[Federal Register Volume 60, Number 245 (Thursday, December 21, 1995)] [Notices] [Pages 66329-66333] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 95-31087] ======================================================================= ----------------------------------------------------------------------- [[Page 66330]] SECURITIES AND EXCHANGE COMMISSION [Release No. 34-36594; File No. SR-Amex-95-29] Self-Regulatory Organizations; American Stock Exchange, Inc.; Order Approving Proposed Rule Change and Notice of Filing and Order Granting Accelerated Approval to Amendment No. 1 to Proposed Rule Change Relating to Bond Listing Standards December 14, 1995. I. Introduction On July 19, 1995, the American Stock Exchange, Inc. (``Amex'' 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 revise its standards for the listing and delisting of debt securities. On December 12, 1995, the Amex submitted to the Commission Amendment No. 1 to the proposed rule change.\3\ \1\ 15 U.S.C. 78s(b)(1) (1988). \2\ 17 CFR 240.19b-4 (1994). \3\ See letter from Claudia Crowley, Amex, to Glen Barrentine, Senior Counsel, Division of Market regulation, SEC, dated December 12, 1995. Amendment No. 1 supplemented the proposal by specifying that (1) the underlying equities of listed convertible debt must be subject to real-time last sale reporting in the United States, (2) specialists assigned to municipal debt must comply with MSRB Rule G- 3, (3) municipal securities will not be subject to off-board trading restrictions, and (4) unrated debt securities of unaffiliated issuers may be listed if an NRSRO has currently assigned an investment grade rating to an immediately senior issue by the same company. --------------------------------------------------------------------------- The proposed rule change was published for comment in Securities Exchange Act Release No. 36225 (September 13, 1995), 60 FR 48734 (September 20, 1995). No comments were received on the proposal. This order approves the proposed rule change, including Amendment No. 1 on an accelerated basis. II. Description of the Proposal Section 104 of the Amex's Company Guide sets forth the current standards for listing bonds and debentures. Presently, the Amex will consider listing a debt security if: (1) The company appears to be in a financial position sufficient to satisfactorily service the debt issue; (2) the issuer meets the size and earnings guidelines applicable to issuers listing common stock; \4\ and (3) the issue has an aggregate market value and principal amount of at least $5 million for issuers that have common stock listed on the Amex or the New York Stock Exchange (``NYSE''), or at least $20 million and 100 holders for issuers that do not have securities listed on the Amex or NYSE. The Amex presently gives consideration to delisting a bond issue if the aggregate market value or principal amount falls below $400,000. For convertible debt, continued listing is dependent upon the underlying security remaining in compliance with the Amex's numerical criteria for that security. \4\ The Amex guidelines provide for the issuer to have stockholders' equity of at least $4,000,000 and pre-tax income of at least $750,000 in its last fiscal year, or in two of its last three fiscal years. --------------------------------------------------------------------------- The Amex proposes to amend its standards for the listing of debt securities with a view towards making the Exchange more accessible to debt issuers and facilitating the listing of such securities.\5\ Specifically, the proposal eliminates the requirements that the issuer demonstrate that it will be able to satisfactorily service the debt issue, and that the issuer meet the size and earnings guidelines applicable to companies listing common stock. The proposal also removes the requirement that issuers that do not have securities listed on the Amex or NYSE have at least 100 holders and an aggregate market value and principal amount of $20 million. Finally, the proposal modifies the current aggregate market value and principal amount requirement by stating that the issuer must have at least $5 million in aggregate market value or principal amount. \5\ The Commission notes that the new guidelines for listing debt securities are substantially similar to the NYSE's debt listing standards, which the Commission approved in Securities Exchange Act Release No. 34019 (May 5, 1994), 59 FR 24765 (May 12, 1994). --------------------------------------------------------------------------- In place of the current guidelines, the proposal provides that the Amex may list an issuer's debt securities if an issuer of an equity security listed on the Amex or NYSE is in ``good standing'' with the respective exchange,\6\ and has an aggregate market value or principal amount of at least $5 million. This standard also will apply to an issuer that is owned by, or under common control with, an issuer of equity securities listed on the Exchange or the NYSE (``listed issuer''); and to an issuer whose debt securities are guaranteed by a listed issuer. \6\ A company is in ``good standing'' if it is above the relevant continued listing guidelines. --------------------------------------------------------------------------- In contrast, debt securities of an ``unaffiliated'' issuer \7\ will not be eligible for initial listing on the Amex unless a nationally recognized securities rating organization (``NRSRO'') has assigned a certain minimum rating to the bonds (or to other bonds issued by the same company). Specifically, debt securities of an unaffiliated issuer will not be eligible for initial listing on the Amex unless: \7\ An unaffiliated issuer is one that has no equity securities listed on the Amex or NYSE; is not, directly or indirectly, majority-owned by, nor under common control with, an issuer of Amex or NYSE-listed equity securities; and is not issuing a debt security guaranteed by an issuer of equity securities listed on the Amex or NYSE. ---------------------------------------------------------------------------An NRSRO has assigned a current rating to the debt security that is no lower than a Standard and Poor's (``S&P'') Corporation ``B'' rating or an equivalent rating by another NRSRO; or If no NRSRO has assigned a rating to the issue, an NRSRO has currently assigned an investment grade rating to an immediately senior issue,\8\ or a rating that is no lower than an S&P Corporation ``B'' rating (or an equivalent rating by another NRSRO) to a pari passu\9\ or junior issue. \8\ To be investment grade, an issue must be assigned a rating no lower than an S&P Corporation rating of ``BBB-'' (or another NRSRO's equivalent thereof). The Amex amended the proposal to specify that it will apply this standard only to unrated bonds that are immediately junior to another rated class of securities issued by the same company. See Amendment No. 1, supra note 3. \9\ A pari passu issue has equal standing with the debt issue proposed to be listed. --------------------------------------------------------------------------- As under its current rules, the Amex will give consideration to delisting a bond issue if the issuer is unable to meet its obligations on the listed debt, or if the debt's aggregate market value or principal amount falls below $400,000. The Amex proposal amends the delisting standards to clarify that any debt issuer that is unable to meet its obligation on the listed debt securities may be delisted. In applying this standard, the Exchange states that it normally will not delist the debt if there is value in the security and continued Exchange trading is in the best interests of investors.\10\ However, if an issuer is unable to meet its financial obligations and there is minimal or no value in the security, the Exchange will give serious consideration to delisting the debt issue.\11\ The Exchange states that it also will consider delisting debt that was listed based on the issuer being either majority-owned or guaranteed by an Amex or NYSE issuer when the equity securities of such owner or guarantor are delisted.\12\ \10\ See Securities Exchange Act Release No. 36225 (September 13, 1995), 60 FR 46734 (September 20, 1995) (notice of this proposed rule change). \11\ Id. \12\ Id. --------------------------------------------------------------------------- Convertible bonds will be reviewed for continued listing when the underlying equity security is delisted, and will be delisted when the related security is no longer subject to real-time last sale reporting in the United States.\13\ Further, if the underlying equity [[Page 66331]] security is delisted due to a violation of the Amex ``corporate responsibility'' criteria (including, but not limited to, the outside director, audit committee and shareholder voting requirements),\14\ the Exchange will delist all debt securities convertible into that equity security. \13\ See Amendment No. 1 supra note 3 (specifying that last trade reporting must be available in the United States). \14\ See Sections 121-123 of the Amex's Company Guide. --------------------------------------------------------------------------- The Amex also proposes to simplify the listing process for debt issuers by reducing the number of documents that an applicant must file in support of its debt listing application. Specifically, the Exchange will eliminate the schedule of distribution and the listing resolution. In addition, the Exchange will no longer require that trustees certify certain issuer-specific information. Finally, the Amex is adopting a new rule to permit the listing of municipal and sovereign debts (i.e., debt issued by foreign governments, and by American states, localities, or government agencies).\15\ The Exchange will evaluate whether to list there issuers on a case-by-case basis and will treat the issuer as an ``unaffiliated'' corporate issuer for purposes of the initial listing guidelines described above. Municipal debt will be subject to the same delisting standards as corporate debt. The Amex will assign municipal securities accepted for listing on the Exchange to specialists that will trade the securities in accordance with all Amex regulations otherwise applicable to the trading of securities on the trading floor.\16\ All Exchange contracts in municipal securities will be compared, settled and cleared in accordance with the applicable regulations of the Municipal Securities Rulemaking Board (``MSRB''). \15\ This does not include debt issued or guaranteed by the United States Government or agencies thereof that presently may be admitted to dealings on the Exchange pursuant to Amex Rule 140. \16\ The Amex intends to require specialist units applying for appointment and registration in municipal securities to be in compliance with MSRB Rule G-3 regulations regarding municipal securities principals and representatives. See Amendment No. 1 supra note 3. The National Association of Securities Dealers, Inc. (``NASD'') has authority to enforce MSRB rules for listed municipal securities. The Amex enforcement in this regard will not preempt or limit in any manner the NASD's authority to act in this area. --------------------------------------------------------------------------- III. Discussion 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).\17\ Specifically, 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. \17\ 15 U.S.C. 78f(b) (1988). --------------------------------------------------------------------------- The development and enforcement of adequate standards governing the initial and continued listing of securities on an exchange is an activity of critical importance to financial markets and the investing public. Listing standards serve as a means for a self-regulatory organization to screen issuers and to provide listed status only to bona fide companies with sufficient float, 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. For the reasons set forth below, the Commission believes that the proposed rule change will provide the Amex with greater flexibility in determining which debt securities warrant inclusion in its bond trading and disclosure systems, while continuing the protections that the Exchange's listing standards provide investors. After careful review, the Commission has concluded that the proposed initial listing standards should help the Amex to ensure that only substantial companies capable of meeting their financial obligations are eligible to have their debt listed on the Exchange. As before, the proposed rule change will require that the Amex evaluate an issuer's ability to cover the interest charges on its debt securities. Although the Exchange currently makes this interest coverage determination itself,\18\ the amended standards will rely instead on either the issuer's relationship with the Amex of NYSE, or the debt's NRSRO rating. \18\ As noted above, the current listing standards require that a company appear to be in a financial position sufficient to satisfactorily service in the debt issue to be listed. --------------------------------------------------------------------------- The Commission agrees that, to the extent that the Amex and the NYSE have adequate listing standards for common stock, the Amex reasonably may assume that listed companies (and certain affiliates thereof) should not pose a significant risk of defaulting on their obligations so long as the companies remain in ``good standing'' on the exchanges. Moreover, debt securities enjoy seniority over equity securities. Because the Amex (or NYSE) presumably would not have listed the junior equity issue unless it was satisfied with the quality of the company, the Commission believes it is reasonable for the Amex to assume that the senior debt issue also warrants listed status. For ``unaffiliated'' issuers, the Commission finds that it is not unreasonable for the Exchange to defer to the expertise of an NRSRO, rather than conducting its own analysis of the company's financial condition, as is presently the case. Although the Commission would be concerned by any potential misuse of NRSRO ratings, the Commission notes that the NRSROs routinely evaluate interest coverage, among other things, when they rate bonds. In addition, their methodology incorporates extrinsic factors, such as characteristics of the issuer's industry group. The Commission therefore agrees with the Exchange that, under these circumstances, NRSRO ratings can be relied upon for determinations about the creditworthiness of issuers. Moreover, the Commission is satisfied that the distinctions in NRSRO ratings drawn by the Amex are valid.\19\ According to the S&P Corporation's debt rating definitions,\20\ bonds rated ``B'' (or higher) currently have the capacity to meet interest payments and principal repayments, whereas bonds rated ``CCC'' (or lower) are dependent upon favorable business, financial or economic conditions to meet timely payments of interest and repayment of principal. The Commission also believes that it is logical for the Amex to assume that an unrated debt issue which is pari passu with (or senior to) an issue with at least a ``B'' rating would, if rated, receive an equal (or higher) rating. Finally, to permit the Amex to list unrated bonds that are immediately junior to an investment grade issue is appropriate because those bonds generally would be rated no more than one rating category lower (i.e., a S&P Corporation ``BB'' rating).\21\ \19\ The Commission notes that the NRSRO ratings being adopted by the Amex are the same standards as the Commission approved for the NYSE in Securities Exchange Act Release No. 34019, supra note 5. \20\ See Standard & Poor's High Yield Directions, January 1994. \21\ Id. --------------------------------------------------------------------------- As for the other provisions in the proposal, the Commission finds that they strike an appropriate balance between protecting investors and enhancing the flexibility of the debt listing process. For instance, the proposed rule change provides that, to be eligible for listing, a bond issue must have an aggregate market value or [[Page 66332]] principal amount of at least $5 million. This should enable the Amex to deny listed status to companies whose securities do not have sufficient liquidity for a fair and orderly market, without infringing upon bona fide issuers' access to the Exchange's bond trading and disclosure systems. Conversely, the Commission does not believe that eliminating the distribution requirement for unaffiliated issuers will have a significant adverse effect on investors in the bond market. In the past, the Commission has recognized that such information may be difficult to estimate accurately and may be relatively less pertinent than other factors.\22\ Additionally, the Commission believes that the proposed elimination of certain documents that the Exchange currently requires from applicants is reasonable. Specifically, the Exchange is eliminating the schedule of distribution because distribution is no longer a listing guideline, and the listing resolution because it is essentially ceremonial in nature and does not serve any significant purpose.\23\ The Amex also will cease to require that trustees certify issuer-specific information. Accordingly, the Exchange only will require that the certificate show the trustee's acceptance of the trust.\24\ \22\ See Securities Exchange Act Release No. 32909 (September 15, 1993), 58 FR 49537 (September 23, 1993) (File No. SR-NYSE-93-21) (approving amendments to Paragraph 703.06 of the NYSE's Listed Company Manual to eliminate requirement that distribution information be submitted as supporting document to debt listing application). \23\ The Exchange will continue to require an opinion of counsel that the issuance of the debt has been approved by the company's board of directors. See Section 213.6(c) of the Amex's Company Guide. Not requiring a listing resolution is consistent with NYSE procedures. See Paragraph 703.06 of the NYSE's Listed Company Manual. \24\ This is consistent with NYSE requirements. See Paragraph 703.06 of the NYSE's Listed Company Manual. --------------------------------------------------------------------------- In terms of the delisting criteria, the Commission has concluded that the revised standards should enable the Amex to identify listed companies that may have insufficient resources to meet their financial obligations or whose debt securities may lack adequate trading depth and liquidity. This, in turn, will allow the Exchange to take appropriate action to protect bondholders. The Amex delisting standards, however, do not include a minimum market value for debt securities. The Exchange states that if an issuer is unable to meet its financial obligations and there is minimal or no value in the security, the Exchange will give serious consideration to delisting the debt issue.\25\ As the Commission discussed in its approval of similar debt standards for the NYSE,\26\ the Commission expects the Amex to consider carefully the propriety of continued exchange trading of the securities of bankrupt or distressed companies,\27\ and expects debt securities with minimal value to be delisted. \25\ See Securities Exchange Act release No. 36225, supra note 10. \26\ See Securities Exchange Act Release No. 34019, supra note 5. \27\ For example, the Commission believes that the Amex should delist the debt of companies in bankruptcy that file a plan of reorganization providing no recovery for debt holders. --------------------------------------------------------------------------- In addition, the Amex will delist convertible bonds whenever the underlying equity security is no longer subject to real-time last sale reporting in the United States.\28\ If the related equity merely moves from the Amex to another market, it is not inconsistent with the Act for the Exchange to have discretion to continue listing the convertible debt. This would not be the case, however, if the underlying security is delisted because the issuer violated one of the Amex's corporate responsibility criteria. As a general matter, the Commission would have serious concerns about any proposal that does not provide for the delisting of convertible bonds where a company acts to disadvantage its shareholders. The Amex proposal addresses this concern by including in its guidelines that the Exchange will delist convertible bonds when the issuer's equity security is delisted due to a violation of the Exchange's corporate governance listing standards.\29\ \28\ See Amendment No. 1, supra note 3 (specifying that last trade reporting must be available in the United States). \29\ See supra note 14 and accompanying text. --------------------------------------------------------------------------- Finally, the Commission believes that the Amex's initial listing and delisting criteria are appropriate for determining whether municipal debt should be trading on the Exchange. Because municipal securities will trade under the Amex's existing regulatory regime for trading securities (which includes specialist obligations, margin requirements, and surveillance programs), the Commission believes that adequate safeguards are in place to ensure the protection of investors in municipal securities.\30\ \30\ The Amex confirmed in Amendment No. 1, supra note 3, that municipal securities will not be subject to off-board trading restrictions. --------------------------------------------------------------------------- The Commission notes that the MSRB's regulatory scheme for the comparison, settlement, and clearing of municipal securities will continue to apply to municipal securities listed on the Amex. Additionally, the Amex will 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.\31\ The Commission believes that it is important that any specialist selected by the Amex for a listed municipal security be familiar with the characteristics of such security. \31\ See Amendment No. 1, supra note 3. --------------------------------------------------------------------------- The Commission finds good cause for approving Amendment No. 1 prior to the thirtieth day after the date of publication of notice of filing thereof. Amendment No. 1 clarifies and codifies the intent of certain language used in the original filing. Finally, the Commission did not receive any comments on the original proposal,\32\ which was noted for the full statutory period, nor did it receive comments on a similar NYSE proposal that was also noticed for the full statutory period.\33\ \32\ See Securities Exchange Act Release No. 36225, supra note 10. \33\ See Securities Exchange Act Release No. 34019, supra note 5. --------------------------------------------------------------------------- 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 rules change that are filed with the Commission, and all written communications relating to Amendment No. 1 between the Commission and any persons, 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 in the Commission's Public Reference Section, 450 Fifth Street, NW, Washington, DC 20549. Copies of such filing will also be available at the principal office of the Amex. All submissions should refer to File No. SR-Amex-95-29 and should be submitted by January 11, 1996. IV. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,\34\ that the proposed rule change (SR-Amex-95-29), including Amendment No. 1 on an accelerated basis, is approved. \34\ 15 U.S.C. 78s(b)(2) (1988). --------------------------------------------------------------------------- For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\35\ \35\ 17 CFR 200.30-3(a)(12) (1994). [[Page 66333]] --------------------------------------------------------------------------- Margaret H. McFarland, Deputy Secretary. [FR Doc. 95-31087 Filed 12-20-95; 8:45 am] BILLING CODE 8010-01-M