[Federal Register Volume 61, Number 183 (Thursday, September 19, 1996)]
[Notices]
[Pages 49371-49373]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-23976]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37668; File No. SR-NYSE-96-17]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the New York 
Stock Exchange, Inc. Relating to Extension of Pilot Programs for 
Capital Utilization and Near Neighbor Measures of Specialist 
Performance

September 11, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on July 1, 
1996, the New York Stock Exchange, Inc. (``NYSE'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the self-regulatory 
organization.\1\ The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ See Letter from James E. Buck, Senior Vice President and 
Secretary, NYSE, to Sharon Lawson, Senior Special Counsel, SEC, 
dated September 10, 1996 (``Amendment No. 1''). The Exchange 
originally requested that the capital utilization and near neighbor 
measure pilots be approved for an additional year, until September 
10, 1997. In Amendment No. 1, the Exchange amended the filing to 
request that the pilots only be extended for an additional four 
months, until January 10, 1997 and requested that the four-month 
extension be approved on an accelerated basis. The Exchange stated 
that during this time, it expected to seek permanent approval of the 
programs from its Board of Directors, and to subsequently file such 
requests with the Commission.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change consists of extending for an additional 
four months, through January 10, 1997, the pilot programs to use 
specialist capital utilization and the ``near neighbor'' approach to 
measure specialist performance.\2\
---------------------------------------------------------------------------

    \2\ The SEC notes that these measures currently are only used by 
the Allocation Committee in making specialist allocation decisions. 
See infra note 4. The SEC initially approved the capital utilization 
program on a one-year pilot basis in Securities Exchange Act Release 
No. 33369 (December 22, 1993), 58 FR 69431 (December 30, 1993). The 
SEC approved a six-month extension of the pilot program in 
Securities Exchange Act Release No. 35175 (December 29, 1994), 60 FR 
2167 (January 6, 1995) (extending pilot through June 30, 1995). The 
SEC approved a subsequent extension of the pilot so that the 
Exchange and the SEC could evaluate the capital utilization and near 
neighbor programs concurrently. See Securities Exchange Act Release 
No. 35926 (June 30, 1995), 60 FR 35760 (July 11, 1995) (extending 
pilot through September 10, 1996). The SEC approved the near 
neighbor program on a pilot basis in Securities Exchange Act Release 
No. 35927 (June 30, 1995), 60 FR 35927 (July 11, 1995) (pilot 
approved through September 10, 1996).
---------------------------------------------------------------------------

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.
    The Exchange requests the Commission to find good cause, pursuant 
to Section 19(b)(2) of the Act, for approving the proposed rule change, 
and Amendment No. 1 thereto, prior to the thirtieth day after 
publication in the Federal Register.\3\
---------------------------------------------------------------------------

    \3\ See Amendment No. 1, supra note 1.
---------------------------------------------------------------------------

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

1. Purpose
    The Exchange currently uses several programs to measure specialist

[[Page 49372]]

performance including specialist capital utilization and the near 
neighbor approach, which compares a stock's performance with stocks 
with similar characteristics. These measures are currently utilized on 
a pilot program basis in Allocation Committee deliberations.\4\ The 
pilot programs are scheduled to expire on September 10, 1996.
---------------------------------------------------------------------------

    \4\ The Exchange's Allocation Policy and Procedures 
(``Allocation Policy'') governs the allocation of equity securities 
to NYSE specialist units. The Allocation Committee has sole 
responsibility for the allocation of securities to specialist units 
pursuant to Board-delegated authority, and is overseen by the 
Quality of Markets Committee of the Board of Directors. The 
Allocation Committee renders decisions based upon the allocation 
criteria specified in the Allocation Policy. The Allocation Policy 
emphasizes that the most significant allocation criterion is 
specialist performance. In this regard, the Allocation Policy states 
that the Allocation Committee will base its allocation decisions on 
the Specialist Performance Evaluation Questionnaire (``SPEQ''), 
objective performance measures, and the Committee's expert 
professional judgment. See Securities Exchange Act Release No. 34906 
(October 27, 1994), 59 FR 55142 (November 3, 1994) (order approving 
revisions to the NYSE's Allocation Policy).
---------------------------------------------------------------------------

    The capital utilization measure of performance focuses on a 
specialist unit's use of its own capital in relation to the total 
dollar value of trading activity in the unit's stocks.\5\ The near 
neighbor approach compares certain performance measures of a given 
stock (price continuity, depth, quotation spread and capital 
utilization) to those of its ``near neighbors'', i.e., stocks that have 
certain similar characteristics. The stock is then categorized as 
either ``below mean'', ``mean'', or ``above mean'' as compared to its 
near neighbors for a given performance measure.\6\ These measures are 
presented to the Allocation Committee in summary form for each unit 
applying for a new listing and are a factor in allocating newly-listed 
stocks.
---------------------------------------------------------------------------

    \5\ For a comprehensive description of the capital utilization 
measure of specialist performance, see Securities Exchange Act 
Release No. 35927, supra note 2.
    \6\ For a comprehensive description of the near neighbor 
measure, see Securities Exchange Act Release No. 35927, supra note 
2.
---------------------------------------------------------------------------

    The Exchange believes the capital utilization and near neighbor 
programs provide useful objective measures of specialist performance, 
and is therefore proposing that the pilot programs be extended for an 
additional four months, through January 10, 1997. During this time, the 
Exchange expects to seek permanent approval of these programs from its 
Board of Directors, and to subsequently file such requests with the 
Commission.\7\
---------------------------------------------------------------------------

    \7\ See Amendment No. 1, supra note 1.
---------------------------------------------------------------------------

2. Statutory Basis
    The basis under the Act for the proposed rule change is the 
requirement under Section 6(b)(5) \8\ that an Exchange have rules that 
are designed to promote just and equitable principles of trade, to 
remove impediments to, and perfect the mechanism of a free and open 
market and, in general, to protect investors and the public interest. 
The Exchange believes that the proposed rule change is consistent with 
these requirements in that continuing to develop objective measures of 
specialist performance would help perfect the mechanism of a free and 
open market.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any 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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. 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. 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 will also be available 
for inspection and copying at the principal office of the Exchange. All 
submissions should refer to File No. SR-NYSE-96-17 and should be 
submitted by [insert date 21 days from date of publication].

IV. 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)(5) of the Act. 
Section 6(b)(5) requires 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. Further, the Commission finds that the proposal is 
consistent with Section 11(b) of the Act \9\ and Rule 11b-1 
thereunder,\10\ which allow exchanges to promulgate rules relating to 
specialists to ensure fair and orderly markets. For the reasons set 
forth below, the Commission continues to believe that the consideration 
of specialist capital utilization and near neighbor analysis by the 
Allocation Committee should enhance the Exchange's allocation process 
and encourage improved specialist performance, consistent with the 
protection of investors and the public interest.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78k(b).
    \10\ 17 CFR 240.11b-1.
---------------------------------------------------------------------------

    Specialists play a crucial role in providing stability, liquidity 
and continuity to the trading of securities. Among the obligations 
imposed upon specialists by the Exchange, and by the Act and rules 
thereunder, is the maintenance of fair and orderly markets in 
designated securities.\11\ To ensure that specialists fulfill these 
obligations, it is important that the Exchange develop objective 
measures of specialist performance and prescribe stock allocation 
procedures and policies that encourage specialists to strive for 
optimal performance. The Commission supports the NYSE's effort to 
develop objective measures of specialist capital utilization and near 
neighbor analysis for use in the allocation process to encourage 
improved specialist performance and market quality.
---------------------------------------------------------------------------

    \11\ See, e.g., 17 CFR 240.11b-1, NYSE Rule 104.
---------------------------------------------------------------------------

    The Commission believes that extending the pilot period for these 
two measures is appropriate because the Exchange indicates that it has 
found these measures useful in providing the NYSE Allocation Committee 
with objective measures of specialist performance. The NYSE's 
Allocation Policy emphasizes that the most significant allocation 
criterion is

[[Page 49373]]

specialist performance.\12\ In the Commission's view, performance based 
stock allocations not only help to ensure that stocks are allocated to 
specialists who will make the best markets, but will provide an 
incentive for specialists to improve their performance or maintain 
superior performance.
---------------------------------------------------------------------------

    \12\ See, e.g., Securities Exchange Act Release No. 34906, supra 
note 4.
---------------------------------------------------------------------------

    For these reasons and for the other reasons discussed in Securities 
Exchange Act Release Nos. 33369 and 35927, the Commission has 
determined to extend the pilot program for these measures through 
January 10, 1997. The Commission believes that extending the pilot 
period is appropriate because it will provide the Exchange and the 
Commission with an opportunity to study further the effects of the use 
of these measures on the NYSE's allocation process prior to the 
Exchange's submission of a request for permanent approval of these 
measures during the four month extension of the pilots. In addition, 
extending the pilots will permit the measures to run concurrently with 
the Rule 103A pilot.\13\ During the pilot period, the Commission 
continues to expect the NYSE to monitor carefully the effects of the 
near neighbor and capital utilization programs and report its findings 
to the Commission in order to assist the Commission in considering 
approval of the pilots on a permanent basis. Specifically, the 
Commission requests that the Exchange should, for the three month 
period between April 1, 1996 to June 30, 1996, submit a report that 
identifies the specialist units, the securities for which they applied, 
the stocks that were allocated to them, and the specialist units' SPEQ 
rating as presented to the Allocation Committee.\14\ In the report, the 
Exchange should identify allocations that were made to specialists 
units with relatively poor tier ratings in the objective measures and 
discuss the reasons the Allocation Committee made such allocations.\15\
---------------------------------------------------------------------------

    \13\ In Securities Exchange Act Release No. 37667 (September 11, 
1996) (File No. SR-NYSE-96-22), the Commission approved an extension 
of the NYSE Rule 103A pilot program until January 10, 1997.
    \14\ The Commission believes that this information will allow it 
to evaluate the extent to which the Allocation Committee's decisions 
appear consistent with the relative performance of specialist units 
according to the objective measures. In this regard, however, the 
Commission recognizes that the Allocation Committee also considers 
the SPEQ results and may use its professional judgment in making 
allocation decisions. See supra note 4.
    \15\ The Exchange may submit one report for both the near 
neighbor and capital utilization pilots. This report should be 
submitted to the Commission no later than November 15, 1996, along 
with any Exchange request for permanent approval of the pilot 
programs.
---------------------------------------------------------------------------

    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of 
notice of filing thereof in the Federal Register. The Commission 
believes that accelerated approval of the proposal is appropriate 
because it will enable the Exchange to continue to make use of the 
capital utilization and near neighbor measures of specialist 
performance on an uninterrupted basis and will ensure continuity and 
consistency in the stock allocation deliberation process prior to the 
Exchange's submission to the Commission of a request for permanent 
approval of these programs. Further, the initial proposals to adopt 
both the capital utilization pilot and near neighbor pilot were noticed 
previously in the Federal Register for the full statutory period and 
the Commission did not receive any comments on these proposals.\16\ 
Accordingly, the Commission believes good cause exists pursuant to 
Section 19(b) of the Act to grant accelerated approval of the pilots' 
extensions.
---------------------------------------------------------------------------

    \16\ See Securities Exchange Act Release Nos. 33369 and 35927, 
supra note 2.
---------------------------------------------------------------------------

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) \17\ that the 
proposed rule change (File No. SR-NYSE-96-17), and Amendment No. 1 
thereto, is hereby approved on an accelerated basis, through January 
10, 1997.

    \17\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
---------------------------------------------------------------------------

    \18\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jonathan G. Katz,
Secretary.
[FR Doc. 96-23976 Filed 9-18-96; 8:45 am]
BILLING CODE 8010-01-M