[Federal Register Volume 60, Number 151 (Monday, August 7, 1995)]
[Notices]
[Pages 40211-40215]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-19384]



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[[Page 40212]]


SECURITIES AND EXCHANGE COMMISSION

[Release Nos. 33-7202; 34-36044; International Series Release No. 833]


Exemptions From Rules 10b-6 and 10b-13 for New York Stock 
Exchange Specialists

August 1, 1995.
    Pursuant to delegated authority, on July 31, 1995, the Division of 
Market Regulation issued a letter (``NYSE Specialist Letter'') granting 
exemptions from Rules 10b-6 and 10b-13 under the Securities Exchange 
Act of 1934 to allow New York Stock Exchange specialists to continue to 
act in their specialist capacity during a distribution of or a tender 
offer for specialty securities when they otherwise would be subject to 
those rules because of their affiliates' participation in such a 
distribution or tender offer. The NYSE Specialist Letter has been 
issued in the context of a continuing review of Rule 10b-6, and is 
published to provide notice of the availability of these exemptions.
Margaret H. McFarland,
Deputy Secretary.
April 28, 1995.
Mr. Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street NW., 
Washington, DC 20549
    Dear Mr. Katz: The New York Stock Exchange, Inc. (the 
``Exchange'' or ``NYSE'') is writing to request relief from the 
restrictions of Rule 10b-6 for certain specialist organizations that 
are affiliated with an organization engaged in a fixed price, firm 
commitment underwriting (hereafter referred to as a 
``distribution'') of a security in which the specialist organization 
makes a market (a ``specialty stock'') where the two organizations 
are conducting their respective operations pursuant to NYSE Rule 98.
    The Exchange is also requesting relief from the restrictions of 
Rule 10b-6 and Rule 10b-13 for such specialist organizations that 
are affiliated with the dealer-manager of an exchange or tender 
offer of a specialty stock, to the extent the specialist 
organization is bidding for or purchasing the security in the course 
of market making activities and not for the purpose of participating 
in the exchange or tender offer.
    The Exchange believes that exemptive relief is appropriate in 
that (i) NYSE specialist organizations are subject to strict 
affirmative and negative obligations that restrict the specialist's 
ability to influence the price of, or condition the market for, a 
specialty stock; (ii) the Exchange's Rule 98 procedures mandate 
information barriers that preclude the flow of material non-public 
market information between a specialist organization and its 
affiliates; and (iii) the Exchange has appropriate surveillance 
capability and will conduct detailed surveillances and reviews of 
trading in conjunction with activities subject to Rule 10b-6 and 
Rule 10b-13. The Exchange proposes that the exemptive relief sought 
herein be subject to the conditions specified below. The Exchange 
undertakes to submit such monitoring reports as the Commission deems 
appropriate.
    Under separate cover, the Exchange is submitting, pursuant to 
the Commission's Rule 19b-4, a filing to amend NYSE Rule 460.20 to 
delete references to ``giving up the book'' by an Exchange 
specialist associated with a broker dealer that has obtained 
exemptive relief from specified NYSE rules pursuant to NYSE Rule 98.

Current Application of Rule 10b-6 to NYSE Specialists Affiliated 
With a Participant in a Distribution

    NYSE Rule 460.10 prohibits Exchange specialist organizations and 
their affiliates from engaging in any ``business transaction'' with 
any company in whose stock the specialist organization is 
registered. The term ``business transaction'' is interpreted to 
include, among other matters, participating in a distribution of a 
security issued by such company.
    Exchange Rule 98 provides an exemption from Rule 460.10 for 
affiliates of a specialist organization that conduct their 
operations pursuant to the Rule's requirements. The Rule 98 
exemption is available only to the affiliate; under no circumstances 
may the specialist organization itself participate in any 
distribution of a security issued by a company in whose stock the 
specialist organization is registered.
    Today, when an affiliated entity is participating in a 
distribution of a security stock, the specialist organization is 
required to withdraw from the market commencing with the applicable 
Rule 10b-6, ``cooling off'' period until the affiliate has completed 
its participation in the distribution. NYSE Rule 460.20 provides 
that the specialist organization must ``give up the book'' (i.e., 
cease to function as market maker) to an unaffiliated specialist 
organization, which then assumes all market making responsibilities 
under NYSE rules, until the approved person (affiliate) has 
completed its participation in the distribution, at which time the 
regular specialist organization regains the ``book'' and resumes its 
market making activities.

Current Application of Rule 10b-3 to NYSE Specialists Affiliated 
With a Dealer-Manager of an Exchange or Tender Offer

    Rule 10b-13 generally prohibits any person making a tender offer 
from purchasing or making arrangements to purchase the security that 
is the subject of a tender offer from the time of the public 
announcement of the tender offer until its expiration. The Exchange 
understands that the Commission staff appears to have taken the 
interpretive position the Rule 10b-13 applies generally to the 
dealer-manager in connection with a tender offer. Thus, under Rule 
10b-13, absent exemptive relief, a specialist organization 
affiliated with such dealer-manager would be prohibited from 
purchasing any such security that was a specialty stock during an 
exchange or tender offer.
    In September 1992, the Division of Market Regulation granted the 
Exchange's request that a specialist organization be exempt from 
Rules 10b-6 and 10b-13, under specified conditions, where an 
affiliate that had obtained an exemption pursuant to Rule 98 was 
participating in a distribution or acting as dealer-manager of a 
tender or exchange offer.\1\ The exemption permits the specialist 
organization to continue to function in its market capacity up until 
the period commencing five business days before the scheduled 
termination of the subject offer. The Exchange is seeking herein to 
broaden the exemption to permit the specialist organization to 
continue to function in its market making capacity during the entire 
offer period.

    \1\ See letter from William Heyman, Director, Division of Market 
Regulation, Securities and Exchange Commission to Robert McSweeney, 
Senior Vice President, Market Surveillance Division, New York Stock 
Exchange, dated September 15, 1992.
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Disparities in Regulation

    The Exchange wishes to note that currently there is a disparity 
between regulatory treatment of over-the-counter market makers and 
Exchange specialists. Market makers for over-the-counter issuers 
need not withdraw from the market if they are participating in a 
distribution of an issuer's securities, as they can continue to make 
markets subject to the passive market making tests. An NYSE 
specialist affiliated with a participant in a distribution of 
specialty security must, however, withdraw from the market, with the 
market making function then being assumed by a relief specialist. An 
over-the-counter issuer may view this disparate treatment of market 
makers as a possible reason to remain listed in the over-the-counter 
market, as it may perceive less potential disruption of the market 
making function in the over-the-counter market. Thus, the current 
regulatory scheme may have a negative impact on the Exchange's 
ability to attract new listings.
    The current disparity in regulation may also operate as a 
disincentive for large, diversified NYSE member firms to enter, and 
commit capital to, the specialist business. Such firms may have to 
weight investment banking opportunities against the potential 
negative impact, both in terms of issuer relations and operational 
efficiencies, that may result when an affiliated Specialist is 
required to cease all market making activity in a specialty security 
subject to distribution. Such a potential negative impact may make 
specializing on the NYSE appear to be less attractive as a business 
proposition.

Affirmative and Negative Obligations of Specialists Under Exchange 
Rules

    Exchange specialists are subject to affirmative and negative 
obligations with respect to their responsibilities to maintain fair 
and orderly markets. The negative obligation is codified in Exchange 
Rule 104, which provides that a specialist shall not effect a 
proprietary transaction in a specialty stock ``unless such dealings 
are reasonably necessary to permit such specialist to maintain a 
fair and orderly market, or to act as an odd-lot dealer in such 
security.'' The 

[[Page 40213]]
affirmative obligation is codified in Rule 104.10(2), which provides 
that, ``In connection with the maintenance of a fair and orderly 
market, it is commonly desirable that a member acting as specialist 
engage to a reasonable degree under existing circumstances in 
dealings for his own account when lack of price continuity, lack of 
depth, or disparity between supply and demand exists or is 
reasonably to be anticipated.''
    The affirmative and negative obligations constitute the 
foundation of the NYSE's regulation of specialists. They preclude a 
specialist from trading when there is sufficient buying and selling 
interest to maintain a fair and orderly market, and require the 
specialist to trade to minimize short-term disparities in supply and 
demand. In the context of trading by a specialist while an affiliate 
is engaged in a distribution of a specialty stock, the negative 
obligation would bar trading by a specialist to influence the price 
of the stock when the market is otherwise fair and orderly; the 
affirmative obligation similarly restricts the ability of a 
specialist to influence a stock's price by requiring the specialist 
to react to short-term imbalances in supply and demand, and trade on 
whichever side of the market will be contra to the overall market 
trend. Thus, the affirmative and negative obligations significantly 
inhibit the specialist's ability to effect transactions for market 
conditioning purposes, which is the type of transaction Rule 10b-6 
is intended to prohibit.
    We are enclosing as an attachment several pages from the 
Exchange's Floor Official Manual which discuss the affirmative and 
negative obligations in detail, and which cross-reference these 
obligations to specific restrictions on specialist's trading as 
codified in various provisions of Rule 104.
Rule 98  Information Barriers

    As noted above, this request for exemptive relief requires the 
specialist and affiliated organization to have Exchange approval 
under NYSE Rule 98 and its Guidelines. NYSE Rule 98 affords 
exemptive relief for entities in a control relationship with a 
specialist organization from restrictions in NYSE Rule 104, 104.13, 
105, 113.20 and 460.10 that would otherwise be applicable to such 
entities' transactions in securities in which the specialist 
organization is registered, or to business transaction with the 
issuers of such securities. Pursuant to Rule 98 and the implementing 
guidelines promulgated thereunder, the specialist organization and 
the affiliated entity must be operated as separate and distinct 
organizations, and information barriers must be established that 
place substantial limits on access to, and communication of, trading 
information, including positions and strategies, between the two 
organizations. Rule 98 exemptive relief is conditioned on the 
organizations' receiving prior written approval from the Exchange. 
The functional separation procedures that must be implemented 
pursuant to Rule 98 preclude the transfer of market-sensitive 
information between a specialist organization and an affiliate, and 
minimize potential conflicts of interest whereby one entity might 
otherwise be inclined to take market action for the purpose of 
benefiting the other entity.
    The Exchange notes that the procedures specified in Rule 98 are 
consistent with procedures pertaining to the establishment of 
information barriers, monitoring of such barriers, and notice (in 
the case of Rule 98, to the Exchange) as described in the 
Commission's recent exemptive letter to CS Holding (TP File No. 94-
267).
    Through Exchange Rule 342 (Supervision), each member 
organization afforded exemptive relief under Rule 98 is required to 
monitor the procedures adopted to comply with the Guidelines. The 
Exchange inspects its member organizations afforded such relief on 
an annual basis for adherence to these supervisory requirements.

Exchange Surveillance

    Since the adoption of Rule 10b-6 in 1955, the Exchange has made 
substantial investments in sophisticated surveillance procedures, 
including comprehensive audit trail submissions by member firms, and 
extensive use of software analytics designed to assist in reviewing 
this and other data available for such surveillance. For example, 
the Market Analysis and Reconstruction System (MARS) enables 
Exchange analysts to retrieve and review trading information 
dynamically and, utilizing information in the Exchange's existing 
data base, enables these analysts to review trading for anomalies 
using many combinations of analytical criteria.
    The Exchange will conduct surveillance and reviews of specialist 
trading activity when an affiliated organization is involved in 
trading activities in a specialty stock subject to Rule 10b-6 or 
Rule 10b-13 that are specifically designed to highlight such trading 
for any possible manipulative intent.

Conditions for Exemptive Relief From Rule 10b-6 and Rule 10b-13

    The Exchange believes that exemptive relief for a specialist 
organization affiliated with a participant in a distribution that 
has obtained exemptive relief pursuant to Rule 98 (an ``Affiliated 
Specialist'' and an ``Affiliated Broker-Dealer'') would be 
appropriate under the following conditions:
    1. Issuer Qualification Standards. The security being 
distributed, or any security of the same class or series as those 
securities, or any right to purchase such security, or any security 
that is the subject of a transaction to which Rule 10b-13 is 
applicable (``Subject Security'') must qualify for the two business 
day cooling-off period specified in paragraphs (a)(4) (v), (xi) and 
(xii)(A) of Rule 10b-6.
    2. Establishment of Information Barriers. The Affiliated 
Specialist and the Affiliated Broker-Dealer must have, and implement 
effectively, written policies and procedures designed to segregate 
the flow of confidential market-sensitive information, including 
distribution information, between the Affiliated Specialist and the 
Affiliated Broker-Dealer. The policies and procedures must have been 
approved by the NYSE as conforming to the requirements of NYSE Rule 
98.
    3. Monitoring of Information Barriers. During the timeframe 
commencing with the two business day cooling-off period until the 
distribution participant has completed its participation in the 
distribution (``Rule 10b-6 Covered Period''), the Affiliated 
Specialist and the Affiliated Broker-Dealer must conduct a daily 
review of transactions in the Subject Securities effected by the 
Affiliated Specialist and the Affiliated Broker-Dealer, 
respectively, and by Affiliated Purchasers, as that term is defined 
in Rule 10b-6(c)(i). Any irregular trades by the Affiliated 
Specialist, the Affiliated Broker-Dealer, and any Affiliated 
Purchaser, or suspected breaches of the Information Barriers, must 
be reported immediately to the NYSE.
    4. Notice of Breach. Should any Affiliated Specialist or 
Affiliated Broker-Dealer discover that there was a breach of the 
Information Barriers during the Rule 10b-6 Covered Period, it must 
provide immediate notice to the NYSE of such occurrence. Upon 
request of the SEC Division of market Regulation (the ``Division''), 
the Affiliated Specialist and/or Affiliated Broker-Dealer shall 
provide the Division with a written analysis of the circumstances 
surrounding that breach.
    5. Annual Compliance Review. a. As part of the annual review 
specified in Exchange Rule 342.30, each Affiliated Specialist and 
each Affiliated Broker-Dealer must include a review, conducted by a 
person independent of the business line being reviewed, of its 
compliance during the calendar year with the terms of this 
exemption, including its operation and any breaches of information 
barriers, and report on such review to its management; or (ii) 
prepare a statement (``Statement'') that it did not participate in 
any distributions of a Subject Security during the calendar year if 
such is the case. Upon a request from the Division, such reviews, 
management reports, and statements must be supplied to the Division 
within 15 days of the request.
    b. Prior to relying on this exemption, each Affiliated Broker-
Dealer and Affiliated Specialist must submit to the Division a 
written explanation of how it will comply with the review noted in 
paragraph (a) above. The explanation of the review must describe, 
among other things, the review plan, the scope of the review, how 
the review will be conducted, and the title of the person or group 
who will conduct the review.
    6. NYSE Surveillance. The NYSE shall establish and implement 
special surveillance procedures to review all trading by the 
Affiliated Specialist and Affiliated Broker-Dealers in Subject 
Securities during the Rule 10b-6 Covered Period, including on-line 
surveillance of trading by the Affiliated Specialist and off-line 
surveillance of trading by Affiliated Broker-Dealers. The NYSE also 
will review trading in Subject Securities by the Affiliated 
Specialist and Affiliated Broker-Dealers for a ten business day 
period prior to the commencement of the Rule 10b-6 Covered Period 
and for two business days thereafter. With respect to transactions 
subject to Rule 10b-13 (the ``Subject Offer''), the NYSE will review 
all trading by the Affiliated Specialist for the period commencing 
with public announcement of the Subject Offer, and reconstruct all 
Affiliated Specialist trading on a daily basis 

[[Page 40214]]
from the period two business days prior to the commencement of the 
Subject Offer until the conclusion of the Subject Offer, to detect 
possible market manipulation and to monitor compliance by the 
Affiliated Specialist with its obligations under NYSE rules.
    7. Notice of Participation. Affiliated Broker-Dealer must notify 
the NYSE of their participation in any distribution during which the 
Affiliated Specialist will continue its specialist activities in 
Subject Securities pursuant to the exemption granted herein. At a 
minimum, the Affiliated Broker-Dealer must provide the NYSE advance 
notice, on the business days prior to commencement of the Rule 10b-6 
cooling-off period, of the dates of the Rule 10b-6 Covered Period 
and notice of the completion of the distribution.
    8. Recordkeeping. A. All documents required under this Exemption 
shall be kept for a period of not less than two years. Reports of 
annual compliance reviews must be retained for a period of three 
years.
    b. None of the requirements of these exemptions shall have any 
effect upon the obligations of any Affiliated Specialist or 
Affiliated Broker-Dealer to make, preserve, or produce records 
pursuant to any other provision of the federal securities laws, or 
the rules of the Exchange.
    9. Disclosure. The Affiliated Broker-Dealer shall include in the 
``Plan of Distribution'' section of the prospectus, pursuant to Rule 
408 under the Securities Act of 1933, a brief description of the 
activities of the Affiliated Specialist and the exemption granted 
herein. When an Affiliated Broker-Dealer is participating in a 
distribution as a managing or co-managing underwriter, the inside 
front cover page of the prospectus shall display prominently a 
statement to the effect that the Affiliated Specialist will act in 
its specialist capacity in the Subject Security pursuant to the 
exemption granted herein.
    10. Analysis. The NYSE will provide the Division with a written 
analysis of the operation of the exemption granted herein for the 
18-month period commencing from the date exemptive relief is 
granted.
    In all other respects, the Affiliated Specialist and its 
Affiliated Broker-Dealer must comply with the provisions of Rules 
10b-6 and 10b-13. No bids or purchases of Subject Securities by the 
Affiliated Specialist or Affiliated Broker-Dealers may be effected 
for the purpose of creating actual, or apparent, active trading in a 
Subject Security or raising the price of a Subject Security. In 
addition, Affiliated Specialists and Affiliated Broker-Dealers 
availing themselves of the exemption herein must comply with the 
anti-fraud and anti-manipulation provisions of the Securities 
Exchange Act of 1934, particularly Section 9(a), Section 10(b), and 
Rule 10b-5 thereunder.
    We have enclosed a description of surveillance of specialist 
trading activity when an affiliate is engaged in a distribution of a 
specialty security. Confidential treatment is requested pursuant to 
the Freedom to Information Act and the applicable SEC rules 
thereunder. Such treatment is requested on the grounds, among 
others, that the information submitted may contain confidential 
financial data of private parties as well as sensitive surveillance 
data, disclosure of which may significantly impair the effectiveness 
of the Exchange's self-regulatory mechanism. Accordingly, should any 
request be made for disclosure of these materials, or their 
contents, we ask that you notify us of this fact immediately, giving 
us an opportunity to interpose our objections.

        Sincerely,
James E. Buck,
Senior Vice President and Secretary.
July 31, 1995.
Mr. James E. Buck,
Senior Vice President and Secretary,
New York Stock Exchange, Inc.,
11 Wall Street,
New York, N.Y. 10005.

Re: Application of Rules 10b-6 and 10b-13 to New York Stock Exchange 
Specialists File No. TP 94-293
    Dear Mr. Buck: In regard to your letter dated April 28, 1995, as 
supplemented by conversations with the staff, this response thereto 
is attached to the enclosed photocopy of your correspondence. By 
doing this, we avoid having to recite or summarize the facts set 
forth in your letter. Each defined term in this letter has the same 
meaning as defined in your letter unless otherwise noted herein.\1\

    \1\ The letter supersedes our letter dated September 15, 1992, 
which granted exemptions from Rules 10b-6 and 10b-13 under the 
Securities Exchange Act of 1934 (``Exchange Act'') to permit 
specialists affiliated with member broker-dealer organizations to 
continue to function as specialists in their respective speciality 
securities in connection with certain mergers and tender or exchange 
offers in which the affiliated broker-dealer participates in a 
distribution or acts as dealer-manager of a tender or exchange 
offer.
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    Response:
    Subject to certain exceptions, Rule 10b-6 under the Securities 
Exchange Act of 1934 (``Exchange Act'') prohibits persons 
participating in a distribution of securities and their ``affiliated 
purchasers,'' as defined in paragraph (c)(6)(i) of Rule 10b-6 
(``Affiliated Purchaser''), from bidding for or purchasing, or 
inducing others to bid for or purchase, such securities, or any 
security of the same class and series as those securities, or any 
right to purchase any such security (``Subject Securities''), until 
they have completed their participating in the distribution. 
Paragraph (a)(4)(xi) (``exception ix'') of Rule 10b-6 excepts from 
this prohibition bids for or purchases of the Subject Securities 
effected by an underwriter, prospective underwriter, or dealer, and 
their affiliated purchasers, prior to two or nine business days 
before the commencement of offers or sales of the security to be 
distributed (``cooling-off period''). Once the cooling-off period 
commences, Rule 10b-6 requires the distribution participant and its 
affiliated purchasers to cease bidding for or purchasing the Subject 
Securities until the distribution participant has completed its 
participation in the distribution (``Rule 10b-6 Covered Period''), 
as set forth in paragraph (c)(3) of Rule 10b-6.
    Because a New York Stock Exchange, Inc. (``NYSE'') specialist 
organization (``Affiliated Specialist'') affiliated with a 
distribution participant would be an Affiliated Purchaser, such 
Affiliated Specialist would be required to suspend its specialist 
activities in a Subject Security during the applicable cooling-off 
period until any affiliated broker-dealer (``Affiliated Broker-
Dealer'') has completed its participation in the distribution.
    Rule 10b-13, among other things, prohibits a person making a 
cash tender offer or exchange offer for an equity security from, 
directly or indirectly, purchasing or making any arrangement to 
purchase such security or any security which is immediately 
convertible into or exchangeable for such security, otherwise than 
pursuant to the offer, from the time the offer is publicly announced 
until its expiration (``Rule 10b-13 Covered Period''). Rule 10b-13 
applies to the dealer-manager of the offer (and affiliates of the 
dealer-manager, including an Affiliated Specialist) because the 
dealer-manager acts as the agent of the bidder to facilitate the 
bidder's objectives.
    Currently, to ensure compliance with Rule 10b-6(a)(4)(xi), the 
NYSE requires the Affiliated Specialist to suspend its specialist 
activities in a Subject Security during the applicable cooling-off 
period specified in Rule 10b-6, until the Affiliated Broker-Dealer 
has completed its participation in the distribution. Specifically, 
NYSE Rule 460.20 provides that the Affiliated Specialist must ``give 
up the book'' (i.e., suspend its specialist activities) to a 
specialist organization unaffiliated with any distribution 
participant, which then assumes all specialist responsibilities 
under NYSE rules. When the Affiliated Broker-Dealer has completed 
its participation in the distribution, the Affiliated Specialist may 
regain the ``book'' and resume its specialist activities in the 
Subject Security.
    On the basis of your representations and the facts presented, 
particularly the affirmative and negative obligations that govern 
specialist trading under NYSE Rule 104; the provisions of NYSE Rule 
98 that require information barrier policies and procedures that 
segment information between the Affiliated Specialist and its 
Affiliated Broker-Dealer; and NYSE surveillance procedures designed 
to detect specialist activity that may condition the market for a 
Subject Security during a distribution, and without necessarily 
concurring in the analysis in your letters, the Commission hereby 
grants exemptions from Rules 10b-6 and 10b-13 to Affiliated 
Specialists and their Affiliated Broker-Dealers to permit the 
Affiliated Specialists to continue to bid for and purchase Subject 
Securities as a specialist during the Rule 10b-6 Covered Period and 
the Rule 10b-13 Covered Period, as applicable, subject to the 
following conditions:
    1. Scope of the Exemptions. These exemptions apply to mergers, 
exchange offers, and firm commitment, fixed price offerings that are 
distributions for purposes of Rule 10b-6, and tender and exchange 
offers subject to Rule 10b-13. The Subject Securities must have a 
minimum price of five dollars per share and a minimum public float 
of 400,000 shares, as computed in accordance with Rule 10b-6(c)(7).
    2. Establishment of Information Barriers. The Affiliated 
Specialist and the Affiliated 

[[Page 40215]]
Broker-Dealer must have, and implement effectively, written policies 
and procedures designed to segregate the flow of confidential 
market-sensitive information, including distribution information, 
between the Affiliated Specialist and the Affiliated Broker-Dealer 
(``Information Barriers''). The policies and procedures must have 
been approved by the NYSE as conforming to the requirements of NYSE 
Rule 98.
    3. Monitoring of Information Barriers. During the Rule 10b-6 
Covered Period or Rule 10b-13 Covered Period, as applicable, the 
Affiliated Specialist and Affiliated Broker-Dealer reasonably must 
monitor for compliance with, and must inquire into possible breaches 
of, Information Barriers. Any inquiries must be documented, and the 
underlying records, including any analyses, inter-office memoranda, 
and employee statements, must be made available promptly to the 
Division of Market Regulation (``Division'') upon request.
    4. Notice of Breach. Should any Affiliated Specialist or 
Affiliated Broker-Dealer discover that there was a breach of the 
Information Barriers during the Rule 10b-6 Covered Period and Rule 
10b-13 Covered Period, as applicable, it must provide immediate 
notice to the NYSE of such occurrence. Upon request of the Division, 
the Affiliated Specialist or Affiliated Broker-Dealer shall provide 
the Division with a written analysis of the circumstances 
surrounding the breach.
    5. Annual Compliance Review. a. Each Affiliated Specialist and 
each Affiliated Broker-Dealer must annually: (i) conduct an 
independent review (``Annual Compliance Review'') of its compliance 
during the calendar year with the terms of these exemptions, 
including their operation and any breaches of information barriers, 
and report on such review to its management; or (ii) prepare a 
statement (``Statement'') that it did not participate in any 
distribution or tender offer involving a Subject Security during the 
calendar year if such is the case. The Annual Compliance Review must 
be conducted by an independent person acceptable to the Division, 
and may be conducted in conjunction with the annual review specified 
in NYSE Rule 342.30. Upon a request from the Division, such reviews, 
management reports, and statements shall be supplied to the Division 
within 15 days of the request.
    b. Prior to relying on these exemptions, each Affiliated Broker-
Dealer and Affiliated Specialist must submit to the Division a 
written explanation of how it will comply with the Annual Compliance 
Review. The explanation of the Annual Compliance Review. The 
explanation of the Annual Compliance Review must describe, among 
other things, the review plan, the scope of the review, how the 
review will be conducted, and the independent person, who will 
conduct the review.
    6. NYSE Surveillance. The NYSE shall establish and implement 
special surveillance procedures to review all trading by the 
Affiliated Specialist and Affiliated Broker-Dealers in Subject 
Securities during the Rule 10b-6 Covered Period, including on-line 
surveillance of trading by the Affiliated Specialist and off-line 
surveillance of trading by Affiliated Broker-Dealers. The NYSE also 
will review trading in Subject Securities by the Affiliated 
Specialist and Affiliated Broker-Dealers for a ten business day 
period prior to the commencement of the Rule 10b-6 covered Period 
and for two business days thereafter. With respect to tender offers 
subject to Rule 10b-13, the NYSE will review all trading by the 
Affiliated Specialist for the period commencing with a public 
announcement of the tender offer, and reconstruct all Affiliated 
Specialist trading on a daily basis from the period as of two 
business days prior to the commencement of the tender offer until 
the offer's expiration.
    7. Notice of Participation. Affiliated Broker-Dealers shall give 
timely notice to the NYSE of their participation in any distribution 
or tender offer during which the Affiliated Specialist will continue 
its specialist activities in Subject Securities pursuant to the 
exemptions granted herein. The Affiliated Broker-Dealer must provide 
the NYSE advance notice prior to the commencement of the Rule 10b-6 
Covered Period and Rule 10b-13 Covered Period, as applicable, and 
notice of the completion of the distribution and tender offer, as 
applicable.
    8. Recordkeeping. a. All documents required under these 
exemptions shall be kept for a period of not less than two years. 
Reports of Annual Compliance Reviews must be retained for a period 
of three years.
    b. None of the requirements of these exemptions shall have any 
effect upon the obligations of any Affiliated Specialist or 
Affiliated Broker-Dealer to make, preserve, or produce records 
pursuant to any other provision of the federal securities laws or 
other regulatory requirements.
    9. Disclosure. a. The Affiliated Broker-Dealer shall include in 
the ``Plan of Distribution'' section of the prospectus, pursuant to 
Rule 408 under the Securities Act of 1933, a brief description of 
the activities of the Affiliated Specialist and the exemptions 
granted herein, as applicable. When an Affiliated Broker-Dealer is 
participating in a distribution as a managing or co-managing 
underwriter, the inside front cover page of the prospectus shall 
display prominently a statement to the effect that the Affiliated 
Specialist will act in its specialist capacity in the Subject 
Security pursuant to the exemptions granted herein.
    b. At the commencement of the distribution or tender offer, the 
Affiliated Broker-Dealer shall disclose to the market the fact of 
the distribution or tender offer and of the Affiliated Specialist's 
continuation as a specialist in the Subject Security, pursuant to 
the exemptions granted herein.
    10. Rule 10b-13 Condition. The Affiliated Specialist may tender 
only those Subject Securities into an exchange offer that it has 
acquired in a manner consistent with its specialist obligations 
under NYSE Rule 104.
    11. Analysis. The NYSE will provide the Division with a written 
analysis of the operation of the exemptions granted herein for the 
18 month period beginning on the date of this letter. On or before 
April 30, 1997, the Division will notify the NYSE whether the 
exemptions should be extended, modified or terminated. Unless 
otherwise extended, these exemptions will expire on July 31, 1997.
    The foregoing exemptions from Rules 10b-6 and 10b-13 are 
strictly limited to the application of those rules to activities by 
Affiliated Specialists, acting in their specialist capacity, as 
described above, and are subject to compliance with the conditions 
set forth above. These exemptions are subject to modification or 
revocation if at any time the Commission or Division determines that 
such action is necessary or appropriate in furtherance of the 
purposes of the Exchange Act.\2\

    \2\ In 1994, the Commission published a concept release 
regarding the anti-manipulation regulation of securities 
distributions, which sought comment on, among other things, the 
application of Rule 10b-6 to affiliated purchasers. See Securities 
Exchange Act Release No. 33924 (April 19, 1994), 59 FR 21681. In 
light of the comments received in response to that release, the 
Commission may determine to undertake rulemaking or other action 
that may supersede these exemptions.
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    No bids or purchases of Subject Securities by the Affiliated 
Specialist or Affiliated Broker-Dealers shall be made for the 
purpose of creating actual, or apparent, active trading in a Subject 
Security or raising the price of a Subject Security. In addition, 
Affiliated Specialists and Affiliated Broker-Dealers availing 
themselves of this exemption are directed to the anti-fraud and 
anti-manipulation provisions of the Exchange Act, particularly 
Section 9(a), (10)(b), 14(e) and Rules 10b-5 and 14e-3 thereunder. 
Responsibility for compliance with these and any other applicable 
provisions of the federal securities laws must rest with the 
Affiliated Specialist, the Affiliated Broker-Dealer, and their 
Affiliated Purchasers. The Commission expresses no view with respect 
to any other questions that the proposed transaction may raise, 
including, but not limited to, the applicability of any other 
federal or state laws.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Brandon Becker,
Director.
[FR Doc. 95-19384 Filed 8-4-95; 8:45 am]
BILLING CODE 8010-01-M