[Federal Register Volume 59, Number 91 (Thursday, May 12, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-11558]


[[Page Unknown]]

[Federal Register: May 12, 1994]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34019; File No. SR-NYSE-93-49]

 

Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Approving Proposed Rule Change and Notice of Filing and Order 
Granting Accelerated Approval to Amendment No. 1 to Proposed Rule 
Change Relating to Bond Listing Standards

May 5, 1994.

I. Introduction

    On December 22, 1993, the New York Stock Exchange, Inc. (``NYSE'' 
or ``Exchange'') submitted to the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to revise its standards for the 
listing and delisting of debt securities. On April 1, 1994, the NYSE 
submitted to the Commission Amendment No. 1 to the proposed rule change 
in order to clarify its interpretation of certain provisions of the 
original filing.
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1991).
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    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 33531 (January 27, 1994), 59 FR 4960 (February 
2, 1994). No comments were received on the proposal. This order 
approves the proposed rule change, including Amendment No. 1 on an 
accelerated basis.

II. Description of the Proposal

    Paragraphs 102.03 and 103.05 of the NYSE's Listed Company Manual 
set forth the current standards for listing debt securities of domestic 
and foreign issuers, respectively, on that Exchange. Under either 
paragraph, the NYSE uses the following minimum criteria to determine 
whether a debt security is eligible to be listed: The bond issue must 
have an aggregate market value or principal amount of $5 million; the 
anticipated distribution must be ``sufficient for trading on the 
Exchange''; and the company must be in a position to cover interest 
charges on all debts issued by it for a subsidiary. In this regard, the 
NYSE deems interest coverage to be inadequate if the interest charges 
on all debt issued by the company, its parent or a subsidiary exceed 
earnings, before or after taxes, as reported in a filing to the 
Commission.\3\ Finally, Paragraphs 102.03 and 103.05 allow the Exchange 
to list convertible debt only if the underlying common stock also is 
listed on the NYSE.
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    \3\See Paragraph 802.00 of the Listed Company Manual.
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    The delisting standards for debt securities are set forth in 
paragraphs 801.00 and 802.00 of the Listed Company Manual. The NYSE 
normally gives consideration to delisting a bond issue if the aggregate 
market value or principal amount falls below $1 million, or if the 
company's interest coverage is deemed to be inadequate.\4\ The NYSE 
also can review the continued listing of a debt security pursuant to 
certain other criteria in paragraph 802.00 (e.g., ``authoritative 
advice received that security is without value,'' ``inability to meet 
current debt obligations or to adequately finance operations''). In 
terms of convertible bonds, paragraph 801.00 states that it is the 
NYSE's customary policy to delist a convertible security if the related 
common stock is delisted.
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    \4\See supra, note 4 and accompanying text.
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    The NYSE proposes to simplify and relax its standards for the 
listing and delisting of debt securities, in order to make the 
Exchange's trading and disclosure systems more accessible to bond 
issuers. Specifically, the proposed amendments to paragraphs 102.03 and 
103.05 will eliminate the requirement that the Exchange evaluate the 
anticipated distribution of a bond issue,\5\ and will replace the 
current definition of adequate interest coverage with a new standard 
based on issuer or bond rating status.\6\ In addition, the NYSE 
proposal will permit the Exchange to list convertible debt whenever the 
underlying equity security is subject to real-time sale reporting in 
the United States.\7\ Only the requirement that the bond issues have an 
aggregate market value or principal amount of no less than $5 million 
will remain unchanged.
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    \5\The proposed rule change also will delete a reference to the 
distribution requirement from paragraph 703.06 of the Listed Company 
Manual, which governs the procedures an issuer must follow to list 
its debt securities on the NYSE.
    \6\See infra, notes 9-13 and accompanying text.
    \7\Amendment No. 1, supra note 3, clarifies that, for both 
domestic and foreign issuers, the underlying equity security must be 
subject to real-time reporting in the United States.
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    As noted above, the NYSE proposal contains a new standard for 
evaluating whether a debt issuer has the ability to meet its interest 
obligations. Rather than using an earnings deficit, or the lack 
thereof, as the basis for making that determination,\8\ the Exchange 
will rely instead on either (1) its own initial and continued listing 
standards for equity securities or (2) the analysis of a nationally 
recognized securities rating organization (``NRSRO'').
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    \8\See supra, note 4 and accompanying text.
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    Specifically, if an issuer of NYSE listed equity is in ``good 
standing'' with the Exchange,\9\ the NYSE normally will list that 
company's debt securities so long as they have an aggregate market 
value or principal amount of at least $5 million. This standard also 
will apply to an issuer owned by, or under common control with, an 
issuer of NYSE listed equity; and to an issuer whose debt securities 
are guaranteed by an issuer of NYSE listed equity. According to the 
NYSE, because debt enjoys seniority over equity, the ``good standing'' 
test warrants listing an ``affiliated'' issuer's bonds.
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    \9\See infra, note 24.
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    In contrast, debt securities of an ``unaffiliated'' issuer\10\ will 
not be eligible for initial listing on the NYSE unless an NRSRO has 
assigned a certain minimum rating to the bonds (or to other bonds 
issued by the same company). Thus, the NYSE will be able to list such a 
debt issue only if it has received a rating no lower than a Standard 
and Poor's (``S&P'') Corporation ``B'' rating (or another NRSRO's 
equivalent thereof). If the issue proposed to be listed has not been 
rated, those bonds must be either senior to, or pari passu with,\11\ an 
issue that has received at least an S&P Corporation ``B'' rating (or 
another NRSRO's equivalent thereof). Alternatively, the proposed rule 
change will allow the NYSE to list unrated bonds that are junior to an 
investment grade issue.\12\
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    \10\As defined in the NYSE proposal, ``an `unaffiliated' issuer 
is one that has no equity securities listed on the Exchange; is not, 
directly or indirectly, majority-owned by, nor under common control 
with, an issuer of Exchange-listed equity securities; and is not 
issuing a debt security that an issuer of Exchange-listed equity 
securities is guaranteeing.''
    \11\A pari passu issue has equal standing with the debt issue 
proposed to be listed.
    \12\To be investment grade, an issue must be assigned a rating 
no lower than an S&P Corporation rating of ``BBB'' (or another 
NRSRO's equivalent thereof). The NYSE has indicated that it will 
apply this standard only to unrated bonds which are immediately 
junior to another rated class of securities issued by the same 
company. Telephone conversation between Michael J. Simon, Milbank, 
Tweed, Hadley & McCloy; Fred Siesel, Director, Fixed Income Markets, 
NYSE; Sharon Lawson, Assistant Director, Division of Market 
Regulation, SEC; and Beth Stekler, Attorney, Division of Market 
Regulation, SEC, on February 4, 1994.
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    As under current Paragraph 802.00, the NYSE will give consideration 
to delisting a bond issue if its aggregate market value or principal 
amount falls below $1 million, or if the issuer is unable to meet its 
obligations on the listed debt securities.\13\ The NYSE also will 
retain the discretion to remove a bond from listing if, among other 
things, ``authoritative advice [is] received that [the] security is 
without value.'' As a practical matter, the NYSE has indicated that it 
normally will not delist debt where there is value in the security and 
continued exchange trading is in the best interests of investors.\14\ 
The Exchange, however, has committed to give serious consideration to 
delisting a bond issue if the debt security has minimal or no value and 
the issuer is unable to meet its financial obligations.\15\
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    \13\See Amendment No. 1, supra, note 3. The standard will 
replace the current definition of inadequate interest coverage. See 
supra, note 4 and accompanying text.
    \14\See Amendment No. 1, supra, note 3.
    \15\Id. Amendment No. 1 provides the following example of a 
situation where the continued exchange trading of a debt security 
normally would not be considered to be in the best interests of 
investors: the issuer is in bankruptcy and files a plan of 
reorganization with no recovery for bond holders.
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    In addition, the NYSE will amend Paragraph 801.00 to specify that 
convertible bonds will be reviewed for continued listing when the 
underlying equity security is delisted,\16\ and will be delisted when 
the related security is no longer subject to real-time last sale 
reporting in the United States. Further, if the common stock is 
delisted due to a violation of the NYSE's ``corporate responsibility'' 
criteria (including, but not limited to, the outside director, audit 
committee and shareholder voting requirements),\17\ then the Exchange 
will delist all debt securities convertible into that common stock.
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    \16\Under Paragraph 801.00, other convertible securities will 
continue to be delisted when the related common stock is delisted.
    \17\See Section 3 of the Listed Company Manual.
    On a related matter, Amendment No. 1, see supra note 3, 
clarifies that, if the NYSE delists the equity securities of a 
company which is the majority owner of an issuer of NYSE listed debt 
or the guarantor thereof, the Exchange will review the listing of 
the formerly ``affiliated'' issuer's bonds, convertible or 
otherwise.
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    Finally, the NYSE has indicated that the listing and delisting 
standards for ``unaffiliated'' corporate issuers\18\ also will apply to 
certain non-corporate issuers. In particular, the proposed rule change 
specifies that sovereign issues will be evaluated on a case-by-case 
basis. The NYSE proposal also will codify the Exchange's current policy 
that only term/dollar municipal bonds may be listed.\19\
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    \18\See supra, notes 11-13 and accompanying text.
    \19\A term/dollar municipal bond is issued with a single 
maturity date (as opposed to a serial bond), and is quoted in 
dollars or as a percentage of its par value (rather than by yield). 
As such, it resembles a corporate bond. Telephone conversation 
between Fred Siesel, Director, Fixed Income Markets, NYSE, and Beth 
Stekler, Attorney, Division of Marketing Regulation, SEC, on January 
7, 1994.
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    The Exchange states that the basis under the Act for the proposed 
rule change is the requirement under section 6(b)(5) that an exchange 
have rules that are designed to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
to remove impediments to and perfect the mechanisms of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest.

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, with the requirements of section 6(b).\20\ Specifically, 
the Commission believes the proposal is consistent with section 6(b)(5) 
requirements that the rules of an exchange be designed to promote just 
and equitable principles of trade, to prevent fraudulent and 
manipulative acts, and, in general, to protect investors and the public 
interest.
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    \20\15 U.S.C. 78f(b) (1988).
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    The development and enforcement of adequate standards governing the 
initial and continued listing of securities on an exchange is an 
activity of critical importance to financial markets and the investing 
public. Listing standards serve as a means for a self-regulatory 
organization to screen issuers and to provide listed status only to 
bona fide companies with sufficient float, investor base and trading 
interest to maintain fair and orderly markets. Once a security has been 
approved for initial listing, maintenance criteria allow an exchange to 
monitor the status and trading characteristics of that issue to ensure 
that it continues to meet the exchange's standards for market depth and 
liquidity. For the reasons set forth below, the Commission believes 
that the proposed rule change will provide the NYSE with greater 
flexibility in determining which debt securities warrant inclusion in 
its bond trading and disclosure systems, without compromising the 
benefits that the Exchange's listing standards offer to investors.
    After careful review, the Commission has concluded that the initial 
listing standards in paragraphs 102.03 (for domestic issuers) and 
103.05 (for foreign issuers), as amended, should ensure that only 
substantial companies capable of meeting their financial obligations 
are eligible to have their bonds listed on the NYSE. As before, the 
proposed rule change will require that the NYSE evaluate an issuer's 
ability to cover the interest charges on its debt securities. Although 
the Exchange currently makes this interest coverage determination 
itself,\21\ the amended standards will rely instead on either the 
issuer's relationship with the NYSE or the bonds' NRSRO rating.
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    \21\See supra, note 4 and accompanying text.
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    The Commission agrees that, to the extent the NYSE has adequate 
listing standards for common stock, the Exchange reasonably may assume 
that NYSE listed companies (and certain affiliates thereof)\22\ in 
``good standing'' with the Exchange\23\ are in solid financial 
condition and do not pose a significant risk of defaulting on their 
obligations. Moreover, as the NYSE correctly notes, debt securities 
enjoy seniority over equity securities. Because the NYSE presumably 
would not have listed the junior equity issue unless it was satisfied 
with the quality of the company, the Commission is unable to conclude 
that the NYSE has no basis for its assumption that the senior debt 
issue also warrants listed status.
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    \22\See supra, text accompanying note 10.
    \23\According to the NYSE, a company is in ``good standing'' if 
it is above the relevant continued listing criteria. See, e.g., 
Paragraph 703.19 of the Listed Company Manual. Telephone 
conversation between Michael J. Simon, Milbank, Tweed, Hadley & 
McCloy; Fred Siesel, Director, Fixed Income Markets, NYSE; and Beth 
Stekler, Attorney, Division of Market Regulation, SEC, on April 11, 
1994.
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    For ``unaffiliated'' issuers, the Commission finds that it is not 
unreasonable for the Exchange to defer to the expertise of an NRSRO, 
rather than conducting its own analysis of the company's financial 
condition, as is presently the case.\24\ Although the Commission would 
be concerned by any potential misuse of NRSRO ratings, the Commission 
notes that the NRSROs routinely evaluate interest coverage, among other 
things, when they rate bonds. In addition, their methodology, unlike 
the NYSE's, incorporates even more extrinsic factors, such as 
characteristics of the issuer's industry group.\25\ The Commission 
therefore agrees with the Exchange that, under these circumstances, 
NRSRO ratings can be relied upon for determinations about the 
creditworthiness of the issuer.
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    \24\See supra, note 4 and accompanying text. The NYSE's 
definition of the term ``unaffiliated issuer'' is set forth above, 
see supra note 11.
    \25\Telephone conversation between Fred Siesel, Director, Fixed 
Income Markets, NYSE, and Beth Stekler, Attorney, Division of Market 
Regulation, SEC.
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    Moreover, the Commission is satisfied that the distinctions in 
NRSRO ratings drawn by the NYSE are valid. According to the S&P 
Corporation's debt rating definitions,\26\ bonds rated ``B'' (or 
higher) currently have the capacity to meet interest payments and 
principal repayments, whereas bonds rated ``CCC'' (or lower) are 
dependent upon favorable business, financial or economic conditions to 
meet timely payments of interest and repayment of principal. The 
Commission also believes that it is logical for the NYSE to assume that 
an unrated debt issue which is pari passu with (or senior to) an issue 
with at least a ``B'' rating would, if rated, receive an equal (or 
higher) rating. Finally, to permit the NYSE to list unrated bonds that 
are immediately junior to an investment grade issue is appropriate 
because those bonds generally would be rated no more than one rating 
category lower (i.e., a S&P Corporation ``BB'' rating).\27\
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    \26\See Standard & Poor's High Yield Directions, January 1994.
    \27\Id.
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    As for the other provisions in Paragraphs 102.03 and 103.05, the 
Commission finds that they strike an appropriate balance between 
protecting investors and enhancing the flexibility of the debt listing 
process. For instance, the proposed rule change retains the current 
requirement that, to be eligible for listing, a bond issue must have an 
aggregate market value or principal amount of at least $5 million. This 
should enable the NYSE to deny listed status to companies whose 
securities do not have sufficient liquidity for a fair and orderly 
market, without infringing upon bona fide issuers' access to the 
Exchange's bond trading and disclosure systems.
    Conversely, the Commission does not believe that eliminating the 
distribution requirement will have a significant adverse effect on 
investors in the bond market. The NYSE currently evaluates distribution 
of debt securities in an ad hoc fashion. The NYSE does not specify a 
mandatory minimum threshold for the number of bonds outstanding and/or 
the number of holders thereof but only requires a distribution 
``sufficient for trading on the Exchange.'' In the past, the Commission 
has recognized that such information may be difficult to estimate 
accurately and may be relatively less pertinent than other factors.\28\ 
From the Commission's perspective, the benefits of streamlining the 
Exchange's substantive review is appropriate, especially since the NYSE 
has discretion not to list an otherwise eligible debt issue if such 
status would be unwarranted.
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    \28\See Securities Exchange Act Release No. 32909 (September 15, 
1993), 58 FR 49537 (September 23, 1993) (File No. SR-NYSE-93-21) 
(approving amendments to Paragraph 703.06 of the Listed Company 
Manual to eliminate requirement that distribution information be 
submitted as supporting document to debt listing application).
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    In terms of the delisting criteria in Paragraph 802.00, the 
Commission has concluded that the revised standards should enable the 
NYSE to identify listed companies that may have insufficient resources 
to meet their financial obligations or whose debt securities may lack 
adequate trading depth and liquidity. This, in turn, will allow the 
Exchange to take appropriate action to protect bondholders. In this 
regard, the NYSE has indicated that it normally will not delist a debt 
security if it has value and if continued exchange trading is in the 
best interests of investors; however, the NYSE has pledged to give 
serious consideration to delisting bonds which, based on their market 
price,\29\ have minimal or no value. In applying this standard, the 
Commission expects the NYSE to consider carefully the propriety of 
continued exchange trading of the securities of bankrupt or distressed 
companies,\30\ and expects bonds with minimal value to be delisted.
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    \29\Telephone conversation between Michael J. Simon, Milbank, 
Tweed, Hadley & McCloy; Fred Siesel, Director, Fixed Income Markets, 
NYSE; Sharon Lawson, Assistant Director, Division of Market 
Regulation, SEC; and Beth Stekler, Attorney, Division of Market 
Regulation, SEC.
    \30\For example, debt of companies in bankruptcy that file a 
plan of reorganization that provides no recovery for debt holders 
should be delisted.
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    The Commission also is satisfied with the NYSE's framework for the 
listing and delisting of convertible debt securities. By authorizing 
the Exchange to list and trade bonds that are convertible into any 
equity security subject to real-time last sale reporting in the United 
States (rather than merely NYSE listed common stock), the proposed rule 
change should help the NYSE adapt to today's rapidly changing market 
environment.\31\ The Commission notes that, like the NYSE, the other 
national securities exchanges and the National Association of 
Securities Dealers, Inc. (``NASD'') make quote and trade information 
publicly available on a ``real-time'' basis. As a result, the 
Commission believes that the NYSE proposal should ensure that investors 
have information necessary to price convertible bonds.
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    \31\In addition, the proposed rule change will conform the 
NYSE's listing standards with the framework used by other markets, 
including the American Stock Exchange.
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    In the Commission's opinion, the above goals also will be furthered 
by the requirement that convertible bonds be delisted whenever the 
underlying equity security is no longer subject to a reporting 
obligation. If the related equity merely moves from the NYSE to another 
market, it is not inconsistent with the Act for the Exchange to have 
discretion to continue listing the convertible debt, unless the 
underlying security is delisted because the issuer has violated one of 
the NYSE's corporate responsibility criteria. As a general matter, the 
Commission would have serious concerns about any proposal that does not 
provide for the delisting of convertible bonds where a company acts to 
disadvantage its shareholders. The NYSE addresses this concern by 
committing to delist convertible bonds when the issuer has violated 
corporate governance listing standards.
    Finally, at this time, the Commission believes that it is 
reasonable for the NYSE to treat the debt of certain noncorporate 
issuers (i.e., foreign governments, American states and localities, 
government agencies) like the debt of ``unaffiliated'' corporate 
issuers. As such, non-corporate debt would have to meet certain rating 
requirements before listing.\32\ Nevertheless, as the NYSE gains 
experience with listing and trading sovereign and municipal bonds, the 
Commission expects the Exchange to monitor the adequacy of its existing 
standards and to develop more narrowly tailored ones where appropriate.
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    \32\See supra, notes 11-13 and accompanying text. In addition, 
such debt would have to comply with the applicable registration 
requirements of Section 12 of the Act.
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    The Commission finds good cause for approving Amendment No. 1 prior 
to the thirtieth day after the date of publication of notice of filing 
thereof. Amendment No. 1 clarifies and codifies the intent of certain 
language used in the original filing. Finally, the Commission did not 
receive any comments on the original proposal, which was noticed for 
the full statutory period.
    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 1 to the proposed rule change. 
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 rules 
change that are filed with the Commission, and all written 
communications relating to Amendment No. 1 between the Commission and 
any persons, 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 in the Commission's Public Reference Section, 
450 Fifth Street NW., Washington, DC 20549. Copies of such filing will 
also be available at the principal office of the NYSE. All submissions 
should refer to File No. SR-NYSE-93-49 and should be submitted by June 
2, 1994.

IV. Conclusion

    It is therefore ordered, Pursuant to section 19(b)(2) of the 
Act,\33\ that the proposed rule change (SR-NYSE-93-49), including 
Amendment No. 1 on an accelerated basis, is approved.

    \33\15 U.S.C. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\34\
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    \34\17 CFR 200.30-3(a)(12) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-11558 Filed 5-11-94; 8:45 am]
BILLING CODE 8010-01-M