[Federal Register Volume 61, Number 63 (Monday, April 1, 1996)]
[Notices]
[Pages 14360-14363]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-7842]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37023; File No. SR-NYSE-96-01]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Granting Accelerated Approval of Proposed Rule Change Amending 
Exchange Rule 460.10

March 25, 1996.

I. Introduction

    On January 5, 1996, the New York Stock Exchange, Inc. (``NYSE'' 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\ the 
proposed rule change, and on February 26, 1996, submitted Amendment No. 
1 to the proposed rule change,\3\ to amend Exchange Rule 460.10 to 
modify certain prohibitions on the ownership by specialists of their 
specialty securities and to amend provisions that limit the business 
transactions specialists may engage in with the issuers of specialty 
securities.

    \1\ 15 U.S.C. Sec. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 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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    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 36904 (Feb. 28, 1996), 61 FR 8998 (Mar. 6, 
1996). No comments were received on the proposal.

II. Background

    NYSE Rule 460.10 prohibits a 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, from acquiring more than 10% of the outstanding 
shares of any equity security in which the specialist is registered. In 
the event the beneficial ownership of such persons, individually or in 
the aggregate, in any such security exceeds 5% of the outstanding 
shares of such security, Rule 460.10 also requires the specialist or 
his or her member organization to report such fact promptly to Market 
Surveillance. In such event, Market Surveillance may require any of the 
persons covered by Rule 460.10 to take appropriate action to either 
dispose of such beneficial ownership or reduce or eliminate his or her 
interest in the specialist organization, as may be acceptable to the 
Exchange. Rule 460.10 also prohibits a specialist, his or her member 
organization or any other member,

[[Page 14361]]
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.

III. Description of Proposal

A. Ownership Restrictions

    The restrictions on beneficial ownership codified in Rule 460.10 
are intended to ensure that a specialist, and persons affiliated 
therewith, do not enter into a control relationship with an issuer in 
whose security the specialist is registered, such that the specialist's 
status as a significant shareholder may create conflicts of interest 
with respect to his or her affirmative and negative obligations to 
maintain a fair and orderly market in the security. The Exchange 
believes that the 10% ownership prohibition of Rule 460.10 as currently 
in effect is unnecessarily restrictive and applies to certain types of 
securities that do not give rise to the potential conflict of interest 
noted above.\4\ To remedy this problem, the Exchange is proposing to 
exempt three types of securities from the 10% ownership prohibition of 
Rule 460.10.\5\

    \4\ For example, in its filing the Exchange noted that Rule 
460.10 would prohibit a specialist registered in both a warrant and 
the underlying common stock from holding more than a 10% position in 
a warrant that is convertible into a much smaller percentage of the 
common stock.
    \5\ The proposed rule does not change the requirement that the 
specialist inform Market Surveillance upon the acquisition of 5% or 
more of a equity issue in which he or she is registered.
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    The first type of securities covered by the proposed amendment are 
convertible or derivative securities, American or Global Depositary 
Receipts, or similar instruments, but only to the extent that 
conversion of any such securities would not result in a position in the 
common stock exceeding the 10% threshold.
    The proposed amendment also would remove the 10% threshold for 
certain investment companies units (``units''), but again only to the 
extent redemption of any such security would not result in a position, 
directly or indirectly, in any equity security in which the specialist 
is registered exceeding the 10% threshold. To come within the above 
exemption, the investment company units must be listed pursuant to 
Section 703.16 of the Exchange's Listed Company Manual.\6\ This section 
sets forth listing standards for units of trading that represent an 
interest in a registered investment company that is organized either as 
an open-end management investment company or as a unit investment 
trust. Under Section 703.16, the investment company would hold directly 
securities comprising or otherwise based on or representing an interest 
in an index or portfolio of securities.

    \6\ The Exchange recently added Section 703.16 to its Listed 
Company Manual. See Securities Exchange Act Release No. 36923, (Mar. 
5, 1996), 61 FR 10410 (Mar. 13, 1996) (order approving File No. SR-
NYSE-95-23).
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    Pursuant to Section 703.16, the Commission recently approved the 
NYSE's proposal to list up to nine series of units in the form of 
``CountryBaskets,'' which are based on the open-end management 
investment company structure and invest directly in a portfolio of 
securities included in the corresponding Financial Times/Standard & 
Poor's Actuaries World Index.\7\ In that approval order, the Commission 
also approved the NYSE's request to amend Rule 460.10 to allow a 
specialist registered in a security issued by an investment company to 
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.\8\ In addition to permitting the purchase and 
redemption of units from the issuer only as appropriate to facilitate 
the maintenance of a fair and orderly market in the subject security, 
any purchases or redemptions must be made at the net asset value and on 
the same terms and conditions as are available to any other 
investor.\9\

    \7\ Each CountryBasket is designed to provide investment results 
that substantially correspond to the price and yield performance of 
the specific index to which it relates. Accordingly, the weighing of 
the portfolio securities of each series substantially corresponds to 
their proportional representation in the relevant index. Id. Before 
the Exchange may list any additional securities pursuant to Section 
703.16, it must make an appropriate filing pursuant to Section 19(b) 
of the Act with the Commission to provide the authorization to 
effect such listings. Id.
    \8\ Id.
    \9\ Additionally, so-called Creation Transactions, must occur 
through the principal underwriter or distributor and not directly 
with the issuer. Id.
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    The Exchange believes that specialists may be required to enter 
into transactions to effect creation or redemption of the units, and 
that these transactions may result in an ownership of greater than 10% 
of an issue of units. Given the open-end nature of these entities, in 
that securities will be issued on a continuous basis, the Exchange 
believes that the issue of control by a specialist would not be 
relevant.\10\ Finally, as noted above, under the proposal, a specialist 
would not be able to hold units which, if redeemed, would result in the 
specialist holding 10% or more of any individual equity security in 
which he is registered.

    \10\ See note 6, infra.
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    The proposed amendment would also exempt from the 10% threshold, 
but only with Exchange permission, a currency warrant that trades in 
relationship to the value of an underlying currency or an index warrant 
that trades in relationship to the value of an 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.

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.\11\ This prohibition is designed to prevent a potential 
conflict of interest by helping to ensure that the issuer does not 
improperly influence the specialist in the performance of his or her 
market making duties by the provision of goods or services upon 
advantageous terms. The Exchange proposes to amend this provision to 
provide that the prohibition shall not apply to the receipt of routine 
business services, goods, materials, or insurance on generally 
available terms. Accordingly, the amended rule would permit business 
dealings between a specialist and an issuer so long as the service or 
good is routinely available to the public, confers no special status to 
the recipient beyond that of a consumer, and is generally available on 
the same terms and conditions.

    \11\ 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 35759 (Aug. 7, 1995) (order approving 
File No. NYSE-95-21).
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IV. Discussion

    After careful consideration, the Commission finds that the proposed 
rule change, as amended, is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to a national 
securities exchange, and, specifically, with the requirements of 
Section 6(b).\12\ In particular, and for the reasons set forth below, 
the Commission believes that the proposal, as amended, is consistent 
with Section 6(b)(5) of the Act in that it is designed to prevent 
fraudulent and manipulative acts and practices and is

[[Page 14362]]
consistent with the protection of investors and the public and with the 
maintenance of fair and orderly markets.\13\

    \12\ 15 U.S.C. Sec. 78f(b).
    \13\ 15 U.S.C. Sec. 78f(b)(5).
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A. Ownership Restrictions

    The established restrictions on ownership of equity securities 
codified in the NYSE's Rule 460.10 prohibit a specialist, and persons 
affiliated therewith, from owning more than 10% of the outstanding 
shares of any equity security in which the specialist is registered. 
This prohibition is based upon a concern that such a large ownership 
interest may give rise to a control relationship between the specialist 
and the issuer that may detract from the specialist's willingness or 
ability to carry out his or her affirmative and negative obligations to 
maintain a fair and orderly market in the security. The Commission 
supports this established restriction and believes that it helps to 
ensure the specialist's integrity in carrying out his or her 
obligations. Nevertheless, the Commission acknowledges that, with 
regard to certain securities, a specialist's position in excess of 10% 
of the outstanding shares of an equity security may not result in a 
relationship between the specialist and the issuer that warrants the 
application of the 10% ownership restriction of Rule 460.10.
    The proposal would allow a specialist to hold a position in excess 
of the 10% threshold in three different types of securities. First, the 
proposal would exempt from the 10% threshold, a specialist's interests 
in convertible or derivative securities, including American Depositary 
Receipts and Global Depositary Receipts, provided that, upon 
conversion, the position in the underlying common stock does not exceed 
10% of an issue in which the specialist is registered. As to such 
securities, the Commission believes that this change is appropriate 
because the rule will still ensure that specialists cannot control more 
than 10% of the underlying issue in which the specialist is registered.
    Second, the proposal would allow a specialist to hold a position in 
excess of 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 security in which the 
specialist is registered exceeding the 10% threshold. To come within 
the above exemption, the investment company units must be list pursuant 
to Section 703.16 of the Exchange's Listed Company Manual. This section 
sets forth listing standards for units of trading that represent an 
interest in a registered investment company that is organized either as 
an open-end management investment company or as a unit investment 
trust. Under Section 703.16, the investment company would hold directly 
securities comprising or otherwise based on or representing an interest 
in an index or portfolio of securities.
    As noted earlier, in the case of such securities the specialist 
would be allowed to purchase or redeem any such security from the 
issuer only as appropriate to facilitate the maintenance of a fair and 
orderly market in the subject security.\14\ In addition, any such 
purchase or redemption would have to be made at the net asset value and 
on the same terms and conditions as are available to any other 
investor.

    \14\ The Commission believes that the Exchange's existing 
surveillance procedures should be adequate to ensure that such 
purchases are made only for the purpose of maintaining fair and 
orderly markets. See Securities Exchange Act Release No. 36923, 
supra note 6.
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    Based upon the foregoing restrictions, the fact that the securities 
will be issued on a continuous basis, and the continued restriction on 
the specialist holding such units which, upon redemption, would result 
in a position in any security in which the specialist is registered 
exceeding the 10% threshold, the Commission believes that the amendment 
of Rule 460.10 to exempt such securities from the 10% ownership 
threshold is appropriate.\15\

    \15\ The Commission notes that its approval of the Exchange's 
proposal to allow specialists to hold a position in excess of 10% in 
certain investment company units does not address any other 
applicable requirements or obligations under the federal securities 
laws. See Securities Exchange Act Release No. 36923, supra note 6, 
at note 42 and accompanying text.
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    Lastly, the proposal would allow a specialist, with Exchange 
permission, to exceed the 10% threshold in a security such as a foreign 
currency warrant, which trades in relationship to the value of an 
underlying currency, or an index warrant, which trades in relationship 
to the value of an underlying index. As to these securities, however, 
the proposal, as amended, still would prohibit a specialist from 
acquiring a position of more than 25% of the issue.
    Based upon the fact that the specialist must receive the permission 
of the Exchange in order to exceed the 10% threshold and that in any 
event the specialist cannot exceed a 25% threshold, the Commission 
believes that the exemption of the above described securities from the 
10% ownership threshold of Rule 460.10 is appropriate. The Commission 
believes that this exemption is appropriate for foreign currency 
warrants, because, with the limitations noted, no control relationship 
is likely to arise with regard to the underlying foreign currency. The 
Commission also believes that such a relationship is unlikely to arise 
with regard to an index warrant, at least where the index is 
sufficiently broad based so that one or a few securities do not 
dominate the index.\16\ The Commission believes that narrow based index 
warrants, however, could potentially give rise to the conflict of 
interest that the 10% ownership threshold is designed to address, 
especially in those situations where the specialist is registered in an 
equity security that represents a significant weight of the index 
value. Accordingly, the Commission would expect the Exchange to 
carefully scrutinize requests to exceed the 10% threshold in such index 
warrants and to grant permission to exceed the 10% threshold only where 
such permission is clearly necessary to the Specialist's market making 
duties and such interest does not present the type of concern addressed 
by Rule 460.10.

    \16\ As noted below, to the extent a specialist can control up 
to 25% of a particular warrant issue, with Exchange approval, the 
Commission notes that such approval should only be given where it is 
clearly necessary for a specialist to meet his market making 
obligations under Rule 104.
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    Finally, in approving these exceptions to the 10% ownership 
threshold, the Commission is also relying upon the continuing provision 
of Rule 460.10 that requires the specialist to report promptly to 
Market Surveillance any beneficial ownership by the specialist, and 
persons affiliated therewith, in any specialty security that, 
individually or in the aggregate, exceeds 5% of the outstanding shares 
of such security. The Commission expects the Exchange to pay particular 
attention to such reports and, as appropriate, to use its authority 
under Rule 460.10 to require that appropriate action be promptly taken 
to dispose of such beneficial ownership or to reduce or eliminate the 
beneficial owner's interest in the specialist organization.\17\ 
Moreover, the Commission notes that, notwithstanding the easing of the 
prohibition of Rule 460.10 on owning more than 10% of a speciality 
security, all transactions by specialists remain subject to NYSE Rule 
104 and the requirement that specialists effect on the Exchange only 
such transactions in their specialty securities as are reasonably 
necessary to permit

[[Page 14363]]
such specialists to maintain fair and orderly markets.

    \17\ NYSE Rule 460.10 specifically gives Market Surveillance the 
authority to require a reduction in specialist positions that equal 
or exceed 5% of the total outstanding shares of the equity security 
in which the specialist is registered.
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B. Business Transactions

    The Commission believes that the general restrictions of Rule 
460.10 on business transactions entered into by specialists with 
companies in whose stock the specialist is registered help ensure that 
the issuer does not improperly influence the specialist in the 
performance of his or her market making duties by the provision of 
goods or services upon advantageous terms. The proposal would exempt 
specialists from this prohibition as to the receipt of routine business 
services, goods, materials, or insurance, on terms that would be 
generally available.
    The Commission believes that the NYSE's proposed rule, as amended, 
is appropriate as it will continue to proscribe business transactions 
that may give rise to a conflict of interest, while permitting 
specialists to engage in routine business transactions that do not 
raise the concerns that the rule is intended to prevent. The proposal 
limits the type of business transactions in which a specialist may 
engage with the issuer of a security in which the specialist is 
registered to those that are available to all other business entities 
and consumers on the same terms and conditions and that confer no 
special status to the recipient beyond that of a consumer. The 
Commission expects the NYSE to interpret this provision narrowly so as 
to permit business dealings between a specialist and the issuer of a 
specialty security only where the service or good is routinely 
available to the public, confers no special status to the recipient 
beyond that of a consumer, and is on terms and conditions that are 
generally available.
    The Commission finds good cause for approving the proposed rule 
change and Amendment No. 1 prior to the thirtieth day after the date of 
publication of notice of such filing thereof in the Federal Register. 
The Commission notes that accelerated approval of the proposal is 
appropriate in order to allow the NYSE to trade CountryBasket 
securities as set forth in File No. SR-NYSE-95-23 on the anticipated 
initial trading date of March 25, 1996. Moreover, the Commission notes 
that the proposal, as amended, was noticed for a period of 16 days, and 
that no comments were received on the proposal during that period.

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\18\ that the proposed rule change (SR-NYSE-96-01), as amended, is 
hereby approved.

    \18\ 15 U.S.C. Sec. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\19\

    \19\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-7842 Filed 3-29-96; 8:45 am]
BILLING CODE 8010-01-M