[Federal Register Volume 61, Number 45 (Wednesday, March 6, 1996)]
[Notices]
[Pages 8998-9000]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-5153]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36904; File No. SR-NYSE-96-01]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the New York Stock Exchange, Inc. Relating to Amendment of 
Exchange Rule 460.10

February 28, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on January 5, 1996, the New 
York Stock Exchange, Inc. (``NYSE'' or ``Exchange'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change, and on February 26, 1996, filed Amendment No. 1 to the proposed 
rule change,\2\ as described in Items I, II, and III below, which Items 
have been prepared by the self-regulatory organization. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.

    \1\ 15 U.S.C. Sec. 78s(b)(1).
    \2\ See Letter from Donald Siemer, Director, Market 
Surveillance, NYSE to Glen Barrentine, Team Leader, Division of 
Market Regulation, SEC, dated February 23, 1996.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change consists of amendments to Exchange Rule 
460.10 to modify certain prohibitions on the ownership by specialists 
of securities in which they are registered (``specialty securities'') 
and to modify the prohibition on business transactions specialists may 
have with the issuers of specialty securities.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of and basis for the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
has prepared summaries, set forth in Sections A, B, and C below, of the 
most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange is proposing to amend Rule 460.10 to modify certain 
prohibitions on the ownership of specialty securities and business 
transactions specialists may have with the issuers of specialty 
securities.
a. Ownership Restrictions
    NYSE Rule 460.10 prohibits a specialist \3\ from acquiring more 
than 10% of the outstanding shares of any equity security in which the 
specialist is registered. If a specialist acquires 5% or more of an 
equity issue in which he or she is registered, notice is required to be 
given to Market Surveillance, and the specialist may be directed to 
reduce the position below that level.

    \3\ By its terms, Rule 460.10 apply to the specialist, his or 
her member organization or any other member, allied member or 
approved person in such member organization or officer or employee 
thereof, individually or in the aggregate.
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    The restrictions on beneficial ownership codified in the rule are 
intended to ensure that specialists do not enter into a control 
relationship with an issuer in whose securities the specialist is 
registered, such that the specialist's status as a significant 
shareholder may create conflicts of interest with respect to the 
specialist's affirmative and negative obligations to maintain a fair 
and orderly market in the security.
    The language of the rule refers specifically to ``any equity 
security'' in which the specialist is registered, although a specialist 
may be registered in a particular security where a position in excess 
of the 5% and 10% parameters would not give rise to the control 
relationship/potential conflict of interest issue noted above. For 
example, a specialist registered in both a warrant and the underlying 
common stock could convert a 10% position in the warrant tinto the 
common stock, but the resulting position in the common stock would not 
approach the 10% control relationship threshold. Other examples could 
be found in convertible securities, or American Depository Receipts or 
Global Depository Receipts, where conversion of the security would 
result in a small position in relation to the overall number of shares 
outstanding in the common stock. The proposed amendment would delete 
the 10% threshold for such convertible 

[[Page 8999]]
securities, provided that, upon conversion, the position in the 
underlying common stock does not exceed 10% of the issue.\4\

    \4\ The proposed rule does not change the requirement that if a 
specialist acquires 5% or more of an equity issue in which he or she 
is registered, he or she must give notice to market surveillance.
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    Another example of a security in which 10% ownership would not 
present a control issue is presented by certain investment company 
units (the ``units''). In File No. SR-NYSE-95-23,\5\ the Exchange 
described certain entities organized as open-end management investment 
companies, which would hold securities comprising, or otherwise based 
on or representing an investment in, an index or portfolio of 
securities that represent the equity markets of a country. Each unit 
represents ownership of a portion of a portfolio of securities 
corresponding to an underlying ``country index,'' as determined by a 
consortium of investment concerns and the Institute of Actuaries. 
Specialists may be required to enter into transactions in these 
securities to effect creation or redemption of the units, and these 
transactions may result in an ownership of greater than 10% of an issue 
of units. Pursuant to changes to Rule 460.10 that have been proposed in 
File No. SR-NYSE-95-23,\6\ the specialists' activities in these 
transactions, however, would be subject to facilitation of their 
market-making responsibilities. In addition and as described more fully 
below,\7\ Rule 460.10, as proposed to be amended hereby, would allow 
the specialist to engage in such transactions only according to the 
same terms and conditions as every other investor. The Exchange 
believes that given the open-ended nature of these entities in that 
securities will be issued on a continuous basis, the issue of control 
by a specialist would not be relevant. The proposed amendment would 
delete the 10% threshold for certain investment company units, provided 
that, the redemption of such units would not result in a position, 
directly or indirectly, in any equity security in which the specialist 
is registered exceeding the 10% threshold.\8\

    \5\ See Securities Exchange Act Release No. 36032 (July 28, 
1995), 60 FR 40403 (Aug. 8, 1995) (File No. SR-NYSE-95-23).
    \6\ In Release No. 34-36032, supra, note 5, the Exchange 
proposed, among other matters, to amend Rule 460.10 to provide that, 
notwithstanding the prohibition of Rule 460.10 on specialist 
engaging in any business transaction with any company in whose stock 
the specialists is registered, specialists registered in a security 
issued by an investment company may purchase and redeem the listed 
security, or securities that can be subdivided or converted into the 
listed security, from the issuer as appropriate to facilitate the 
maintenance of a fair and orderly market in the subject security.
    \7\ See part II. A. 1. b. below.
    \8\ For purposes of Rule 460.10, on investment company unit 
refers to a security that represents an interest in a registered 
investment company that could be organized as a unit investment 
trust, an open-end management investment company, or a similar 
entity, all as more completely described in proposed Section 703.16 
of the Exchange's Listed Company Manual, which is proposed to be 
amended in Release No. 34-36032, supra, note 5.
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    The proposed amendment would also exempt from the 10% threshold, 
with Exchange permission, a specialist registered in a security where 
the corporate control relationship issue is absent, such as a foreign 
currency warrant, which trades in relationship to the value of that 
underlying currency, or an index warrant, which trades in relationship 
to the value of that underlying index. With respect to these 
securities, however, the specialist would not be permitted to acquire a 
position of more than 25% of the issue.
    In these situations, the Exchange believes that the specialist 
should be permitted, to the extent consistent with the specialist's 
market making responsibilities, to exceed the 10% parameter in Rule 
460.10 without being required to liquidate its position in the 
security.
b. Business Transactions
    Rule 460.10 also prohibits a specialist, his or her member 
organization or any other member, allied member, approved person in 
such member organization or officer or employee from engaging in any 
business transaction with any company in whose stock the specialist is 
registered.\9\ This prohibition is designed to prevent a potential 
conflict of interest with the specialist's market making obligations 
and any status he or she might attain through business dealings with 
the issuer. This prohibition, however, may be read to cover any type of 
business dealing between a specialist and an issuer, including one 
where the service or good is routinely available to the public and 
confers no special status to the recipient beyond that of a consumer. 
The Exchange proposes to amend the rule to permit the receipt of such 
routine business services by a specialist or other party listed in the 
rule. For example, a specialist organization may wish to contract for 
commercial insurance services from one of its specialty stock 
companies. The amended rule would permit such a transaction, as long as 
the type of service is generally available to other business entities.

    \9\ Under certain circumstances, NYSE Rule 98 affords exemptive 
relief to approved persons of a specialist organization from 
restrictions found in various NYSE rules, including certain 
provisions of NYSE Rule 460. See Securities Exchange Act Release No. 
36043 (Aug. 1, 1995), 60 FR 40218 (August 7, 1995) (Order approving 
File No. NYSE-95-21).
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2. Statutory Basis
    The proposed rule change is consistent with Section 6(b)(5) of the 
Act in that it is designed to prevent fraudulent and manipulative acts 
and practices and to perfect the mechanism of a free and open 
market.\10\

    \10\ 15 U.S.C. Sec. 78f(b)(5).
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    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(8) that an Exchange have rules that do 
not impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.\11\ The Exchange does not 
believe that market makers in derivative securities in other market 
centers are subject to restrictions such as those contained in Rule 
460.10. Thus, the proposed rule change is consistent with these 
objectives in removing a barrier to competition without compromising 
investor protection or the public interest.

    \11\ 15 U.S.C. Sec. 78f(b)(8).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The New York Stock Exchange does not believe that the proposed rule 
change will impose any inappropriate burden on competition that is not 
necessary or appropriate in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the publication of this notice in the Federal 
Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. 

[[Page 9000]]
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-96-01 and should be submitted by March 27, 1996.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-5153 Filed 3-5-96; 8:45 am]
BILLING CODE 8010-01-M