[Federal Register Volume 60, Number 211 (Wednesday, November 1, 1995)]
[Notices]
[Pages 55615-55617]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-27130]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36417; File No. SR-BSE-95-12]

Self-Regulatory Organizations; Boston Stock Exchange, Inc.; Order 
Granting Approval to Proposed Rule Change and Notice of Filing and 
Order Granting Accelerated Approval of Amendment No. 1 to Proposed Rule 
Change Relating to Specialist Concentration
October 25, 1995.
    On June 19, 1995, the Boston Stock Exchange, Inc. (``BSE'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``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 seeking permanent approval of the Exchange's 
Specialist Concentration Policy.

    \1\15 U.S.C. 78s(b)(1).
    \2\17 CFR 240.19b-4.
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    The proposed rule change was published for comment in the Federal 
Register on July 25, 1995.\3\ No comments were received on the 
proposal. On October 18, 1995, the BSE submitted Amendment No. 1 to the 
proposed rule change.\4\ This order approves the proposed rule change. 
In addition, Amendment No. 1 is approved on an accelerated basis.

    \3\Securities Exchange Act Release No. 35987 (July 18, 1995), 60 
FR 38065.
    \4\See Letter from Karen Aluise, Assistant Vice President, BSE, 
to Glen Barrentine, Team Leader, SEC (Oct. 13, 1995). Amendment No. 
1 is described infra at note 8 and accompanying text.
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    The Exchange's current policy regarding the concentration of 
specialist units was first approved by the Commission on a six-month 
pilot basis ending August 7, 1990.\5\ The Commission later approved the 
renewal of the pilot program for additional one-year periods through 
September 26, 1995.\6\

    \5\Securities Exchange Act Release No. 27684 (Feb. 7, 1990), 55 
FR 5527 (approving File No. SR-BSE-89-05).
    \6\See Securities Exchange Act Release Nos. 28327 (Aug. 10, 
1990), 55 FR 33794 (approving File No. SR-BSE-90-11); 29551 (Aug. 
13, 1991), 56 FR 41380 (approving File No. SR-BSE-91-06); 31037 
(Aug. 13, 1992), 57 FR 37854 (approving File No. SR-BSE-92-08); 
32753 (Aug. 16, 1993), 58 FR 44707 (approving File No. SR-BSE-93-
15); and 34716 (Sept. 26, 1994), 59 FR 50026 (approving File No. SR-
BSE-94-12).
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    The BSE's Specialist Concentration Policy pilot program establishes 
certain standards based on Consolidated Tape Association (``CTA'') 
ranking\7\ of specialist stocks for reviewing certain proposed mergers, 
acquisitions, and other combinations between or among specialist units. 
The proposed policy 

[[Page 55616]]
would authorize those members of the Executive Committee of the 
Exchange's Board of Governors that are not affiliated with a specialist 
organization to review proposed combinations that, in the Exchange's 
view, may lead to undue concentration with the specialist community.\8\

    \7\The CTA disseminates last sale transaction information for 
trades executed on any of the participant exchanges or the Nasdaq 
Stock Market. 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 the average volume of trades 
and shares reported to CTA over the past four quarters. Securities 
Exchange Act Release No. 35987 (July 18, 1995), 60 FR 38065.
    \8\The Executive Committee must be composed of at least five 
members of the Board, two of whom must be the Chairman and the Vice 
Chairman. Boston Stock Ex. Const. art. VII, Sec. 2, Boston Stock Ex. 
Guide (CCH), para.1202 (July 1993). Amendment No. 1 modifies the 
BSE's Specialist Concentration Policy such that any member of the 
Executive Committee that is affiliated with a specialist 
organization will be prohibited from participating in any 
discussions or decisions of the Committee in applying this policy.
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    The Executive Committee would review any arrangements where 
previously separate specialist organizations would be operating under 
common control and would comprise: 15% or more of the 100 most actively 
traded CTA stocks; or 15% or more of the second 100 most actively 
traded CTA stocks; or 20% or more of the third 100 most actively traded 
CTA stocks; or 15% or more of all the CTA stocks eligible for trading 
on the BSE where the Free List contains fewer than 100 issues.\9\

    \9\The Free List is made up of securities that are not 
registered to certain specialists and can be traded by any 
specialist.
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    The Executive Committee would approve or disapprove the proposed 
combination based on its assessment of the following considerations: 
(1) Specialist performance and market quality in the stocks subject to 
the proposed combination; (2) the likelihood that the proposed 
combination would strengthen the capital base of the resulting 
organization, minimize the potential for financial failure and negative 
consequences of any such failure on the specialist system as a whole, 
and maintain or increase operational efficiencies; (3) 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;\10\ and (4) the effect of the proposed 
combination on the overall concentration of specialist organizations.

    \10\With respect to the ``commitment to the Exchange market'' 
criteria, 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: 
the acceptance and cooperation in the development, implementation, 
and enhancement of 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 the Exchange's rules.
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    The Exchange has stated previously that the Policy is designed to 
provide the BSE with a mechanism for reviewing proposed mergers, 
acquisitions, and other combinations between or among specialist units 
that may lead to a level of concentration within the specialist 
community that is detrimental to the Exchange and the quality of its 
markets.\11\ The Exchange expressed its belief that if specialist units 
were permitted to aggregate control or dominate activity on the Floor 
of the Exchange: the potential for increasing order flow would be 
diminished seriously; a disproportionately large number of top quality 
stocks could be handled by one or a small number of specialist firms; 
the barriers that new entrants to the specialist business face may 
increase; the Exchange could become dependant upon one firm for a 
disproportionately large portion of its revenues; the influence of the 
larger firms over the policies or direction of the Exchange would 
increase significantly; competition among specialists for new stock 
allocations would be reduced; the integrity of the entire stock 
allocation process would be undermined; and, in general, the incentives 
for quality markets and higher standards of performance would be 
reduced.

    \11\See Securities Exchange Act Release No. 27684 (Feb. 7, 
1990), 55 FR 5527 (approving File No. SR-BSE-89-05).
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    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).\12\ In this regard, 
the Commission deems the proposal consistent with the Section 
6(b)(5)\13\ 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. The proposal identifies specific levels of review for 
combinations that could impair market quality and hinder competition to 
the detriment of investors and the public interest, but still ensures 
that combinations that are beneficial to the marketplace will not be 
prohibited.

    \12\15 U.S.C. 78f(b).
    \13\15 U.S.C. 78f(b)(5).
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    The Commission believes that in many situations combinations among 
specialist units can be beneficial for the quality of the market and 
for the units themselves, particularly those units with limited capital 
and resources. The Commission, however, recognizes the BSE's concern 
that undue concentration could result in various negative effects on 
market quality by, among other things, hampering competition among 
specialists and reducing incentives for specialists to provide better 
markets. In addition, the Commission recognizes that, as specialist 
concentration increases, the continued financial and operational 
vitality of any one unit will have increased importance on the overall 
quality of the Exchange's markets and its specialist system as a whole.
    Accordingly, in light of the legitimate concentration concerns 
identified by the BSE, the Commission considers it appropriate for the 
BSE to have a permanent review policy that authorizes it to monitor 
specialist combinations to determine their impact upon the competitive 
environment necessary to maintain an orderly market. Furthermore, the 
Commission continues to believe the concentration factors contained in 
the proposal should enable the BSE to identify those combinations that 
could be harmful to market quality while at the same time not hamper 
the approval of those combinations that would not result in undue 
concentration or impair market quality. Finally, the Commission 
believes that exclusion of affiliated Executive Committee members from 
participating in the discussions and decision making process concerning 
specialist combinations should allow the Exchange to avoid a potential 
conflict of interest situation and result in a fairer decision.
    The Commission finds good cause for approving proposed Amendment 
No. 1 prior to the thirtieth day after the date of publication of 
notice of filing thereof in the Federal Register. Amendment No. 1 would 
exclude all members of the Executive Committee who are also 

[[Page 55617]]
affiliated with specialist organizations from participating in the 
discussions and decisions concerning proposed specialist combinations. 
As a result, approval of Amendment No. 1 should result in a fairer and 
more impartial decision making process. In addition, Amendment No. 1 is 
similar to rules of other self-regulatory organizations.\14\ For these 
reasons, the Commission finds good cause for accelerating approval of 
the proposed rule change, as amended.

    \14\See, e.g., PSE Rule 11.3 (prohibiting committee members from 
adjudicating any matter in which they have an interest).
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    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, 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 Section, 450 Fifth Street, 
N.W., Washington, D.C. 20549. Copies of such filing also will be 
available for inspection and copying at the principal office of the 
Boston Stock Exchange. All submissions should refer to File No. SR-BSE-
95-12 and should be submitted by November 22, 1995.
    It therefore is ordered, pursuant to Section 19b)(2) of the 
Act,\15\ that the proposed rule change (SR-BSE-95-12), including 
Amendment No. 1, is approved.

    \15\15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\

    \16\15 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-27130 Filed 10-31-95; 8:45 am]
BILLING CODE 8010-01-M