[Federal Register Volume 62, Number 103 (Thursday, May 29, 1997)]
[Notices]
[Pages 29170-29177]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-14018]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38669; File No. SR-NYSE-97-12]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the New York Stock Exchange, Inc., Relating to Amendments to 
the Exchange's Allocation Policy and Procedures

May 22, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on April 16, 1997, the New 
York Stock Exchange, Inc. (``NYSE'' or ``Exchange'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change 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.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange, pursuant to Rule 19b-4 of the Act, submits a proposed 
rule change amending the NYSE's Allocation Policy and Procedures. The 
text of the proposed rule change is as follows [new text is italicized; 
deleted text is bracketed]

New York Stock Exchange, Inc., Allocation Policy and Procedures

I. Purpose

    The current allocation process was established in 1976. [In 
September 1987] T[t]he Quality of Markets Committee of the NYSE Board 
of Directors has periodically appointed [a] special Allocation System 
Review Committees (ARCs) to conduct [a] comprehensive reviews of the 
allocation process. [The ARC's recommendations were implemented once 
approved by the SEC in May 1990. A second and third committee were 
appointed to review the policy and to make revisions where 
appropriate.] The objective of each review was to preserve the 
integrity of the original system and build upon its strengths, in order 
to ensure that the allocation process:
    (1) Is based on fairness and consistency;
    (2) Maximizes the professionalism, expertise and objectivity of 
committee members;
    (3) Minimizes potential conflicts of interest;
    (4) Rewards performance and provides an incentive for performance 
improvement;
    (5) Spreads reward and risk throughout the specialist system, in 
order to contribute to its strength and continued viability;
    (6) Provides the best possible match between specialist unit and 
stock, and provides an opportunity for input from the listing company 
for that purpose;
    (7) Provides for education of all participants in the allocation 
process; and
    (8) Ensures the strength and autonomy of the Allocation Committee 
in applying policy.
    [Both committees concluded that, since its inception in 1976, the 
allocation process has worked very well.] Because specialists can 
expand their business only by increasing the number of their specialty 
stocks, allocation criteria and procedures and the performance 
evaluations on which they rely focus critical attention on customer 
service and ongoing improvement in the level of specialists' 
performance. The result is higher quality markets, benefiting the 
investing public, listed companies and member organizations.
    [The committee recognizes that one key to continued success is 
ongoing education to ensure understanding of and commitment to the 
allocation process. The effectiveness of the allocation system, and the 
full confidence of the broad range of Exchange constituents in that 
process, also depend on specialist performance data and can be 
sustained only to the extent that the performance evaluation process 
provides the highest quality data to the deliberative process. The 
Allocation System Review Committee reviewed and developed 
recommendations regarding the SPEQ

[[Page 29171]]

process in 1991. It is essential that the Exchange continue to 
periodically review and seek to improve the specialist performance 
evaluation process as well as the allocation system.]
    This document presents the policy of the Exchange with respect to 
the allocation of equity securities: (1) When a common stock is to be 
initially listed on the Exchange: (2) when a security is to be 
reallocated as a result of disciplinary or other proceedings under 
Exchange Rules 103A, 475 and 476; or (3) when a specialist unit 
voluntarily surrenders its registration in a security as a result of 
possible disciplinary or performance improvement action. The purpose of 
the allocation system is: (1) To ensure that securities are allocated 
in an equitable and fair manner and that all specialist units have a 
fair opportunity for allocations based on established criteria and 
procedures; (2) to provide an incentive for ongoing enhancement of 
performance by specialist units; (3) to provide the best possible match 
between specialist unit and security and (4) to contribute to the 
strength of the specialist system.

II. Allocation Committee

Responsibility

    The Allocation Committee has sole responsibility for the allocation 
of securities to specialist units under this policy pursuant to 
authority delegated by the Board of Directors, and is overseen by the 
Quality of Markets Committee of the Board (``QOMC''). The Allocation 
Committee renders decisions based on the allocation criteria specified 
in this policy (see Section IV). Allocation decisions are published for 
Exchange Floor members and are communicated to listing companies by 
Exchange staff. The Allocation Committee gives periodic reports to the 
QOMC.

Composition

    The composition of the Allocation Committee is intended to maximize 
expertise and objectivity in the allocation process.
    To this end, the committee is comprised of 7 Floor brokers, 
including 3 broker Governors (1 of whom may be an independent/two 
dollar broker), 4 other Floor brokers from the Allocation Panel (1 of 
whom must be an independent/two dollar broker) and 2 allied members 
from the Market Performance Committee or the panel. For options 
allocations, only 1 Governor shall sit on the committee. Commission 
brokers contribute their experience in conducting business with 
specialists, as well as broad-based knowledge of units on the Floor. 
Therefore, they have the largest representation on the committee. 
Allied members often provide a perspective on the trading 
characteristics of new listings and experience as an off-Floor customer 
of the specialists. Including Governors on the committee adds 
comprehensive knowledge of specialist performance as well as a broad 
perspective and expertise relating to the Exchange.
    The 9-member committee is chosen from an Allocation Panel (See 
Section III), which includes Floor brokers, allied members, Governors, 
and Senior Floor Officials. Selection of committee members within the 
appropriate member categories is random as to individuals, but an 
effort is made to appoint individuals who have not yet served on the 
committee before reappointing past committee members. The Exchange also 
tries to provide a balanced Floor geographical mix--3 Main Room, 2 
Garage, 1 Blue Room, 1 Expanded Blue Room. Efforts are also made to 
include no more than one broker or allied member whose firm is 
affiliated with a specialist unit.

Term of Service

    Committee members serve 4-month terms, and every two months four or 
five members are rotated, thereby fostering continuity and objectivity 
in the decision-making process.
    A committee member whose term has expired is ineligible for 
consecutive reappointment, but after two months is eligible for further 
service if again randomly selected.

Quorum Requirement

    A full Allocation Committee affords optimal participation, and 
every effort is made to have 9 members for each allocation decision. 
Whenever standing committee members are unable to serve for a 
particular meeting or must abstain from deliberations regarding 
particular stocks, randomly selected panel members may substitute to 
complete a 9-member committee. A quorum requirement is established so 
that allocation decisions can otherwise be made, provided there are 7 
members including 6 Floor brokers, at least two of whom are Governors, 
and 1 allied member. For options allocations, a quorum shall include 
one Governor. In the event that any of the broker Governors on the 
standing committee are not able to attend an Allocation Committee 
meeting, or are unable to participate in the allocation of a particular 
stock, the Exchange first seeks to substitute for such Governor(s) with 
another broker Governor on the panel. If no such Governor is available, 
a Senior Floor Official broker on the panel who is not currently a 
standing member of the Allocation Committee may serve as a substitute 
for a Governor for the purpose of meeting the Governor quorum 
requirement. If no Senior Floor Official broker on the panel is 
available, any Senior Floor Official broker on the standing committee 
may substitute for the absent Governor(s) for the purpose of meeting 
the Governor quorum requirement. The Exchange seeks as a substitute a 
Senior Floor Official who is not currently a standing member of the 
Allocation Committee in order to maximize the level of seniority of the 
standing committee. In the event no current Floor broker or allied 
panel member is available, a former Allocation Committee chairman may 
substitute, but may not substitute for a Governor for the purpose of 
meeting the Governor quorum requirement, unless such former Allocation 
Committee chairman is a Senior Floor Official on the panel. A former 
chairman brings unique experience and expertise to the process.

Chairman

    The Allocation Committee chairman is selected from among the Floor 
brokers on the standing committee whose firms conduct business with the 
public, as well as Governors. (Governors and brokers whose firms are 
affiliated with a specialist unit are ineligible to serve as chairman.) 
All candidates for chairman must have experience on the Allocation 
Committee to qualify. The chairman is elected by current Allocation 
Committee members, including outgoing members, and members of the 
committee who will be serving at the time of the chairman's 
appointment.
    While allocation decisions are made by the committee as a whole, 
the chairman's role calls for leadership in conducting meetings in 
accordance with policy and procedure, emphasizing the importance of 
preserving the integrity of the allocation process, the committee's 
responsibility to serve the best interests of the public and the 
Exchange, and the need to suspend individual interest and avoid 
possible conflicts of interest.
    In order to foster a complete understanding of and ensure 
consistency of the allocation process, each new chairman is elected two 
months prior to the commencement of his or her term as chairman. The 
eligible members will thus include the brokers with 4 to 6 months 
remaining in their committee terms, plus the brokers selected for 
rotation onto the committee two months hence. The chairman will

[[Page 29172]]

serve until the end of his or her committee term (i.e., two to six 
months).
    If elected prior to the commencement of his or her committee term 
the chairman-elect will attend meetings as an observer and discuss the 
allocations with the current chairman. If already serving on the 
committee, the chairman-elect will likewise discuss the meetings with 
the current chairman. Orientation of each new chairman will also be 
provided by former chairmen of the Allocation Committee and by the 
Quality of Markets Committee. A standardized agenda for education of 
new chairmen will be made available.

Committee Member Abstentions

    In making allocation decisions pursuant to this policy, it is the 
responsibility of each Allocation Committee member to adhere strictly 
to the approved allocation criteria. A committee member who feels he or 
she cannot abide by the criteria due to potential conflict of interest 
(e.g., allocation involving a relative, a financial interest, relief 
specialists, etc.) should disqualify himself or herself from the 
deliberations.
    If an Allocation Committee member has an investment banking 
relationship (defined as manager or co-manager of an underwriting 
group) or is in an advisory fee relationship with an about-to-be listed 
company, that committee member must abstain from allocation 
deliberations with respect to that particular stock. A broker or allied 
member whose firm is affiliated with a specialist unit must abstain 
from deliberations regarding allocation of a stock for which that unit 
has applied.

Committee Disclosure

    The names of the standing committee members will be kept 
confidential. Allocation Committee books will not be delivered to 
committee members on the trading Floor. Committee members will pick up 
their books at the Committee Support Services area.

Committee Information

    Allocation policy provides the application form and related written 
correspondence as the means by which interested parties transmit to the 
Allocation Committee information pertinent to allocations. Exchange 
members and investment bankers may not initiate contact with Allocation 
Committee members pertaining to an upcoming allocation. Allocation 
Committee members will enforce this prohibition. Allocation decisions 
are made by the committee as a whole, based on the published allocation 
criteria. Under all circumstances the confidentiality of the Allocation 
Committee's deliberations is paramount.

Observation of Committee Meetings

    All incoming committee members are expected to observe as many 
committee meetings as possible prior to the commencement of their 
committee terms.

III. Allocation Panel

Composition

    The composition of the Allocation Panel reflects the committee 
structure and includes 28 Floor brokers, [8] 12 allied members 
(including the 4 allied members serving on the Market Performance 
Committee), the 8 Floor broker Governors who are part of the panel by 
virtue of their appointment as Governors, [the 4 allied members serving 
on the Market Performance Committee,] and a minimum of 5 Senior Floor 
Official brokers that have been appointed to the panel.

Selection

    Panel members are nominated by the membership. A selection 
committee, appointed by the Floor Directors, reviews the nominations 
and recommends panel appointments to the Floor Directors, who finalize 
recommendations for presentation to the QOMC. The selection committee 
operates in accordance with such guidelines as are established and made 
known to the membership from time to time. The selection committee and, 
in turn, the Floor Directors seek to develop a representative panel 
that maximizes professional expertise and broad exposure on the Floor 
by including members from various types of firms and from diverse 
locations on the Floor. To the maximum extent possible, the Floor 
members on the panel are expected to be a core group of experienced, 
senior professionals, such as former Allocation Committee chairmen, 
Senior Floor Officials, and current and former Floor Governors.
    In the case of allied members, the member organization is appointed 
to the panel. The individual representative is then selected by the 
organization. A Floor Director gives guidance to the organization in 
selecting an appropriate representative.

Eligibility

    Professional expertise and experience are essential to the 
excellence of the allocation system. Therefore, a Floor member must 
have a minimum of 5 years experience as a member on the Floor in order 
to be eligible for appointment to the Allocation Panel. In the case of 
allied members, the member organization shall select a representative 
with at least 51 years of trading experience in listed equities and a 
senior position on the trading desk. Each allied member may designate 
one alternate who meets the Panel qualifications, subject to approval 
by the Floor Directors.

Term of Service

    Panel members are appointed to serve a one-year term. They may 
serve a maximum of 6 consecutive one year terms. Once a panel member 
has served a total of two 4-month committee terms, the member is 
rotated off the panel at the next annual meeting of the Exchange. The 
panel members serve staggered terms so that every 2 months 4 or 5 
members rotate from the committee. Once rotated off, the member is 
ineligible for appointment to the panel for one year. Governors are not 
subject to the two committee term restriction, but remain on the panel 
for as long as they are Governors. Senior Floor Officials are subject 
to annual reappointment, but are not subject to the two committee term 
restriction and are not limited to a maximum of six consecutive one 
year terms.

IV. Allocation Criteria

    Allocation decisions under this policy are based on the 
professional judgment of the Allocation Committee in applying specified 
criteria.
    In order to ensure that a single criterion is not afforded too 
great a weight in any allocation decision, and in order to ensure 
consistency in the allocation process, the Allocation Committee will 
base its decisions on the following:
    (i) Results of the Specialist Performance Evaluation Questionnaire 
(``SPEQ'') (to be given [no more than] 25% weight);
    (ii) Objective performance measures; and
    (iii) The committee's expert professional judgment in considering 
the SPEQ, objective measures of performance, and other criteria as 
enumerated below. Set forth below are the criteria, followed by an 
explanation of each:

--SPEQ
--Objective performance measures
--Professional judgment
--Listing company input
--Allocations received
--Capital deficiency, disciplinary actions, justifiable complaints
--Foreign listing considerations

[[Page 29173]]

Specialist Performance Evaluation Questionnaire

    The SPEQ includes several facets. Professional judgment determines 
the relative weight of the various aspects listed below:
    (a) Ratings in the current quarter, particularly relative to other 
applicants;
    (b) Improved ratings;
    (c) Ratings over time (e.g., 4 quarters), to consider possible 
aberrations in ratings;
    (d) The strengths of the individual specialist designated by the 
unit to handle the stock, relative to the strengths of the specialists 
designated by other applicants, as indicated by SPEQ comments that 
frequently refer to performance of individuals;
    (e) Ratings and written comments on specific specialist functions 
in relation to particular characteristics of the new listing; and
    (f) Written SPEQ comments as to the performance of the entire unit.

Objective Measures of Performance

    The objective performance measures include TTV, stabilization, 
capital utilization, near neighbor analysis and such other measures as 
may be adopted. Objective measures in Rule 103A include:
    (a) Timeliness of regular openings;
    (b) Promptness in seeking Floor official approval of a non-
regulatory delayed opening;
    (c) Timeliness of DOT turnaround; and
    (d) Response to administrative messages.
    The objective measures are reported to the Allocation Committee as 
a ``pass'' or ``fail'' as specified in Rule 103A.
    Specialist dealer performance is measured in terms of participation 
(TTV); [and] stabilization; capital utilization, which is the degree to 
which the specialist unit uses its own capital in relation to the total 
dollar value of training in the unit's stocks; and near neighbor 
analysis, which is a measure of specialist performance and market 
quality comparing performance in a stock to performance of stocks hat 
have similar market characteristics. The Allocation Committee receives 
the most recent data available and historical data with respect to each 
applicant's performance in relation to other units evaluated during the 
same time period.
    The Allocation Committee is informed if an applicant has been 
subject to a performance improvement action in the most recent four 
quarters.
    Although stocks are allocated to units, as noted above, the 
committee may give consideration to the person who will serve as the 
specialist. Therefore, it is important that the application accurately 
represent the unit's plans as to the individual who will handle the 
stock.

Professional Judgment

    The expert, professional judgment of the members of the Allocation 
Committee is crucial to the allocation decision-making process. 
Decisions are based on professional judgment, rather than mathematical 
calculation. Each committee member evaluates the data and determines 
how the specified criteria should be applied in each allocation, based 
on his or her expertise and experience from the viewpoint of his or her 
role in the Exchange community. In addition to the SPEQ and the 
objective performance measures described above, the committee also 
considers listing company input, allocations received, capital and 
disciplinary and cautionary data, as detailed below.

Listing Company Input

    Listing on the New York Stock Exchange is a significant development 
for a company, and the assignment of a specialist through the 
allocation process is an important step. The Exchange's Allocation 
Policy is intended to provide listing companies with a choice of 
alternatives as to how their specialist unit may be selected. The 
listing company may choose to have its specialist unit selected by the 
Allocation Committee, in accordance with the criteria specified in the 
Allocation Policy, and the exercise of the Committee's expert 
professional judgment. Alternatively, the listing company may choose to 
become more directly involved in the selection process. In that case, 
the company may request that the Allocation Committee select specialist 
units that would be appropriate to trade the company's stock, with the 
company then making the final selection from among the group of units 
as chosen by the Allocation Committee. Such a group shall consist of 
three, four, or five units, selected by the Committee as demonstrably 
deemed to be the most qualified to receive such allocation from among 
the units that apply, based upon the criteria set forth in this policy. 
These procedures shall apply to the allocation of a newly-listing 
company, as well as the reallocation of an already listed company.
Specialist Unit Selected by Allocation Committee
    If the listing company so chooses, the Allocation Committee shall 
select the specialist unit to be allocated the company's stock based on 
the Committee's expert assessment of the type of specialist unit that 
would be most appropriate for the company, and the Committee's 
professional evaluation of performance data and other relevant 
information as specified in the Allocation Policy. The listing company 
may submit a letter to the Allocation Committee describing the 
characteristics (e.g., trading philosophy, policies on maintaining 
communications with its listed companies, etc.) it believes would be 
appropriate for the unit that would be selected to trade its stock. The 
listing company may not, however, identify any particular specialist 
unit in its letter, or specify characteristics so unique as to be 
applicable only to a readily identifiable specialist unit.
Specialist Unit Selected by Listing Company
    If the listing company so chooses, it may request that the 
Allocation Committee select specialist units that would be appropriate 
to trade the company's stock, with the company then making the final 
selection. If the listing company chooses this alternative, the company 
may either make no communication to the Allocation Committee, or it may 
submit a letter (as noted in the preceding paragraph) to the Committee 
describing the characteristics the company believes would be 
appropriate for the units to be selected by the Committee. The listing 
company may not, however, identify any particular specialist unit in 
its letter, or specify characteristics so unique as to be applicable 
only to a readily identifiable specialist unit.
Meetings Between Listing Company and Specialist Units
    Within two business days after the selection of a group of 
specialist units as described above (unless the Exchange has determined 
to permit a longer time period in a particular case), the listing 
company shall meet, either in person or by teleconference, with 
representatives of each of the specialist units. Meetings to be held in 
person shall normally be held at the Exchange, unless the Exchange has 
agreed that they may be held elsewhere. At least one representative of 
the listing company must be a senior official of the rank of Corporate 
Secretary of above of that company. No more than three representatives 
of each specialist unit may participate in the meeting, each of whom 
must be employees of the specialist unit, and one of whom must be the 
individual who is proposed to trade the company's stock.

[[Page 29174]]

Listing Company's Selection of Specialist Unit
    Within one business day following its meeting with representatives 
of the specialist units (or such longer time period as the Exchange may 
permit in a particular case), the listing company shall select its 
specialist unit in writing, signed by a senior official of the rank of 
Corporate Secretary or higher duly authorized to so act on behalf of 
the company. The Allocation Committee shall then confirm the allocation 
of the stock to that unit, at which time the stock shall be deemed to 
have been so allocated.

Allocation Applications

    In their applications for the allocation of a listing company's 
stock, specialist units must describe all pertinent factors as to why 
they believe they should be allocated the stock. At a minimum, such 
factors should include how the unit will allocate resources (staff and/
or capital) to accommodate this new issue and what new resources, if 
any, will the unit need to acquire to service this stock [a description 
of the unit's capital base]; identify and experience of the individual 
proposed to trade the stock, with a description of other securities 
traded by that individual; and a discussion of why that individual is 
appropriate to trade the listing company's stock. If the listing 
company has submitted a letter to the Allocation Committee as permitted 
herein, a copy of such letter shall be made available to all specialist 
units. In their applications to be allocated the stock of such company, 
specialist units shall be expected to indicate how they meet the 
characteristics described in the company's letter. If, within six 
months of the date a newly-listed company begins trading on the 
Exchange (or a company which has been reallocated begins trading with 
its new unit), the specialist unit determines that the individual 
specialist who trades the company's stock should be an individual other 
than the one named in the allocation application, the specialist unit 
shall so inform the Allocation Committee, in writing, and disclose its 
reasons therefor. These letters shall be maintained in the permanent 
records of the Committee.
    In addition, specialist units must describe in their applications 
to be allocated the stock of a listing company any contacts they, or 
any individual acting on their behalf, have had with any employee of 
that company, or any individual acting on behalf of that company with 
regard to its prospective listing on the Exchange, within six months 
prior to the date that allocation applications are solicited with 
respect to that company.

Allocations Received

    The committee is provided information on allocations received by 
each unit in the preceding year and the current year, the number of 
applicants for those stocks allocated in the past and the number of 
stocks lost through corporate mergers, delistings or other such events 
over which the specialist has no control. While a recent allocation 
does not preclude a unit from being awarded a subsequent new listing, 
the committee considers such factors in comparing similarly qualified 
applicants.

Capital Deficiency Information

    The committee is informed of any applicant that is in capital 
violation, or is potentially in violation, based on a current check of 
estimated capital data (conducted between the application deadline and 
the date of the allocation meeting). A unit with a capital deficiency 
will be informed in advance of the meeting and may provide information 
for the committee explaining the circumstances of the unit's capital 
situation. The unit's capital history will also be provided (frequency 
of past violations and borderline situations).

Disciplinary and Cautionary Data

    The committee is informed of disciplinary and cautionary actions, 
as described below.
    Cautionary letters and summary fines regarding market maintenance 
are reported for 12 months beginning at the time of issuance.
    All other cautionary letters and summary fines are reported for 6 
months beginning at the time of issuance.
    The preceding parameters apply equally to disciplinary or 
cautionary actions that result from a justifiable complaint (public or 
institutional complaint received via correspondence).
    The committee is informed of significant pending enforcement 
matters. The investigations are included in an allocation file when 
[(a) a stipulation is signed or (b) when charges are issued] the 
commencement of an enforcement action is authorized. If formal 
disciplinary action is ultimately taken, the item would remain in the 
file for [6] 12 months after a Hearing Panel decision is final.

Foreign Listing Considerations

    The special characteristics of foreign issues often require the 
specialist to commit extra resources in order to be a presence in the 
foreign market. Therefore, in allocating a foreign issue, the committee 
also considers a specialist applicant's commitment to establish and 
maintain relationships with arbitrage houses and foreign brokerage 
firms, and to gain familiarity with various aspects of trading 
securities of foreign issuers.

V. Policy Notes

Spin-offs, Listing of Related Companies and Relistings

    Spin-offs and related companies of listed companies and relistings 
are treated as new listings, with allocation open to all units. 
Information about the relationship to a listed company or prior listing 
and the name of the specialist involved, is included on the stock data 
sheet inviting specialist applications. The same information is 
provided to the committee for consideration in their deliberations 
regarding the allocation of the new listing. While committee members 
use their own judgment to determine what consideration, if any, should 
be given to that information, a listing company's request not to be 
allocated to its former specialist unit (or the specialist in the 
parent or related company) will be honored.

Listed Company Mergers

    When two NYSE listed companies merge, the merged entity is assigned 
to the specialist in the company that is determined to be the survivor-
in-fact (dominant company). Where no surviving/dominant entity can be 
identified, the matter is referred to the Allocation Committee and all 
specialist units are invited to apply.
    In situations involving the merger of a listed company and an 
unlisted company, where the unlisted company is determined to be the 
survivor-in-fact, such company may choose to remain registered with the 
specialist unit that had traded the listed company entity in the 
merger, or it may request that the matter be referred to the Allocation 
Committee. In such a case, applications will be invited from all 
specialist units, and the Allocation Committee shall honor the 
company's request not to be allocated to the specialist unit that had 
traded the listed company.
    ``Target'' Stock. The specialist unit registered in such stock 
prior to a separate listing shall remain registered in such stock after 
its separate listing, unless the listing company requests that the 
matter be referred to the Allocation Committee. In such a case, 
applications will be invited from all specialist units, and the 
Allocation Committee shall

[[Page 29175]]

honor the company's request not to be allocated to the specialist unit 
that had traded the ``target'' stock.

Allocation Freeze Policy

    In the event that a specialist unit: (i) loses its registration in 
a specialty stock as a result of proceedings under Exchange Rules 103A, 
475 or 476; or (ii) voluntarily withdraws its registration in a 
specialty stock as a result of possible proceedings under those rules, 
the unit will be ineligible to apply for future allocations for the six 
month period immediately following the reassignment of the security 
(Allocation Prohibition).
    Following the Allocation Prohibition, a second six month period 
will begin during which a specialist unit may apply for new listings, 
provided that the unit demonstrates to the Exchange relevant efforts 
taken to resolve the circumstances that triggered the Allocation 
Prohibition. The determination as to whether a unit may apply for new 
listings will be made by Exchange staff, in consultation with the Floor 
Directors. The factors the Exchange will consider will vary depending 
on the unit's particular situation, but may include one or more steps 
such as:

--Supplying additional manpower/experience;
--Changes in professional staff;
--Attaining appropriate dealer participation;
--Enhancing back-office staff; and
--Implementing more stringent supervision/new procedures.

Allocation Sunset Policy

    Allocation decisions shall remain effective with respect to any 
initial public offering listing company which lists on the Exchange 
within three months of such decision. If a listing company does not 
list within three months, the matter shall be referred again to the 
Allocation Committee, with applications invited from all units.

Support of the Allocation System

    The Allocation Committee views positively a specialist unit's 
applying for a broad range of issues.

Criteria for Applicants That Are Not Currently Specialists

    Since an entity seeking to enter the specialist business does not 
have a history directly comparable to that of existing units, the 
Allocation Committee considers the following criteria with respect to 
applicants that are not currently specialists.
    1. Individuals proposed as specialists must have successfully 
completed the Exchange's specialist examination.
    2. The proposed unit must demonstrate that it understands the 
specialist business, including the needs of brokers, their 
organizations, and their customers.
    3. The proposed unit must demonstrate an ability and willingness to 
trade as necessary to maintain fair and orderly markets with depth and 
liquidity, and facilitate the execution of orders.
    (a) The proposed unit should indicate the extent of its capital 
commitment to specializing over and above the minimum capital 
requirements.
    (b) The proposed unit must have sufficient specialist and clerical 
support dedicated to maintaining and servicing the market in a 
specialty stock.
    (c) If the proposed specialist unit or any of its participants is 
presently a specialist or market maker on any exchange, performance 
during the prior 12 months, as evidenced by available data maintained 
by such exchange which evaluates the quality of performance of the unit 
or its participants as a specialist or market maker on such exchange, 
will be considered by the Allocation Committee.
    4. Other factors that will be considered by the Allocation 
Committee include any action taken or warning issued within the past 12 
months by any regulatory or self-regulatory organization against the 
unit or any of its participants [relating to:] with respect to any 
capital or operational problem, or any regulatory or disciplinary 
matter.
    (a) Any capital or operational problem; or
    (b) Any Floor-related activity.

VI. Procedures

Applications

    Whenever a security is to be allocated to a specialist, unit, all 
specialist units are invited to submit applications to the Exchange 
prior to the published deadline for the allocation of such security. 
The application of any specialist unit shall be in such form as shall 
be approved from time to time by the Exchange, but each applicant shall 
be free to submit in writing such additional information in support of 
its application as it may wish to bring to the attention of the 
Allocation Committee.

Blanket Applications

    All specialist units shall be deemed to have filed with the 
Exchange a blanket application pursuant to which the applicant agrees 
to accept the allocation of any security. Any security allocated to a 
specialist unit on the basis of its blanket application shall not be 
reflected in the records of the Exchange as a ``security gained'' nor 
shall it prejudice that unit's eligibility for future allocations.

Decision Making

    An allocation decision pursuant to this policy is made on the basis 
of the specified criteria, by a majority vote of the committee members 
present at the meeting and eligible to vote on such matter.

Announcement

    Written notice of the name and post location of the successful 
applicant are make known to the members of the Exchange and to the 
issuer of the security allocated.

Registration of Specialists

    Each member associated with the specialist unit to which any 
security is allocated who acts as a regular specialist in such security 
shall be registered as a specialist in such security pursuant to Rule 
103.

VII. Education

    Education of all participants is a key to ensuring continued 
quality and consistency in the allocation process. A summary of the 
education process follows:
    New panel members receive an orientation conducted by former 
Allocation Committee chairmen and staff, and serve as observers at 
meetings before their terms begin. A standardized agenda for educating 
allocation Committee members will be made available. The new Allocation 
Committee chairman is elected two months in advance of his or her 
appointment to provide time to observe and learn from the existing 
chairman. The newly elected chairman also receives an orientation by 
former committee chairmen and the Quality of Markets Committee. A 
standardized agenda for educating new chairmen will be made available.
    Education efforts regarding the allocation process are offered 
periodically for specialists as well as the general membership.

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

[[Page 29176]]

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 intent of the Exchange's Allocation Policy and Procedures is: 
(1) To ensure that securities are allocated in an equitable and fair 
manner and that all specialist units have a fair opportunity for 
allocations based on established criteria and procedures; (2) to 
provide an incentive for ongoing enhancement of performance by 
specialist units; (3) to provide the best possible match between a 
specialist unit and a security; and (4) to contribute to the strength 
of the specialist system. In September 1987, the Quality of Markets 
Committee (``QOMC'') appointed the first Allocation Review Committee 
(``ARC'') to undertake a comprehensive review of the Exchange's then-
existing allocation procedures which had been in effect since 1976. 
ARC's recommendations were filed with the SEC in 1988 and approved in 
1990.\2\ In April 1991, the QOMC determined that the Allocation Policy 
and Procedures should be re-examined and appointed a new committee, ARC 
II, to do so. The Committee's recommendations were subsequently filed 
with the Commission, and approved in 1993 as a one-year pilot.\3\ In 
August 1994, the Exchange filed for and subsequently received permanent 
approval of that pilot.\4\ In accordance with the Exchange's commitment 
to preserve the integrity of the existing allocation system while 
refining the allocation policy as necessary, ARC III convened in 
November 1993. The Committee's recommendations were filed with the 
Commission, and approved in September 1994.\5\ In December 1995, the 
QOMC appointed ARC IV to continue to review the allocation process. The 
Committee made several recommendations with respect to the Allocation 
Policy and Procedures. Several of these recommendations were submitted 
by the Exchange for immediate effectiveness in March 1997 for a seven-
month pilot period.\6\ Additional recommendations of ARC IV are being 
submitted in this filing.
---------------------------------------------------------------------------

    \2\ Securities Exchange Act Release No. 27803 (Mar. 14, 1990), 
55 FR 10740 (Mar. 22, 1990) (order approving File No. SR-NYSE-88-
32).
    \3\ Securities Exchange Act Release No. 33121 (Oct. 29, 1993), 
58 FR 59085 (Nov. 5, 1993) (order approving File No. SR-NYSE-92-15).
    \4\ Securities Exchange Act Release No. 34906 (Oct. 27, 1994), 
59 FR 55142 (Nov. 3, 1994) (order approving File No. SR-NYSE-94-30).
    \5\ Securities Exchange Act Release No. 34626 (Sept. 1, 1994), 
59 FR 46457 (Sept. 8, 1994) (order approving File No. SR-NYSE-94-
18).
    \6\ Securities Exchange Act Release No. 38373 (Mar. 7, 1997), 62 
FR 13421 (Mar. 20, 1997) (notice of filing and immediate 
effectiveness for a seven-month period of File No. SR-NYSE-97-04).
---------------------------------------------------------------------------

    The principle changes to the Exchange's Allocation Policy and 
Procedures are described below.
    Mergers of listed and unlisted companies. Currently, companies 
resulting from mergers of listed and unlisted companies are registered 
by staff with the specialist in the listed company, regardless of size 
or survivorship considerations. Under the proposal, a company resulting 
from the merger of a listed company with an unlisted company would 
remain with the specialist in the listed company unless the unlisted 
company is determined to be the survivor-in-fact and the unlisted 
company requests allocation, in which case, all units would be invited 
to apply.
    Targeted stock. Currently, there is no policy for targeted stock. 
Under the proposal, these securities (also known as ``letter stock'') 
typically are ``targeted'' to a specific aspect of an issuer's overall 
business. When such a security is ``uncoupled'' and becomes an 
independent entity, it would remain with the current specialist in the 
target stock unless the issuer requests that the new stock be allocated 
by the Allocation Committee.
    Reporting of disciplinary actions. Currently, enforcement actions 
are reported to the Allocation Committee when the stipulation is signed 
or charges are issued. Such items remain in the file for 6 months after 
a Hearing Panel decision is made final. Under the proposal, enforcement 
actions would be reported to the Allocation Committee when an 
enforcement case is authorized. Moreover, if formal disciplinary action 
is ultimately taken, the item would remain in the file for 12 months 
after a Hearing Panel decision is final. In addition, the current 
policy interpretation that summary fines, not just cautionary letters, 
for market maintenance are reported for 12 months, has been codified.
    Allocation applications. Currently, a specialist's application for 
an allocation of a particular issue must contain a description of the 
unit's capital base. Under the proposal, the specialist is required to 
describe how it will allocate resources (staff and/or capital) to 
accommodate the new issue being applied for, and what new resources, if 
any, will the unit need to service the stock being applied for.
    Allocation ``Sunset'' Policy. Currently, a one year sunset policy 
has been followed. Under the proposal, initial public offering 
companies that list within three months after allocation would be 
traded by the specialist unit that originally received the allocation. 
Thereafter, the matter would be referred again to the Allocation 
Committee, with applications invited from all units.
    Allocation ``Freeze'' Policy. The Allocation Freeze Policy, which 
provides that a specialist firm may not apply to be allocated a stock 
following reallocation of a stock or voluntary withdrawal of 
registration in a stock as a result of an Exchange disciplinary 
proceeding would be incorporated into the Allocation Policy. The 
Allocation Freeze Policy was approved in a prior filing, but was not 
incorporated directly into the Allocation Policy.
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.

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

    The Exchange does not believe that the proposed rule change will 
impose any inappropriate burden on competition.

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

[[Page 29177]]

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-97-12 and should be 
submitted by June 19, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-14018 Filed 5-28-97; 8:45 am]
BILLING CODE 8010-01-M