[Federal Register Volume 60, Number 151 (Monday, August 7, 1995)]
[Notices]
[Pages 40217-40219]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-19386]



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[[Page 40218]]


SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36043; File No. SR-NYSE-95-21]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Granting Accelerated Approval of Proposed Rule Change and Notice 
of Filing and Order Granting Accelerated Approval to Amendment No. 1 to 
Proposed Rule Change Relating to Amendments to 460.20

August 1, 1995.

I. Introduction

    On May 26, 1995, 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 amend Exchange Rule 460.20 to 
require an associated specialist of an approved person acting as an 
underwriter in a distribution of a security in which the associated 
specialist is registered to ``give up the book'' if the associated 
specialist and approved person do not have an exemption from Rule 10b-6 
or Rule 10b-13.

    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4 (1994).
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    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 35929 (June 30, 1995), 60 FR 35759 (July 11, 
1995). No comments were received on the proposal. On July 27, 1995, the 
Exchange submitted Amendment No. 1 to the proposed rule change.\3\ This 
order approves the proposed rule change, including Amendment No. 1, on 
an accelerated basis.

    \3\ See letter from James E. Buck, Senior Vice President and 
Secretary, NYSE, to Glen Barrentine, Senior Counsel, SEC, dated July 
26, 1995. In Amendment No. 1, the Exchange amended the NYSE rule to 
reflect more accurately the requirements under Rules 10b-6 and 10b-
13 for specialists to give up the book if the specialists and their 
approved persons do not have an exemption from such rules. See infra 
note 10 and accompanying text.
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II. Description of Proposal

    Rule 10b-6 under the Act requires a specialist organization to 
withdraw from the market when an affiliated entity is participating in 
a distribution of a security in which the specialist organization is 
registered commencing with the applicable cooling off period specified 
in Rule 10b-6 until the affiliate has completed its participation in 
the distribution.\4\ Currently, to ensure compliance with Rule 10b-6, 
NYSE Rule 460.20 requires a specialist organization to ``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 until the 
approved person (affiliate) has completed its participating in the 
distribution.\5\ At the conclusion of the approved person's 
participation, the regular specialist organization regains the ``book'' 
and resumes its specialist activities.

    \4\ Rule 10b-6 is an anti-manipulation rule that, subject to 
certain exceptions, prohibits persons engaged in a distribution of 
securities from bidding for or purchasing, or inducing others to 
purchase, such securities, any security of the same class and series 
as those securities, or any right to purchase any such security 
(``related securities'') until they have completed their 
participation in a distribution. The provisions of Rule 10b-6 apply 
to issuers, selling shareholders, underwriters, prospective 
underwriters, dealers, brokers, and other persons who have agreed to 
participate or are participating in the distribution, as defined in 
Rule 10b-6(c)(5), and their ``affiliated purchasers,'' as defined in 
Rule 10b-6(c)(6), including broker-dealer affiliates. The applicable 
cooling off period is described in (xi) and (xii) of Rule 10b-
6(a)(4). See 17 CFR 240.10b-6.
    \5\ Exchange Rule 460.10 prohibits an approved person of a 
specialist organization from engaging in any business transaction 
with any company whose stock the specialist is registered or accept 
a finder's fee from such company. See NYSE Rule 460. NYSE Rule 98, 
however, affords exemptive relief for approved persons of a 
specialist organization from restrictions found in various NYSE 
rules, including certain provisions of rule 460, that would 
otherwise be applicable to such approved persons' transactions in 
NYSE securities in which the specialist organization is registered 
or to business transactions with the issuers of such securities. See 
NYSE Rule 98, infra note 9. Therefore, an approved person of a 
specialist organization must be entitled to an exemption from Rule 
460.10 pursuant to Rule 98 to act as an underwriter in any capacity 
for a distribution of securities in which an associated specialist 
is registered.
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    The Exchange has filed a request with the Division of Market 
Regulation (``Division''), separately from this proposed rule change, 
for exemptive relief from certain provisions of Rules 10b-6 and 10b-13 
\6\ (``Petition for Exemptive Relief'').\7\ This request was based on 
competitive concerns in light of the amendments to Rule 10b-6 and new 
Rule 10b-6A that permit NASD market makers to continue to make markets 
in a stock while participating in an underwriting of that stock, 
subject to several restrictions on their level of market making 
activity (``passive market making'').\8\ In this regard, the Exchange 
believed that the failure to provide some type of exemptive relief from 
Rule 10b-6 for NYSE specialist units affiliated with underwriting firms 
may have a detrimental effect on the Exchange's ability to compete for 
issuer listings and on the willingness of large firms to invest capital 
in the specialist business. The Exchange further believed that the 
Commissions's passive market making restrictions could not be extended 
appropriately to Exchange specialists, who are subject to an 
affirmative obligation to deal when necessary to maintain a fair and 
orderly market. The Exchange believed, however, that exemptive relief 
was appropriate in light of the restrictions on the flow of information 
between the affiliated specialists and its approved person contained in 
Exchange Rule 98 \9\ along with the additional safeguards specified in 
its Petition for Exemptive Relief.

    \6\ Rule 10b-13 under the Act, among other things, prohibits a 
person making a tender offer or exchange offer for any equity 
security from, directly or indirectly, purchasing or making any 
arrangement to purchase any such security (or any security that is 
immediately convertible or exchangeable for such security), 
otherwise than pursuant to the offer, from the time the offer is 
publicly announced until its expiration, including any extension 
thereof. Rule 10b-13 also applies to the dealer-manager of a tender 
offer because the dealer-manager acts as the agent of the bidder to 
facilitate the bidder's objectives. See 17 CFR 240.10b-13.
    The Exchange is seeking relief from Rule 10b-13 to allow 
affiliated specialists to continue their market making functions in 
their respective specialty securities in connection with certain 
mergers or tender or exchange offers in which an affiliated broker-
dealer is participating.
    \7\ See letter from James E. Buck, Senior Vice President and 
Secretary, NYSE, to Jonathan G. Katz, Secretary, SEC, dated April 
28, 1995.
    \8\ See Securities Exchange Act Release No. 32117 (Apr. 8, 
1993), 58 FR 19528. In general, Rule 10b-6A permits ``passive market 
making'' in connection with the distributions of certain securities 
quoted on the Nasdaq Stock Market during the Rule 10b-6 cooling-off 
period, the period when the rule's provisions otherwise would 
prohibit such transactions. A passive market maker's bids and 
purchases, however, are limited to the highest current independent 
bid i.e., a bid of a market maker who is not participating in the 
distribution and is not an affiliated purchaser of a participating 
market maker. Furthermore, Rule 10b-6A contains certain eligibility 
criteria, volume limitations on purchases, and notification and 
disclosure requirements. See Rule 10b-6A(c)(2) (Level of Bid), 
(c)(3) (Requirements to Lower the Bid), (c)(4) (Purchase 
Limitation), (c)(5) (Limitation on Displayed Size), (c)(6) 
(Identification of a Passive Market Making Bid), (c)(7) 
(Notification and Reporting to the NASD). See 17 CFR 240.10b-
6A(c)(2) through (c)(6).
    \9\ Pursuant to Rule 98 and the guidelines promulgated 
thereunder, the specialist organization and affiliated entities must 
be operated as separate and distinct organizations, and 
``information barriers'' must be established that place substantial 
limits on access to, and communications 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 NYSE, which conducts an 
annual review of each firm to ensure that all conditions for the 
exemption are being met.
    Under this proposal, the Exchange proposes to replace the current 
``give up the book'' provision with one that would make NYSE Rule 
460.20 compatible with the Exchange's Petition for Exemptive Relief. 
The proposed rule change would allow an affiliated specialist to 
continue to make a market in the securities in which the affiliated 

[[Page 40219]]
specialist was registered during distribution, provided that it has 
obtained an Exchange exemption from Rule 460.10 pursuant to Rule 98 and 
a Commission exemption from Rule 10b-6 or Rule 10b-13.\10\ Under the 
new provision, an associated specialist would still be required to 
``give up the book'' in the subject security to another specialist 
member organization satisfactory to the Exchange, in situations where 
the associated specialist and approved person do not have an exemption 
from Rule 10b-6 or Rule 10b-13, until the book may be reacquired by the 
associated specialist in accordance with Rule 10b-6 or Rule 10b-13.

    \10\ Absent an exemption from or exception to Rule 10b-6, 
Exchange specialists that are affiliated with a person participating 
in a distribution of securities would be precluded from bidding for 
or purchasing such securities or any related securities.
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III. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    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).\11\ The Commission 
believes the proposal is consistent with the 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.

    \11\ 15 U.S.C. 78f(b) (1988 & Supp. V 1993).
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    The Commission believes that the rule change is consistent with the 
requirements of the Act in that the proposal will allow the NYSE rules 
to reflect accurately the current state of the law. In response to the 
NYSE's Petition for Relief, the Division has granted exemptions from 
Rules 10b-6 and 10b-13 to permit NYSE specialists (``Affiliated 
Specialists'') affiliated with a NYSE member firm (``Affiliated Broker-
Dealer'') to remain in the market and to continue their normal 
specialist activities during the period when the Affiliated Broker-
Dealer is engaged in a distribution of a specialty security or is 
acting as a dealer manager in a tender or exchange offer for a 
specialty security.\12\

    \12\ See Letter regarding Application of Rules 10b-6 and 10b-13 
to New York Stock Exchange Specialists (File No. TP94-293) (July 31, 
1995). The exemptions provided in this letter will expire in two 
years from the effective date of the exemptions unless otherwise 
extended. This sunset provision is consistent with the NYSE's 
proposed rule change, which would require an associated specialist 
of an approved person acting as an underwriter in a distribution to 
``give up the book'' if the associated specialist and approved 
person do not have an exemption from Rule 10b-6 or Rule 10b-13.
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    In providing the requested relief to the NYSE specialists, the 
Division has placed certain terms and conditions on the exemptions as 
well as limitations on their scope. As conditions to the exemptions, 
the Affiliated Specialist and the Affiliated Broker-Dealer must comply 
with the terms of, and the enumerated obligations imposed by, the 
exemptive letter. Moreover, the NYSE also has certain responsibilities 
to conduct surveillance of Affiliated Specialists and Affiliated 
Broker-Dealers for compliance with the conditions of the exemptions, to 
guard against manipulative conduct, and to provide an analysis of the 
operation of the exemptions to the Division.
    The amendment to Rule 460.20 would require the NYSE specialists to 
``give up the book'' during a distribution in which an approved person 
participates if the associated specialist and approved person do not 
have an exemption from Rule 10b-6 or Rule 10b-13. The Commission, 
therefore, believes that Exchange Rule 460.20 is consistent with Rules 
10b-6 and 10b-13 and any exemption as granted by the Division. The 
proposed rule change would also reaffirm, through an exchange rule, the 
obligations under Rules 10b-6 and 10b-13 of an associated specialist to 
``give up the book'' where such specialist does not have an exemption 
from such rules.
    The Commission notes that the exemptions as provided by the 
Division are subject to modification or revocation at any time the 
Commission or the Division determines that such action is necessary or 
appropriate in furtherance of the purposes of the Act. Therefore, it is 
the responsibility of the associated specialist and the approved person 
to become aware of any changes in the exemptions and to determine 
whether an exemption continues to apply to their activities. Moreover, 
the Exchange should notify its members of any modifications or 
revocation of the exemptions granted by the Division.
    Moreover, the Commission finds good cause for approving the 
proposed rule change, including Amendment No. 1, prior to the thirtieth 
day after the date of publication of notice of filing thereof. The 
Exchange's original proposal was published in the Federal Register for 
comment and no comments were received.\13\ Amendment No. 1 merely 
codifies the intention of, and what necessarily must be implied from, 
the proposed rule change: that associated specialists do not have to 
give up the book if the associated specialists and approved persons 
have an exemption from Rule 10b-6 or Rule 10b-13. Amendment No. 1 does 
not alter the substance of the NYSE's original proposal as previously 
published. Moreover, the proposed rule change, as amended, merely makes 
Exchange Rule 460.20 compatible with the exemptions granted by the 
Division; the rule change does not independently create any rights or 
obligations for NYSE specialists. Based on the above, the Commission 
finds that there is good cause, consistent with Section 6(b)(5) of the 
Act, to accelerate approval of the amended proposed rule change.

    \13\ See Securities Exchange Act Release No. 35929 (June 30, 
1995), 60 FR 35759 (July 11, 1995).
IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1. 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. Sec. 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 Exchange. All 
submissions should refer to File No. SR-NYSE-95-21 and should be 
submitted by August 28, 1995.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-NYSE-95-21), as amended, is 
approved.

    \14\ 15 U.S.C. 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) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-19386 Filed 8-4-95; 8:45 am]
BILLING CODE 8010-01-M