[Federal Register Volume 59, Number 137 (Tuesday, July 19, 1994)]
[Unknown Section]
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From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17523]


[[Page Unknown]]

[Federal Register: July 19, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34367; File No. SR-BSE-94-4]

 

Self-Regulatory Organizations; Boston Stock Exchange, Inc.; Order 
Approving Proposed Rule Change and Notice of Filing and Order Granting 
Accelerated Approval of Amendment Nos. 1 and 2 to Proposed Rule Change 
Relating to Listing Requirements for Common Stock.

July 13, 1994.
    On February 25, 1994, the Boston Stock Exchange, Inc. (``BSE'' 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 amend its listing requirements 
for securities listed on the Exchange. On June 7, 1994, the BSE 
submitted to the Commission Amendment No. 1 to the proposed rule 
change.\3\ On June 9, 1994, the BSE submitted to the Commission 
Amendment No. 2 to the proposed rule change.\4\
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    \1\15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1994).
    \3\See letter from Neal E. Sullivan, Vice President, Listings 
and Government Relations, BSE, to Louis A. Randazzo, Attorney, 
Office of Derivative and Exchange Oversight, SEC, dated June 2, 
1994. Amendment No. 1 proposed that the number of required 
beneficial holders be changed from 500 to 600, instead of to 750 as 
originally requested.
    \4\See letter from Neal E. Sullivan, Vice President, Listings 
and Government Relations, BSE, to Louis A. Randazzo, Attorney, 
Office of Derivative and Exchange Oversight, SEC, dated June 8, 
1994. Amendment No. 2 changed the proposal to state that the 
Exchange shall file and application for delisting should the company 
fail to meet certain requirements within 30 days of suspension, 
rather than 90 days as originally proposed.
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    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 33827 (March 28, 1994), 59 FR 15754 (April 4, 
1994). No comments were received on the proposal. This order approves 
the proposed rule change, and grants accelerated approval to Amendment 
Nos. 1 and 2.

I. Description of the Proposal

    The Exchange is amending Chapter XXVII, Section 1 of the BSE Rules 
to revise the listing requirements for initial listing of securities on 
the Exchange. The Exchange will impose more stringent listing criteria 
by increasing mandatory minimum requirements, modernizing the language 
of the rule, and responding to the Commission's concerns regarding 
certain issuers and promoters seeking listing on regional exchanges 
solely as a means to avoid the requirements of Rule 15c2-6 under the 
Act.\5\
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    \5\Rule 15c2-6 provides, in part, that as a means reasonably 
designed to prevent fraudulent, deceptive, or manipulative acts or 
practices, it is unlawful for a broker or dealer to sell a 
designated security to, or to effect the purchase of a designated 
security unless certain conditions are fulfilled, such as, approving 
a person's account for transactions in designated securities by, 
among other things, obtaining information concerning the person's 
financial situation, investment experience, and investment 
objectives. See 17 CFR 240.15c2-6 (1994). The Commission enacted 
this rule to address the concern with regard to the widespread 
incidence of misconduct by some broker-dealers in connection with 
transactions in low-priced stocks, commonly referred to as ``penny 
stocks,'' that are traded predominantly in the over-the-counter 
market. Because exchange-listed securities are exempt from the rule, 
stringent quantitative listing and maintenance standards for 
exchange-listed securities should help ensure that certain issuers 
do not circumvent the rule's requirements by seeking to list their 
securities on regional exchanges.
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    Specifically, the BSE is amending the listing requirements for 
common stock relating to tangible assets, public float, beneficial 
stockholders, and minimum bid prices.
    The Exchange is increasing the portion of the required total assets 
($3,000,000) that must constitute tangible assets. The amount of 
required tangible assets has been increased from $1,500,000 to 
$2,000,000. The Exchange defines tangible assets as assets less any 
intangible assets. Intangible assets currently include, but are not 
limited to, goodwill, patents, licenses, and trademarks. This 
definition is being amended to include other assets as the Exchange 
shall deem intangible.\6\ Additionally, the BSE is increasing the 
amount of required public float from 500,000 shares to 750,000 shares, 
exclusive of shares held by directors, officers or other concentrated 
holdings of five percent or more (currently 10% or more).
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    \6\See BSE Chapter XXVII, Paragraph 2260, Section 1.
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    The BSE is also amending the requirement relating to the minimum 
number of beneficial stockholders.\7\ Specifically, the Exchange is 
increasing the number of required beneficial stockholders from 500 to 
600, exclusive of the holdings of directors, officers or other 
concentrated holdings of five percent or more (currently 10% or more). 
In addition, the BSE is adding a delisting provision to the minimum 
stockholder requirement. Currently, with respect to a company which 
seeks to list a common stock issue following an initial public 
offering, the Exchange must receive assurances from the company or its 
representatives that the minimum beneficial stockholder requirement 
will be met following the distribution of the shares. If not met within 
six months of listing, the Exchange will take action to suspend 
dealings in the specific issue until the stockholder requirement is 
met. The BSE is adopting a provision that limits the period in which a 
company, listed following an initial public offering, can remain below 
the beneficial stockholder requirement once dealings in the issue have 
been suspended. Specifically, if a company fails to meet the beneficial 
stockholder requirement within 30 days of the suspension of dealings in 
the issue, the Exchange shall file an application for delisting with 
the Commission.\8\
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    \7\The Exchange defines a ``beneficial holder'' as the ultimate 
owner of the stock even though the stock may be kept in street name. 
See BSE Chapter XXVII, Section 1(C).
    \8\A security registered with a national securities exchange may 
be stricken from listing and registration pursuant to Section 12(d) 
of the Act, and rule 12d2-2 thereunder. SEC Rule 12d2-2 contains the 
Commission's procedures for delisting a security from an exchange, 
including, but not limited to, a requirement to file an application 
for delisting with the Commission. See 15 U.S.C. Sec. 781(d) (1988); 
17 CFR 240.12d2-2 (1994).
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    Furthermore, the BSE is amending the minimum bid price required for 
listing. For a company involved in an initial public offering, the BSE 
is increasing the minimum bid price from $1.00 per share to $2.00 per 
share at the time of listing. The new standards require a company not 
involved in an initial public offering to maintain a bid price of $2.00 
per share for 45 days prior to listing up from $1.00 per share for 30 
days prior to listing.
    Finally, the BSE is amending the listing requirement relating to 
net tangible assets and net income. The common stock listing criteria 
relating to net tangible assets and net income currently requires that 
the company have either net income of $100,000 in two of the past three 
years, or net tangible assets in the amount of $500,000. The BSE is 
increasing this criteria to require either net income of $100,000 in 
two of the past three years, or in the alternative, $2,000,000 in net 
tangible assets.\9\
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    \9\The Exchange defines ``net tangible assets'' as stockholders' 
equity less any intangible assets as described in Paragraph A of 
Section 1, Chapter XXVII of the BSE Rules. See also, supra note 6 
and accompanying text.
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    The Exchange believes that the proposed rule change is consistent 
with Section 6(b)(5) under the Act in that it is designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to perfect the mechanism of a free and 
open market system, and, in general, to protect investors and the 
public interest.

II. Discussion

    The development and enforcement of adequate standards governing the 
listing of securities on an exchange is an activity of critical 
importance to exchange markets and to the investing public. Listing 
standards serve as a means for the self-regulatory organizations to 
screen issuers and to provide listed status only to bona fide companies 
with substantial float, investor base, and adequate financial stability 
to ensure sufficient liquidity for fair and orderly markets.
    The Commission believes that the Exchange's rule change is 
consistent with the requirements of the Act and the rules and 
regulations thereunder and, in particular, the requirements of Section 
6(b)(5) of the Act.\10\ Section 6(b)(5) of the requires, among other 
things, that an exchange have rules that are designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, and to protect investors and the public 
interest.
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    \10\15 U.S.C. Sec. 78f(b)(5) (1988).
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    The Commission believes that the amendments to Chapter XXVII, 
Section 1, which increase certain BSE requirements for listing common 
stock, should benefit investors trading these securities at the 
Exchange. The Commission believes that the revised listing requirements 
should help to ensure that only legitimate companies with substantial 
public float, investor base, and demonstrated financial stability would 
be listed on the BSE. The new requirements also should enable the 
Exchange to assure that a fair and orderly market can be maintained in 
BSE listed securities. In particular, increasing the required minimum 
number of beneficial stockholders to 600 and the number of outstanding 
public float to 750,000 shares should help to ensure a wide public 
distribution of an issuer's stock, and a minimum initial level of 
liquidity in BSE listed securities. A wider public distribution of 
shares resulting from a larger number of holders will decrease the 
opportunities for manipulation, and will help create a more liquid 
market for trading.
    Moreover, the Commission believes that the more stringent 
requirements to be met will prevent the continuous listing of a company 
that fails to meet the minimum listing standards. Because the BSE will 
file a delisting application upon a company's failure to meet the 
minimum beneficial shareholder (600) requirement within 30 days of 
suspension of dealings in the issue,\11\ the liquidity of the 
marketplace will be preserved and investors will be protected.
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    \11\As stated above, currently, with respect to a company which 
seeks to list on the BSE following an initial public offering, the 
Exchange must receive assurances from the company or its 
representatives that the minimum beneficial stockholder requirement 
will be met following the distribution of the shares. If not met 
within six months of listing, the Exchange shall take action to 
suspend dealings until the stockholder requirement is met.
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    In addition, the increased requirements would enable the BSE to 
verify the financial health of the company by requiring upon listing a 
higher minimum bid price per share, and a higher amount of tangible 
assets. For example, the amendment increases the proportion of total 
assets required ($3 million) to qualify as tangible assets from 
$1,500,000 to $2,000,000.\12\ It also requires that a listed company 
have either net income of $100,000 in two of the past three years, or 
net tangible assets in the amount of $2,000,000. Additionally, with 
respect to an initial public offering, the amendment increases the 
minimum bid price at the time of listing from $1 to $2 per share. With 
respect to a company not involved in an initial public offering, a 
minimum bid price of $2 per share must be maintained for 45 days prior 
to listing. The Commission believes that these increased listing 
standards should help ensure that only companies with sufficient 
financial resources to meet their financial obligations continue to be 
listed on the Exchange.
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    \12\The Exchange is not changing the listing standard relating 
to the amount of total assets. Current listing standards require a 
company to have at least $3,000,000 in total assets.
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    Finally, the Commission believes that the proposed rule change will 
increase the effectiveness of Rule 15c2-6 under the Act.\13\ The 
Commission adopted Rule 15c2-6 to address a growing concern with the 
widespread incidence of misconduct by some broker-dealers in connection 
with transactions in low-priced stocks, commonly referred to as ``penny 
stocks.'' These stocks are traded predominantly in the over-the-counter 
market and quoted in the ``pink sheets.'' Rule 15c2-6, which became 
effective on January 1, 1990, imposes various sales practice 
requirements on broker-dealers who recommend purchases of certain low-
priced securities to persons who are not established customers. Because 
exchange-listed securities or securities authorized for quotation on 
the National Association of Securities Dealers, Inc.'s Automated 
Quotation (``NASDAQ'') system are exempt from Rule 15c6-6,\14\ 
stringent quantitative listing and maintenance standards for exchange-
listed securities should help ensure that certain issuers do not 
circumvent the requirements of this rule by seeking to list their 
securities on regional exchanges. As the Commission noted in the 
release adopting Rule 15c2-6, it expects the exchanges to join it in 
closely monitoring for fraudulent sales practices in exchange-listed 
securities in order to prevent the transfer of such activities from the 
pink sheet market to the exchange market.\15\ The new, more stringent 
listing requirements of the BSE will help prevent low-priced securities 
of companies without substantial float, assets, and shareholders from 
evading the application of Rule 15c2-6 by listing on the BSE.
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    \13\17 CFR 240.15c2-6 (1994).
    \14\Rule 15c2-6 exempts from its requirements securities that 
are registered on a national securities exchange that makes 
transaction reports available pursuant to Rule 11Aa3-1 under the Act 
or approved for quotation in the NASDAQ system. 17 CFR 240.15c2-6(c) 
(1994). See surpa note 5.
    \15\See Securities Exchange Act Release No. 27160 (August 22, 
1989), 54 FR 35468 (August 28, 1989).
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    The Commission finds good cause for accelerated approval of 
Amendment Nos. 1 and 2 to the rule change prior to the thirtieth day 
after publication of notice of filing thereof. The BSE's proposed 
listing requirements were published in the Federal Register for the 
full statutory period and no comments were received.\16\ Amendment Nos. 
1 and 2 modify the rule filing to make certain adjustments to the rule 
change that are not substantially more burdensome and that leave its 
overall structure unchanged. The Commission finds that accelerated 
approval of Amendment Nos. 1 and 2 is necessary in order for the BSE to 
be able to effectuate its new listing standards in a timely manner upon 
approval.
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    \16\See Securities Exchange Act Release No. 33827 (March 28, 
1994), 59 FR 15754 (April 4, 1994).
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III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment Nos. 1 and 2. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, 
D.C. 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. Sec. 552, will be available for inspection and 
copying at the Commission's Public Reference Room. Copies of Amendment 
Nos. 1 and 2 will also be available for inspection and copying at the 
principal office of the BSE. All submissions should refer to File No. 
SR-BSE-94-4 and should be submitted by August 9, 1994.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\17\ that the proposed rule change (SR-BSE-94-4), including 
Amendment Nos. 1 and 2 on an accelerated basis, is approved.

    \17\15 U.S.C. Sec. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-17523 Filed 7-18-94; 8:45 am]
BILLING CODE 8010-01-M