulate and enforce corporate governance standards may then have to be givento SROs or government regulators.16 Exchange Act Rule I IAa-2-l, 17 C.F.R.§240.I IAa-2-I.The controversy concerning the merit of NASDAQ listingstandards in contrast to the standards of national securities exchanges was settled by the National Securities MarketsImprovement Act of 1996, Pub. Law 104-290, 110 Stat 3416 (1996), which preempted state regulation of the securitiesregistration and offering process for "covered securities." This means merit review is not applicable to nationallytraded securities, including NASDAQ listed securities. Securities Act, § 18(a)(3), 15 U.S.C. §77r(a)(3).17 Schreiber v. Burlington Northern, Inc. 472 U.S. I (1977); Santa Fe Industries, Inc. v. Green, 430 U.S. 462 (1977); Cortv. Ash, 422 US. 66, 84 (1975).18 Self-Regulatory Organizations; Order Approving Proposed Rule Change by the New York Stock Exchange, Inc.Amending the Exchange's Audit Committee Requirements and Notice of Filing and Order Granting AcceleratedApproval of Amendments No. I and 2Thereto, Exchange Act Release No. 42233,64 Fed. Reg. 71529 (December 21,1999). New SEC disclosure rules complement these requirements. See Audit Committee Disclosure, Exchange ActRelease No. 42266, 64 Fed. Reg. 73389 (December 30, 1999).19 Business Roundtable v. SEC, 905 F.2d 406 (D.C.Cir 1990).Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub