Thanks to a recent decision by the U.S. Securities and Exchange Commission, shares of mortgage giant Fannie Mae are still traded on the New York Stock Exchange, even though the corporation has failed to comply with SEC financial reporting requirements. That’s a travesty.
Fannie Mae first disclosed problems in its accounting practices and financial statements more than two years ago and at that time assured investors that accurate financial statements would be prepared and filed with the SEC. Since then, more errors have been discovered, the anticipated earnings restatement has been pegged at around $11 billion, and financial statements for 2004 and 2005 have yet to be filed. Federal regulators, Congress and the U.S. Department of Justice have opened investigations into the scandal.
Yet the NYSE has deemed Fannie Mae to be too important to be removed from the big board due to the nature of company’s business and its $55 billion market capitalization. This special privilege came about because the SEC approved an NYSE proposal that the exchange itself be allowed to continue to list a company that hasn’t filed its financial statements if that company has an important position in the market.
The SEC’s bizarre decision to allow the NYSE to make an independent judgment call about an individual corporation seems tailor-made to benefit Fannie Mae. A reasonable investor might wonder: Why would the SEC, a government agency, abdicate its responsibility and hand such authority to the NYSE, a private-market entity?
The SEC doesn’t exist to protect institutional, individual or inside investors from bad investments or to protect corporations from the consequences of their own misdeeds and mistakes. Rather, the government agency is supposed to ensure that publicly traded corporations disclose auditor-certified financial statements and other information. Disclosure is supposed to inform investors so they can protect themselves from unwise investments. Disclosure is the foundation of the entire system.
Here’s a snippet of the NYSE’s order as reported by Reuters news service: “The Exchange believes that there are very rare circumstances involving listed companies that have a position in the market (relating to both the nature of their business and their very large publicly-held market capitalization) such that their delisting from the Exchange would be significantly contrary to the national interest and the interests of public investors, notwithstanding a delay in an annual report filing that extended beyond one year.”
The NYSE will review the situation quarterly and monitor Fannie Mae’s progress toward completion of its amended financial statements and SEC reports. Whether those check ups will have any real meaning remains to be seen.
True, Fannie Mae holds a special position in the U.S. economy because it creates a secondary market for real estate-backed mortgages. But Fannie Mae isn’t the only corporation that’s able to perform that function.
Moreover, the reasonable investor might wonder whether the SEC and NYSE will grant the same special treatment to other large-cap public corporations that are engaged in important businesses and that also have a problem with those pesky SEC financial disclosure forms. Will the cry be heard in boardrooms across America: No more 10-Ks? No more 10-Qs? And we can still trade on the NYSE?! Woo-hoo!
Delisting Fannie Mae wouldn’t be a welcome development for the NYSE or the institutional investors that own 93 percent of Fannie’s stock. Yet it wouldn’t be a death knell for the company either, and it would be a better reflection of its true position than the free ride on the NYSE it is getting at the moment. Delisting would serve notice that it’s high time for Fannie Mae to clean up its act and comply with the SEC regulations.
Any corporation, no matter how large, complex, well-positioned, important to the market or perhaps politically connected, that does not file certified financial statements with the SEC in a timely manner should not be traded on the NYSE, especially after being given ample extra time to comply. The NYSE is the world’s most prestigious financial marketplace and as such it should be the gold standard; the presence of Fannie Mae in its ranks at this time does not meet that standard.
Not delisting Fannie Mae also sends the wrong message to shareholders, who might well conclude that financial statements are irrelevant, that compliance with disclosure requirements doesn’t matter, and that if they just buy shares in any big well-connected important-to-the-market company, the SEC and NYSE will make sure they’ll be okay.
Unless, of course, that big well-connected important-to-the-market company turns out to be the next Enron.
Marcie Geffner is a real estate reporter in Los Angeles.
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