[Federal Register Volume 60, Number 63 (Monday, April 3, 1995)]
[Notices]
[Pages 16898-16899]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-8092]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35542; File No. SR-PHLX-94-69]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval to 
Amendment No. 1 to the Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc., Relating to a One Year Pilot Program for the Trading, 
Comparison, Clearing, Settling, Listing, and Delisting of Municipal 
Securities

March 28, 1995.
    On December 20, 1994, the Philadelphia Stock Exchange, Inc. 
(``PHLX'' or ``Exchange'') filed with 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 proposal to establish a one year pilot program 
allowing the Exchange to list and trade municipal securities.

    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1994).
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    Notice of the proposal appeared in the Federal Register in 
Securities Exchange Act Release No. 35308 (January 31, 1995), 60 FR 
7251 (February 7, 1995). No comments were received on the proposed rule 
change.\3\

    \3\On March 15, 1995, the PHLX amended its proposal to clarify 
the delisting standards for municipal securities. See Letter from 
Murray L. Ross, Secretary, PHLX, to Sharon Lawson, Assistant 
Director, Division of Market Regulation, Commission, dated March 14, 
1995 (``Amendment No. 1''). Specifically, Amendment No. 1 indicates 
that PHLX Rule 810(b)(4)(d), as amended, will apply solely to 
municipal securities.
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    The PHLX proposes to initiate a one year pilot program for the 
trading, comparison, clearance, settlement, listing and delisting of 
municipal securities. Specifically, the PHLX proposes to (1) Amend PHLX 
Rules 132, ``Dealing Outside the Exchange in Securities Dealt in on the 
Exchange,'' 501, ``Specialist Appointment,'' 803, ``Criteria for 
Listing--Tier I,'' and 810, ``Suspension and Delisting Policies Based 
on Exchange Findings;'' and (2) add PHLX Rule 309, ``Municipal 
Securities,'' to provide requirements for trading, comparison, 
settlement, clearing and listing and delisting of municipal securities.
    To be eligible for listing on the Exchange, proposed PHLX Rule 
803(c)(5) provides that a municipal debt security must: (1) Have an 
aggregate market value and principal amount outstanding of at least 
$20,000,000; (2) have at least 100 public beneficial holders of record; 
and (3) be rated as investment grade by at least one nationally 
recognized rating service.
    Proposed PHLX Rule 810(b)(4)(d) allows the Exchange to delist a 
municipal debt security when the issue is (1) Not rated as investment 
grade by at least one nationally recognized rating service; (2) does 
not have at least a market value or principal amount outstanding of 
$500,000; or (3) is not held by at least 50 public beneficial holders 
of record.
    The Exchange proposes to assign any municipal security it lists to 
a specialist\4\ and to trade municipal securities in accordance with 
all PHLX regulations otherwise applicable to the trading of securities 
on the equities trading floor of the Exchange, except that pursuant to 
proposed PHLX Rule 132(d)(17) municipal securities shall be exempt from 
the provisions of the Exchange's off-board trading rule. Under proposed 
PHLX Rule 309, municipal securities will be compared, settled and 
cleared in accordance with the applicable regulations of the MSRB.

    \4\The PHLX intends to require specialist units applying for 
appointment and registration in municipal securities to be in 
compliance with the Municipal Securities Rulemaking Board (``MSRB'') 
Rule G-3 regulations regarding municipal securities principals and 
representatives. The National Association of Securities Dealers 
(``NASD'') has authority to enforce MSRB rules for listed municipal 
securities. The PHLX enforcement in this regard will not preempt or 
limit in any manner the NASD's authority to act in this area.
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    The PHLX believes that the proposed rule change is consistent with 
the requirements of section 6(b)(5) under the Act in that it is 
designed to promote the mechanism of a free and open market and to 
protect investors and the public interest.
    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, the requirements of section 6(b)(5),\5\ in that it is 
designed to promote just and equitable principles of trade, to protect 
investors and the public interest, and to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling and 
processing information with respect to, and facilitating transactions 
in, securities.

    \5\15 U.S.C. 78f(b)(5) (1988).
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    With regard to the listing standards for municipal securities 
proposed by the PHLX, the Commission notes that listing 
[[Page 16899]] standards serve as a means for a self-regulatory 
organization to screen issuers and to provide listed status only to 
issuers with sufficient 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.
    The Commission believes that the municipal securities listing and 
delisting criteria proposed by the PHLX are designed to protect 
investors and ensure the maintenance of fair and orderly markets in 
such listed securities. The PHLX's proposal provides that only 
municipal bond issuers that satisfy the criteria established in PHLX 
Rule 803(c)(5) will be considered for listing on the Exchange. 
Specifically, under PHLX Rule 803(c)(5) a municipal debt security must: 
(1) Have an aggregate market value and principal amount outstanding of 
at least $20,000,000; (2) have at least 100 public beneficial holders 
of record; and (3) be rated as investment grade by at least one 
nationally recognized rating service.
    The Commission believes that these criteria, along with any other 
information relevant to determine whether the issue is appropriate for 
exchange trading, should help to ensure that only municipal issuers 
capable of meeting their financial obligation and whose bond issues can 
support a liquid trading market will be listed on the Exchange. The 
criteria will also alert municipal issuers seeking listing on the PHLX 
of the Exchange's specific listing standards.
    The Commission notes that proposed PHLX Rule 810(b)(4)(d) allows 
the Exchange to delist a municipal debt security when the issue is (1) 
Not rated as investment grade by at least one nationally recognized 
rating service; (2) does not have at least a market value or principal 
amount outstanding of $500,000; or (3) is not held by at least 50 
public beneficial holders of record. The Commission believes that the 
delisting standards should allow the Exchange to identify issuers that 
may have insufficient resources to meet their financial obligations or 
whose debt securities may lack sufficient trading depth and liquidity 
for a fair and orderly market.
    Under the proposal, municipal securities will trade in accordance 
with all PHLX regulations otherwise applicable to the trading of 
securities on the equities trading floor of the Exchange, except that 
municipal securities will be exempt from the provisions of the PHLX's 
off-board trading rule. Because municipal securities will trade under 
the PHLX's existing regulatory regime for equities, which includes 
specialist obligations and margin requirements, the Commission believes 
that adequate safeguards are in place to ensure the protection of 
investors in municipal securities.
    Further, the Commission notes that the regulatory scheme in place 
for municipal securities will continue to apply to PHLX-listed 
municipal securities,\6\ with the additional coverage of the PHLX 
surveillance program to the trading of listed municipal securities. The 
Commission believes that this regulatory framework will provide 
sufficient oversight of municipal securities trading on the Exchange.

    \6\See note 4, supra.
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    The PHLX intends to require specialist units applying for 
appointment and registration in municipal securities to be in 
compliance with MSRB Rule G-3 regarding municipal securities principals 
and representatives. The Commission notes that this requirement is 
consistent with the rules of the MSRB and, in addition, that it is 
important that any specialist selected by the PHLX for a listed 
municipal security be familiar with the characteristics of municipal 
securities.
    Finally, the Commission notes that the PHLX's proposal to list and 
trade municipal securities is virtually identical to a proposal 
submitted by the Pacific Stock Exchange, Inc. (``PSE''), which was 
approved by the Commission.\7\ Therefore, the Commission finds that the 
proposed rules are equally acceptable for the PHLX.

    \7\See Securities Exchange Act Release Nos. 33721 (March 7, 
1994), 59 FR 11636 (order approving File No. SR-PSE-94-05) 
(establishes municipal bond trading pilot program through July 5, 
1994); 34317 (July 5, 1994), 59 FR 35546 (July 12, 1994) (order 
approving File No. SR-PSE-94-21) (extends municipal bond trading 
pilot program through November 2, 1994); 34911 (October 27, 1994), 
59 FR 55303 (November 4, 1994) (order approving File No. SR-PSE-94-
32) (extends municipal bond trading pilot program through November 
2, 1995).
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    The Commission finds good cause for approving Amendment No. 1 to 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register because 
Amendment No. 1 clarifies the proposal by indicating that the delisting 
standards for municipal securities apply solely to municipal securities 
and not to the debt of other non-listed issuers. Because Amendment No. 
1 clarifies the Exchange's proposal and raises no new regulatory 
issues, the Commission believes it is consistent with sections 6(b)(5) 
and 19(b)(2) of the Act to approve Amendment No. 1 on an accelerated 
basis.
    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 rule 
changes 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. Copies of 
such filing will also be available for inspection and copying at the 
principal office of the above-mentioned self-regulatory organization. 
All submissions should refer to the file number in the caption above 
and should be submitted by April 24, 1995.
    It Is Therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\8\ that the proposed rule change (SR-PHLX-94-69) relating to the 
pilot program for listing and trading municipal securities is approved 
until March 28, 1996.

    \8\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.\9\

    \9\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-8092 Filed 3-31-95; 8:45 am]
BILLING CODE 8010-01-M