United States securities markets operate under a system of supervised self-regulation created by the Securities Exchange Act of 1934 (Exchange Act). That system includes substantive regulation of the traders and the issuers of securities traded in those markets through the use of listing standards.
These listing standards have a unique status. They are part of a self-regulatory system, but are not classic self-regulation. The markets do not govern the traders of which it consists; rather, it governs outsiders—the issuers. The markets and the Securities and Exchange Commissions have sought to control issuers in ways not clearly related to trading in the market by imposing "corporate governance" listing standards.
The first judicial consideration of these corporate governance listing standards came only recently, upon review of Exchange Act Rule 19c-4 (Rule 19c-4), a voting rights standard promulgated by the Commission in 1988. In Business Roundtable v. SEC, the court invalidated Rule 19c-4 because it was not consistent with the purposes of the Exchange Act. Consistency with the Exchange Act is a requirement imposed upon Commission-promulgated rules by section 19(c) of the Act. In tortured dictum, however, the court created a theory to save the marketplaces' ability to impose corporate governance listing standards.
This Article argues that the more logical and correct result is to admit that corporate governance listing standards have no place in marketplace rules, whether promulgated by the Commission or by the markets themselves. These standards were not designed to protect shareholders, but originated primarily as marketing campaigns by the exchanges. They cannot stand against Congress' clear command in the Exchange Act that rules, whether of the Commission or the markets, must be consistent with the purposes and objectives of the Act. More importantly, a world without marketplace-imposed standards likely would not be detrimental to corporations or shareholders.
The first section of this Article defines "corporate governance" listing standards and traces their development in each major marketplace and traces the development of the federal securities laws governing listing standards. The second section reviews the history of Rule 19c-4 and the Business Roundtable opinion, and concludes that the court's dictum, which would permit markets to impose corporate governance listing standards, is inconsistent with the Exchange Act and is unworkable. Finally, the third section describes a world without corporate governance listing standards and explains how any attempt to remove them likely will be made only by the Commission.
Douglas C. Michael, Untenable Status of Corporate Governance Listing Standards Under the Securities Exchange Act, 47 Bus. Law. 1461 (1992).