[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