[Federal Register Volume 59, Number 53 (Friday, March 18, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-6414]


[[Page Unknown]]

[Federal Register: March 18, 1994]


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SECURITIES AND EXCHANGE COMMISSION
Release No. 34-33759; File No. SR-PSE-93-12]

 

Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendments No. 1 and No. 2 to Proposed Rule Change by 
Pacific Stock Exchange, Inc., Amending Its Listing and Maintenance 
Requirements

March 14, 1994.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on August 
11, 1993, the Pacific Stock Exchange, Inc. (``PSE'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change, and on January 10, 1994, filed Amendment No. 1 to 
the proposed rule change,\1\ and on February 3, 1994, filed Amendment 
No. 2 to the proposed rule change,\2\ as described in Items I, II and 
III below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\Amendment No. 1: (1) Provided additional qualitative 
requirements in determining a company's listing eligibility under 
proposed Rule 3.2(a)(7) and more stringent requirements for 
convertible preferred stock and bonds under proposed Rule 3.2(d) and 
(e); (2) replaced the term ``Small Corporate Offering Registration'' 
(``SCOR'') with ``Small Business Stock Offering'' (``SBSO''); (3) 
expanded the Tier II designation to include listing requirements for 
initial and continued listing of secondary issues; (4) revised the 
public distribution criteria in proposed Rule 3.5(m)(1) and (2) to 
more closely conform with the Philadelphia Stock Exchange's proposed 
Tier II common stock maintenance requirements; (5) added reasons for 
suspending or delisting the securities of a company under Rule 3.5; 
and (6) made stylistic changes.
    \2\Amendment No. 2 replaced the term ``Small Business Stock 
Offering'' (``SBSO'') with ``Small Corporate Offering Registration/
Regulation A'' (``SCOR'').
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change.

    The PSE is submitting this proposed rule change in order to 
strengthen its listing requirements and practices.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of and basis for the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
has prepared summaries set forth in Section A, B, and C below, of the 
most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Introduction. The development and enforcement of adequate 
regulations governing the listing of securities on the Exchange is of 
critical importance to the investing public. Therefore, the Exchange 
proposes to amend Rule 3 of its rules to revise its listing 
requirements for initial and continued listing of securities on the 
Exchange.
    The Exchange seeks to impose more stringent listing requirements by 
establishing mandatory minimum requirements. The Exchange believes that 
the employment of mandatory requirements, as opposed to mere 
guidelines, will serve as a mechanism to equitably screen issuers and 
to provide listed status only to bona fide companies (i.e., companies 
with sufficient financial resources to meet their financial 
obligations). Limited exceptions to the mandatory minimum requirements 
will be made only in cases, described more fully below, where a 
security is also listed on the New York Stock Exchange (``NYSE''), 
American Stock Exchange (``Amex'') or NASDAQ National Market System 
(``NASDAQ/NMS''). However, no exceptions will be made for any security 
listed under the Tier I designation under the Exchange's rules.
    Initial Listing Requirements. The amendments proposed by the 
Exchange are substantial and comprehensive, as they impact not only 
common stock but also preferred stock, warrants, and debt instruments. 
In addition to reorganizing and defining specific terms within Rule 
3.1,\3\ the Exchange is proposing to add Rule 3.2(a), which outlines 
definitive requirements to be considered in an application for listing. 
The Exchange will consider not only established numerical requirements, 
but also other qualitative factors, including the nature and scope of 
the company's operations, the financial condition and accounting 
practices, composition of assets, management experience, and the extent 
of competition and economic conditions within the particular industry.
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    \3\The Exchange rules governing the listing of currency and 
index warrants have been incorporated into Rule 7.
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    Most significantly, the Exchange is proposing a multi-tiered 
structure for original listing and maintenance of securities on the 
Exchange. Securities may be listed pursuant to either the Tier I or 
Tier II listing requirements, and are distinguished with respect to 
blue-sky exemptions, transaction reporting, listing fees, and 
corresponding maintenance requirements.
    A listing under the Tier I designation generally signifies that the 
company has achieved maturity and high status in its industry in terms 
of assets, earnings, and shareholder interest and acceptance. The Tier 
I listing requirements for common stock include numerical as well as 
corporate governance policies that conform with the standards set forth 
in the Memorandum of Understanding between the North American 
Securities Administrators Association, Inc. (``NASAA'') and the Chicago 
Board Options Exchange (``CBOE'').\4\ Any other securities that are 
listed pursuant to the requirements set forth in Rule 3.2, paragraphs 
(d) through (i), including any equity option or index product listed in 
accordance with Rule 3.6 or Rule 7, respectively, shall qualify for 
inclusion under the Tier I designation. These requirements are in 
uniformity with the CBOE, and also meet the same standards established 
by the NYSE and Amex.\5\
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    \4\The Memorandum of Understanding was approved by NASAA and the 
CBOE on May 30, 1991. The Memorandum is reprinted in the NASAA 
Reports at page 601.
    \5\See CBOE, Rule 31.5; NYSE Listed Company Manual Section 7; 
Amex Company Guide Sections 103 to 107. In formulating these 
requirements, the CBOE standards were used as a benchmark because 
the CBOE was the most recent national securities exchange to be 
recognized in every state of the United States as an approved 
marketplace for registration exemption purposes.
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    The Exchange's proposed Tier II designation is limited to the 
listing of common stock, preferred stock, bonds, debentures, and common 
stock purchase warrants. These listing requirements are less stringent 
than the requirements under Tier I, but they nevertheless include both 
quantitative and non-quantitative (such as corporate governance 
standards) requirements that are materially higher than the Exchange's 
existing listing standards.\6\ The Exchange believes that the listing 
of a company's securities under this designation is important because 
it will continue to provide small companies with access to the capital 
markets and will supply much-needed liquidity to public investors 
within a regulated marketplace. The Exchange notes that it previously 
submitted to the Commission a rule filing to list and trade common 
stock that qualifies under the Small Corporate Offering Registration/
Regulation A (``SCOR'') designation.\7\ The proposed rule is also 
intended to facilitate the capital formation process for small 
companies. The SCOR listing requirements would, in effect, constitute a 
third tier of listing requirements; however, for purposes of the 
exchange exemption under most state blue sky laws, SCOR securities will 
not be deemed ``listed'' on the Exchange.
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    \6\In formulating these listings requirements, the Exchange 
conducted a comparative analysis of the other regional stock 
exchanges' standards. The PSE's proposed listing requirements are at 
least equal to or higher than those of the other regional stock 
exchanges.
    \7\These were previously designated as Small Corporate Offering 
Registration securities. See Exchange Act Release No. 32514 (June 
25, 1993), 58 FR 35496 (July 1, 1993) (File No. SR-PSE-92-42).
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    In cases where a company's security does not qualify for inclusion 
under the Tier I designation, yet the security is listed or has been 
approved for listing on either the NYSE, Amex (except for so-called 
``ECM'' securities)\8\ or NASDAQ/NMS, the Exchange may list such 
security under the Tier II designation in reliance upon the listing 
requirements of the applicable exchange (or association).
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    \8\The Amex's Emerging Company Marketplace (``ECM'') 
accommodates the listing of growth companies which are to small to 
meet the Exchange's regular listing criteria. See Amex Company Guide 
Section 1102 (listing criteria for ECM securities).
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    Maintenance Requirements and Delisting Procedures. The proposal 
will establish under Rule 3.5 more stringent numerical maintenance 
requirements, and also includes other factors or events that would 
invoke the suspension or delisting of a company's securities.\9\ As 
with its initial listing requirements, the Exchange's maintenance 
requirements will be strictly enforced.\10\ Whenever the issuer fails 
to meet any provision of the proposed maintenance requirements, the 
matter will be immediately evaluated by the Equity Listing Committee. 
The Committee will determine whether to suspend dealings in the 
security and/or request the issuer to take immediate action to remedy 
any identified deficiency. Should the issuer fail to correct any 
deficiency by the prescribed date, the Committee shall take action to 
delist the security. In cases where the issuer's security fails to meet 
the applicable maintenance requirements under Tier I of Rule 3.5, the 
security will be removed as soon as practicable from trading under this 
designation. The security of the company will be admitted to trading 
under Tier II should it meet the applicable maintenance 
requirements.\11\
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    \9\These are substantially similar to the COBE's requirements 
(except for securities listed under the Tier II and SCOR criteria).
    \10\Securities listed under the Tier I designation will not be 
granted waivers from the Exchange's maintenance requirements. Any 
security that no longer meets the Tier I maintenance requirements, 
but meets the applicable Tier II maintenance requirements, will be 
reclassified as a Tier II security. The Exchange, however, may grant 
a waiver for the continued listing of any security in cases where 
the security remains listed on either the NYSE, Amex (except for so-
called ``ECM'' securities), or NASDAQ/NMS; provided, however, that 
the Exchange determines that there is reasonable basis for a waiver. 
In such cases, the security will be included under the Tier II 
designation.
    \11\Special transition rules will apply to securities listed or 
approved for listing prior to the effective date of this proposed 
rule change. At such time, to qualify for inclusion under the Tier I 
designation, a security must meet the applicable initial listing 
requirements as set forth in Rule 3.2 (including any equity option 
or index product listed pursuant to Rule 3.6 or Rule 7, 
respectively); however, a security listed on either the NYSE, Amex 
(except for so-called ``ECM'' securities), or NASDAQ/NMS may be 
designated as a Tier I security so long as it meets the applicable 
Tier I maintenance requirements in Rule 3.5. Any security not 
qualifying as a Tier I security will be designated a Tier II 
security. Such Security must meet the Tier II maintenance 
requirements within two years of the effective date of this rule 
change. Until that time, the Exchange's former delisting standards 
under PSE Rule 3.5 will be applied.
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    Finally, the proposal will also establish as Rule 3.5(t) specific 
delisting procedures to provide the issuer with the opportunity to 
appeal a delisting decision.
    Corporate Governance and Disclosure Policies. As set forth in Rule 
3.3, the proposal will require that specific corporate governance and 
disclosure policies be established by domestic issuers of any equity 
security listed on the Exchange.\12\ The Exchange believes that 
effective and responsive corporate governance ensures that 
shareholders' interests are sufficiently protected. Therefore, each 
listed company will be expected to follow certain practices aimed at 
maintaining appropriate standards of corporate responsibility, 
integrity, and accountability to their shareholders. This rule also 
includes the Exchange's formal disclosure policy, which describes 
procedures for a listed company to employ in their communication of 
material information to the Exchange and investing public.
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    \12\The Exchange will not require an issuer of a security under 
the Tier II or SCOR designation to comply with the provision for an 
audit committee as set forth in Rule 3.3(b).
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    Trading Environment and Transaction Reporting. All securities, 
regardless of the requirements used for their admission to listing, 
will be subject to auction market trading rules and real-time 
reporting. Transactions in Tier II and SCOR designated securities will 
be identified by a special suffix to the ticker symbol so that members, 
public investors and others can distinguish these securities from other 
securities traded on the Exchange.\13\ Finally, all of the Exchange's 
rules and surveillance procedures will be applicable to transactions in 
securities listed under the Tier I, Tier II and SCOR designations.
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    \13\The suffix will not be applied, however, to a security 
listed on either the NYSE, Amex, or NASDAQ/NMS even though it is 
designated by the Exchange as a Tier II security.
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    Penny Stock Reform Act of 1990. The Exchange believes that the 
heightened listing requirements will serve to enhance the integrity of 
the marketplace and to protect the public interest. As recognized by 
the Commission,\14\ adequate listing criteria are necessary to screen 
out companies that lack substantial float, assets and shareholders, 
thereby assuring sufficient liquidity for fair and orderly markets. The 
Exchange believes that the proposed rule change also acts in 
furtherance of the interests of Rule 15c2-6 of the Securities Exchange 
Act of 1934.\15\ Rule 15c2-6, also referred to as the Penny Stock Rule, 
was enacted by the Commission in response to concerns of widespread 
misconduct by broker-dealers in the recommendation, to persons who are 
not established customers, of low-priced securities that are not 
registered on an exchange or authorized for quotation on NASDAQ. The 
Commission noted that, due to the effect that the Rule may have on 
small business capital formation, many such businesses may seek listing 
on an exchange in order to avoid the restrictions of the Rule.\16\ As 
such, and since broker-dealer abuses may extend to exchange traded low-
priced securities, the Commission stated its expectation that self-
regulatory organizations develop new regulatory initiatives designed to 
address fraud and manipulation in low-priced securities. The Exchange 
believes that the heightening of its listing requirements, thereby 
precluding the listing of many low-priced securities, addresses the 
Commission's concern.
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    \14\See Exchange Act Release No. 28293 (August 1, 1990), 55 FR 
32518 (August 9, 1990) (File No. SR-CSE-90-04).
    \15\17 C.F.R. 240.15c2-6 (1993).
    \16\See Exchange Act Release No. 27160 (August 22, 1989), 54 FR 
35468 (August 28, 1989) (File No. S7-3-89).
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    Finally, the Exchange believes that the proposed rule change serves 
to create uniformity of enhanced listing standards among the various 
exchanges and that general uniformity in raising the standards will 
benefit the marketplace as a whole, thereby further serving the 
public's interest. With the enactment of Rule 15c2-6, the Exchange has 
been made aware of the necessity for higher listing requirements, and 
with this rule change is seeking to address the Commission's concerns.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b) of the 
Act, in general, and furthers the objectives of Section 6(b)(5), in 
particular, in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market, and to protect investors and the public 
interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments on the proposed rule change were neither solicited 
nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the publication of this notice in the Federal 
Register or within such other period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve the proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street NW., Washington, DC 20549. Copies 
of the submission, all subsequent amendments, all written statements 
with respect to the proposed rule change that are filed with the 
Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying at the 
Commission's Public Reference Section, 450 Fifth Street NW., 
Washington, DC 20549. Copies of such filing will also be available for 
inspection and copying at the principal office of the PSE. All 
submissions should refer to File No. SR-PSE-93-12 and should be 
submitted by April 8, 1994.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-6414 Filed 3-17-94; 8:45 am]
BILLING CODE 8010-01-M