[Federal Register Volume 59, Number 189 (Friday, September 30, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-24271]


[[Page Unknown]]

[Federal Register: September 30, 1994]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34716; File No. SR-BSE-94-10]

 

Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Boston 
Stock Exchange, Inc. Relating to Specialist Concentration

September 26, 1994.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on August 30, 1994, the Boston Stock Exchange, Inc. (``BSE'' or 
``Exchange'`) filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the self-regulatory 
organization. The Commission is granting accelerated approval and is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
---------------------------------------------------------------------------

    \1\15 U.S.C Sec. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1991).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange seeks to obtain accelerated effectiveness as to a one-
year extension of the Specialist Concentration Policy pilot program.\3\ 
This will continue to permit the Exchange's Executive Committee to 
review proposed combinations that, in the Exchange's view, may lead to 
undue concentration within the specialist community. The Exchange 
therefore requests the Commission to find good cause, pursuant to 
Section 19(b)(2) of the Act, for approving the proposed rule change 
prior to the thirtieth day after publication in the Federal Register. 
Accelerated approval is hereby granted for the reasons stated below.
---------------------------------------------------------------------------

    \3\On February 7, 1990, the Commission approved, on a six-month 
pilot basis ending August 7, 1990, a proposed rule change by the BSE 
to establish procedures for reviewing proposed combinations among 
specialist units on the Exchange. See Securities Exchange Act 
Release No. 27684 (February 7, 1990), 55 FR 5527 (approving File No. 
SR-BSE-89-05). The Commission later approved the renewal of the 
pilot program for additional one-year periods ending August 1, 1991, 
August 13, 1992, August 13, 1993, and August 13, 1994. See 
Securities Exchange Act Release Nos. 28327 (August 10, 1990), 55 FR 
33794 (File No. SR-BSE-90-11); 29551 (August 13, 1991), 56 FR 41380 
(File No. SR-BSE-91-06); 31037 (August 13, 1992), 57 FR 37854 (File 
No. SR-BSE-92-08); and 32753 (August 16, 1993), 58 FR 44707 (File 
No.SR-BSE-93-15).
---------------------------------------------------------------------------

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 III below. The self-regulatory 
organization has prepared summaries, set forth in Sections 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
    The purpose of the proposed rule change is to extend the 
concentration policy pilot program, which establishes certain standards 
based on Consolidated Tape Association (``CTA'') ranking\4\ of 
specialist stocks for reviewing certain proposed mergers, acquisitions 
and other combinations between or among specialist units. The proposed 
policy would authorize the Executive Committee of the Board of 
Governors to review proposed combinations that, in the Exchange's view, 
may lead to undue concentration within the specialist community.
---------------------------------------------------------------------------

    \4\In March 1973, the CTA was formed and the consolidated tape 
was established to disseminate last sale transaction information for 
trades executed on any of the participant exchanges or through the 
National Association of Securities Dealers Automated Quotation 
(``NASDAQ'') system. The current CTA participants include the New 
York Stock Exchange (``NYSE''), American Stock Exchange (``Amex''), 
Chicago Stock Exchange (``CHX''), Philadelphia Stock Exchange 
(``Phlx''), Pacific Stock Exchange (``PSE''), BSE, Chicago Board 
Options Exchange (``CBOE''), Cincinnati Stock Exchange (``CSE''), 
and the National Association of Securities Dealers (``NASD''). Each 
specialist stock is ranked according to the number of CTA trades in 
such stock. The ranking is based upon an average for the past four 
quarters.
---------------------------------------------------------------------------

    The Executive Committee will review any arrangement where 
previously separate specialist organizations would be operating under 
common control and would comprise:
    (a) 15% or more of the 100 most actively traded CTA stocks; or,
    (b) 15% or more of the second 100 most actively traded CTA stocks; 
or,
    (c) 20% or more of the third 100 most actively traded CTA stocks; 
or,
    (d) 15% or more of all the CTA stocks eligible for trading on the 
BSE where the Free List contains fewer than 100 issues.\5\
---------------------------------------------------------------------------

    \5\The Free List is made up of securities which are not 
registered to certain specialists and can be traded by any 
specialist.
---------------------------------------------------------------------------

    The Executive Committee shall approve or disapprove the proposed 
combination based on its assessment of the following considerations:
    (a) Specialist performance and market quality in the stocks 
subjects to the proposed combination;
    (b) The effects of proposed combination in terms of the following 
criteria:

    (i) Strengthening the capital base of the resulting specialist 
organization;
    (ii) Minimizing both the potential for financial failure and the 
negative consequences of any such failure on the specialist system 
as a whole; and
    (iii) Maintaining or increasing operational efficiencies;

    (c) Commitment to the Exchange market, focusing on whether the 
constituent specialist organizations engage in business activities that 
might detract from the resulting specialist organization's willingness 
or ability to act to strengthen the Exchange agency/auction market and 
its competitiveness in relation to other markets; and
    (d) The effect of the proposed combination on overall concentration 
of specific organizations.
    With respect to the criteria relating to the ``commitment to the 
Exchange market'', the Executive Committee would look to a variety of 
factors that extend beyond compliance with the Exchange's requirements 
for providing sufficient capital, talent and order handling services. 
For example, the Committee would review and assess each constituent 
unit's past performance on the Exchange relating to such matters as:
     Acceptance and cooperation in the development, 
implementation and enhancement to the Boston Exchange Automated 
Communications and Order-routing Network (``BEACON'');
     Efforts at resolving problems concerning customer orders;
     Willingness to facilitate early openings in order to 
compete effectively with other exchanges; and
     Willingness to voluntarily provide Execution Guarantees 
beyond the minimum required under Rule 2039A.\6\
---------------------------------------------------------------------------

    \6\See BSE Rule 2039A. The Rule states that the BSE Execution 
Guarantee shall be available to each member firm in all issues 
traded through the Intermarket Trading System (ITS) registered to a 
member specialist of the Exchange. For example, the rule imposes an 
obligation upon specialists to guarantee executions on all agency 
orders from 100 up to and including 1,299 shares.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that the basis under the Act for the proposed 
policy is Section 6(b)(5) in that the policy enables the Exchange to 
monitor the tendencies toward concentration in the specialist community 
and to intervene to prevent undue concentration. As such, it is 
designed to protect investors and the public interest, and is not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers, or to regulate by virtue of any authority 
conferred by this title matters not related to the purpose of this 
title or the administration of the Exchange.

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

    The Exchange does not believe that the proposed policy 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

    Comments have neither been solicited nor received.

III. 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 BSE. All 
submissions should refer to File No. SR-BSE-94-10 and should be 
submitted by October 21, 1994.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    The Commission finds that the BSE's proposal to extend its pilot 
program regarding specialist concentration for an additional one-year 
period is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange, 
and, in particular, the requirements of Section 6 of the Act.\7\ For 
the reasons set forth below, the Commission believes that the BSE 
proposal to extend its specialist concentration pilot furthers the 
objectives of Section 6 of the Act.
---------------------------------------------------------------------------

    \7\15 U.S.C. Sec. 78f(b)(5) (1988).
---------------------------------------------------------------------------

    The Commission believes it is necessary to extend the pilot 
program's operation in order to afford both the Exchange and the 
Commission a further opportunity to evaluate the pilot's operation 
during the Commission's consideration of permanent approval of the 
concentration rules. Although the pilot has been in effect since 
February, 1990, only two proposed combinations have triggered an 
extensive Committee review by exceeding the concentration limits set 
forth in the policy. Consequently, the Commission believes that the 
Exchange, in conjunction with the SEC, needs additional time to fully 
evaluate the operation of the concentration policy and to determine 
whether the concentration rules are enhancing the quality of the 
markets that specialist units make and thus improve the standards of 
specialist performance. The Commission believes that allowing the 
Exchange an additional one-year period in which to implement the pilot 
will enable the Exchange and the Commission to adequately address the 
effectiveness of the pilot.
    In its prior orders renewing and extending the pilot program,\8\ 
the Commission requested that the BSE develop criteria to evaluate the 
effects of its concentration rules on the activities of specialists and 
to determine, for example, whether implementation of these rules is 
increasing the performance and effectiveness of specialists and aiding 
in the prevention of undue concentration. Specifically, the Commission 
requested that the BSE submit a report to the Commission addressing, 
among other things, the following issues: the number of proposed 
specialist combinations that have triggered an Executive Committee 
review since the inception of the pilot program and the circumstances 
surrounding these reviews; whether the existence of more firms has 
increased competition among specialists for new stock allocations; 
whether the concentration rules have increased incentives for quality 
markets and higher standards for performance; and the impact that the 
specialist combination rules have had upon the competitive environment 
necessary to maintain an orderly market.
---------------------------------------------------------------------------

    \8\See supra, note 3.
---------------------------------------------------------------------------

    In response to the Commission's request, the BSE submitted a 
letter\9\ which addressed many of the issues the Commission outlined in 
previous orders. The BSE stated that, during the last pilot period, 
there have been no proposed specialist combinations that exceeded the 
concentration limits set forth in the policy.\10\ The BSE reported that 
the last combination reviewed under the concentration policy was in 
February of 1993. The acquisition was discussed in the previous pilot 
extension approval order.
---------------------------------------------------------------------------

    \9\See letter from George Mann, Senior Vice President and 
General Counsel, Boston Stock Exchange, to Amy Bilbija, Commission, 
dated September 1, 1994.
    \10\The BSE has had a total of two proposed combinations that 
exceeded the concentration limits since the inception of the pilot 
program. The first such proposed combination was discussed in 
Securities Exchange Act Release No. 29551 (August 13, 1991), 56 FR 
41380 (File No. SR-BSE-91-06). The second such proposed combination 
was discussed in Securities Exchange Act Release No. 32753 (August 
16, 1993), 58 FR 44707 (File No. SR-BSE-93-15).
---------------------------------------------------------------------------

    The Commission also asked the BSE to discuss various other issues, 
identical to the requests made during the previous one-year pilot 
periods. The BSE's responses were identical to those submitted pursuant 
to the previous pilot extension due to the absence of relevant data 
during the last year.
    During the extended pilot period, as was requested during the 
previous one-year pilot periods, the Commission expects the Exchange to 
continue to develop criteria to evaluate the effects of its 
concentration rules on the activities of specialists. In this regard, 
the Commission expects the BSE to report to the Commission by May 1, 
1995, the number of proposed specialist combinations that have 
triggered an Executive Committee review since the extension of the 
pilot program and the circumstances surrounding these reviews; whether 
competition among specialists for new stock allocations as well as 
specialists and specialist firms applying for those allocations since 
the inception of the pilot program;\11\ and whether any of the 
specialist firms that have undergone Executive Committee review have 
demonstrated an improvement in specialist evaluation results or 
displayed a higher quality of markets. In addition, the Commission 
remains interested in whether the BSE finds that the concentration 
rules have assisted the Exchange in increasing order flow and if so, 
the reasons for this conclusion, as well as the impact that the 
specialist combination rules have had upon the competitive environment 
necessary to maintain an orderly market.\12\
---------------------------------------------------------------------------

    \11\The Commission believes the BSE needs to more fully address 
and justify why the proposed concentration levels are set 
appropriately. In particular, the Commission expects the BSE to 
demonstrate that the Policy does not result in a decrease in 
competition for allocation and adversely affect the quality of the 
BSE's markets.
    \12\In evaluating the effects of the pilot, the Commission 
expects the BSE to provide specific data to support its conclusions.
---------------------------------------------------------------------------

    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of 
notice of filing thereof in the Federal Register. The Commission 
believes that accelerated approval of the extension of the pilot 
program furthers the protection of investors and the public interest 
because it allows the Exchange additional time to evaluate the 
effectiveness of the pilot program on an uninterrupted basis during the 
Commission's consideration of the Exchange's request for permanent 
approval of its rules for reviewing proposed specialist combinations 
and because the BSE's concentration policy may result in higher quality 
markets and improved standards of specialist performance. Further, the 
substance of the proposal has been noticed previously in the Federal 
Register for the full statutory period and the Commission did not 
receive any comments on it.\13\
---------------------------------------------------------------------------

    \13\See supra note 3.
---------------------------------------------------------------------------

    It Is Therefore Ordered, Pursuant to section 19(b)(2)\14\ that SR-
BSE-94-10 is hereby approved on a pilot basis through August 13, 1995.

    \14\15 U.S.C. Sec. 78s(b)(2) (1988).
---------------------------------------------------------------------------

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
---------------------------------------------------------------------------

    \15\17 CFR 200.30-3(a)(12) (1991).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-24271 Filed 9-29-94; 8:45 am]
BILLING CODE 8010-01-M