[Federal Register Volume 62, Number 139 (Monday, July 21, 1997)]
[Notices]
[Pages 39043-39045]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-19072]



[[Page 39043]]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38828; File No. SR-NYSE-97-12]


Self-Regulatory Organizations; the New York Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change Relating to Amendments 
to the Exchange's Allocation Policy and Procedures

July 9, 1997.

I. Introduction

    On April 16, 1997, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend the Exchange's 
Allocation Policy and Procedures.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 38669 (May 22, 1997), 62 FR 29170 (May 29, 
1997). No comments were received on the proposal.

II. Background

    The Exchange's Allocation Policy and Procedures govern 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.
    In its proposal, the NYSE states that 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.\3\ 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.\4\ In August 1994, the Exchange filed for and subsequently 
received permanent approval of that pilot.\5\ 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.\6\ 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.\7\ 
Additional recommendations of ARC IV are contained in this filing.
---------------------------------------------------------------------------

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

III. Description of Proposal

    The NYSE proposes to amend Part IV, Allocation Criteria, of its 
Allocation Policy and Procedures with respect to the Specialist 
Performance Evaluation Questionnaire (``SPEQ), objective measures of 
performance, allocation applications, and disciplinary and cautionary 
data.
    With respect to the Exchange's SPEQ,\8\ the NYSE proposes that in 
considering whether a stock will be assigned to a particular specialist 
unit, the Allocation Committee shall give 25% weight to the results of 
the SPEQ. Currently, the policy only requires the Allocation Committee 
to consider no more than 25% of the SPEQ results.
---------------------------------------------------------------------------

    \8\ The SPEQ is a quarterly survey on specialist performance 
completed by eligible floor brokers (i.e., any floor broker with at 
least one year of experience). The SPEQ consists of 21 questions and 
requires floor brokers to rate, and provide written comments on, the 
performance of specialist units with whom they deal frequently.
---------------------------------------------------------------------------

    With respect to the objective measures of performance used by the 
Allocation committee in considering whether to assign a stock to a 
particular unit, the NYSE proposes to add two criteria, capital 
utilization and near neighbor analysis. Capital utilization measures 
the degree to which the specialist unit uses its own capital in 
relation to the total dollar value of trading in the unit's stocks, 
while the near neighbor analysis measures specialist performance and 
market quality by comparing performance in a stock to performance of 
stocks that have similar market characteristics. The Commission had 
previously approved the use of these criteria in allocation decisions, 
but these criteria had never been codified into the actual language of 
the allocation policy and procedures.\9\
---------------------------------------------------------------------------

    \9\ Securities Exchange Act Release No. 38158 (Jan. 10, 1997), 
62 FR 2704 (Jan. 17, 1997).
---------------------------------------------------------------------------

    With respect to allocation applications, the NYSE proposes that in 
their applications for the allocation of a listing company's stock, 
specialist units describe all pertinent factors as to why they believe 
they should be allocated the stock, which shall include how the unit 
will allocate resources (staff and/or capital) to accommodate this new 
issue and what new resources, if any, the specialist unit will meet to 
acquire to service this stock. The NYSE proposes to delete the language 
requiring a description of the specialist unit's capital base.
    With respect to the reporting of disciplinary actions, the NYSE 
proposes to amend its allocation policy and procedures such that 
enforcement actions would be reported to the Allocation Committee when 
an enforcement case is authorized, rather than when the stipulation is 
signed or charges are issued, as is currently required. 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, 
rather than six months, as is currently required. In addition, the 
current policy interpretation that summary fines, not just cautionary 
letters, for market maintenance are reported for 12 months, would be 
codified.
    The NYSE also proposes to amend Part V, Policy Notes, of its 
Allocation Policy and Procedures with respect to mergers of listed and 
unlisted companies, targeted stock, allocation ``freeze'' policy, 
allocation ``sunset''

[[Page 39044]]

policy, and criteria for applicants that are not currently specialists.
    With respect to mergers of listed and unlisted companies, the NYSE 
proposes to amend its allocation policy and procedures to allow a 
company that results from the merger between a listed company and an 
unlisted company to remain registered with the specialist unit that had 
traded the listed company. Under the proposal, however, if the unlisted 
company is determined to be the survivor-in-fact, the unlisted company 
may request that the Allocation Committee reallocate the stock of the 
unlisted company. In this case, all specialist units would be invited 
to apply, except that the Allocation Committee shall honor the unlisted 
company's request not to be allocated to the specialist unit that had 
traded the listed company's stock. Currently, companies resulting from 
mergers of listed and unlisted companies must remain registered with 
the specialist for the listed company regardless of whether the 
unlisted company is the survivor-in-fact.
    With respect to targeted stock, the NYSE proposes that when such a 
security is ``uncoupled'' and becomes an independently entity, the 
targeted stock would remain registered with the current specialist in 
the listed company. Under the proposal, however, the listed company may 
request that the Allocation Committee reallocate the targeted stock of 
the listed company. In this case, all specialist units would be invited 
to apply, except that the Allocation Committee shall honor the listed 
company's request that the targeted stock not be allocated to the 
specialist unit that had traded the target stock. In its filing, the 
NYSE notes that there is no current policy for allocating targeted 
stock.
    The NYSE proposes to codify into its Allocation Policy and 
Procedures its 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. Specifically, 
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 specialist unit would be ineligible to apply for future allocations 
for the six month period immediately following the reassignment of the 
security. Following this initial six month period, a second six month 
period will begin during which a specialist until may apply for new 
listings, provided that the unit demonstrates to the Exchange relevant 
efforts taken to resolve the circumstances that triggered the 
prohibition. Under the allocation freeze policy, 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 specialist unit's 
particular situation, but may include whether the specialist unit has: 
Implemented more stringent supervision and new procedures; enhanced 
back-office staff; attained appropriate dealer participation; changed 
professional staff; and supplied additional manpower and experience.
    With respect to the allocation ``sunset'' policy, the NYSE proposes 
that allocation decisions remain effective with respect to any initial 
public offering companies that list within three months. Under the 
proposal, if a listing company does not list within three months, the 
matter shall be referred again to the Allocation Committee and 
applications invited from all specialist units. The NYSE notes that 
previously it had followed a one-year sunset policy.
    With respect to the criteria for applicants that are not currently 
specialists, the NYSE proposes to add a provision requiring that the 
Allocation Committee consider, in addition to capital or operational 
problems, 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 with respect to any regulatory or disciplinary 
matter. Currently, the policy only requires consideration of those 
disciplinary matters or warnings related to any Floor-related activity.

IV. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, with the requirements of Section 6(b).\10\ In particular, 
the Commission believes the proposal is consistent with the Section 
6(b)(5) requirements that the rules of an exchange be designed to 
promote just and equitable principles of trade, to prevent fraudulent 
and manipulative acts, and, in general, to protect investors and the 
public interest. Further, the Commission finds that the proposal also 
is consistent with Section 11(b) of the Act \11\ and Rule 11b-1 \12\ 
thereunder, which allow exchanges to promulgate rules relating to 
specialists to ensure fair and orderly rules relating to specialists to 
ensure fair and orderly markets.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
    \12\ 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 the specialists by the Exchange, and by the Act and the 
rules thereunder, is the maintenance of fair and orderly markets in 
their designated securities.\13\ To ensure that specialists fulfill 
these obligations, it is important that the Exchange develop and 
maintain stock allocation procedures and policies that provide 
specialists with an initiative to strive for optimal performance.
---------------------------------------------------------------------------

    \13\ See 17 CFR 240.11b-1; NYSE Rule 104.
---------------------------------------------------------------------------

    The Commission believes that the Exchange's proposal to amend Part 
IV, Allocation Criteria, of its Allocation Policy and Procedures is 
consistent with the Act for the reasons set forth below.
    As described above, the proposal will require the Allocation 
Committee to give 25% weight to the results of the SPEQ in determining 
whether to allocate a stock to a particular specialist unit. Under the 
current Allocation Policy, the SPEQ is to be given no more than 25% 
weight in allocation decisions. The Commission believes that this 
change will provide certainty to the Allocation Committee on what 
portion of its decision should be based on the SPEQ and will ensure 
that allocation decisions are based in sufficient part on specialist 
performance. In this regard, the Commission continues to believe that 
performance, as measured by the objective criteria, should be the 
primary consideration of the Allocation Committee.
    Although the SPEQ remains a useful tool to measure performance, as 
noted above, the Commission believes that objective measures of 
performance should play an important role in allocation decisions. In 
particular, the Commission has previously stated its belief that 
objective performance measures can identify poor market making 
performance that otherwise may not be reflected in a specialist unit's 
SPEQ survey results.\14\ In this regard, the Commission believes it is 
appropriate to codify into NYSE's Allocation Policy and Procedures 
capital utilization and near neighbor analysis as objective measures of 
performance to be considered by the

[[Page 39045]]

Allocation Committee in making their allocation decisions.\15\ 
Specifically, the Commission has previously stated its belief that 
these quality market measures identify aspects of market making that 
are directly relevant to the specialist's maintenance of fair and 
orderly markets. The Commission continues to believe that the near 
neighbor analysis and capitalization measures could assist the 
Allocation Committee in allocating stocks to specialists who commit 
their own capital to maintain stable and liquid markets and, thus, 
believes codification of such measures into the NYSE's Allocation 
Policy and Procedures is appropriate.
---------------------------------------------------------------------------

    \14\ Securities Exchange Act Release No. 33369 (Dec. 22, 1993), 
58 FR 69431 (Dec. 30, 1993).
    \15\ The Commission previously approved the consideration of 
specialist near neighbor analysis and capital utilization by the 
Allocation Committee. Release No. 38158, supra note 9. Today, the 
Commission is merely approving the codification of such measures 
into the NYSE's Allocation Policy and Procedures.
---------------------------------------------------------------------------

    By requiring specialist units to include in their applications for 
the allocation of a listing company's stock a description of how the 
specialist unit will allocate resources (staff and/or capital) to 
accommodate this new issue and what new resources, if any, the 
specialist unit will need to acquire to service this stock, the 
Commission believes that the proposal will provide the Allocation 
Committee with the necessary information to better determine which 
specialist unit is best equipped to handle trading of a particular 
stock. Moreover, by requiring that enforcement actions against 
specialists be reported to the Allocation Committee when an enforcement 
case is authorized, rather than later when the stipulation is signed or 
charges are issued, the proposal should ensure that relevant 
information about enforcement matters considered on a timely basis by 
the Allocation Committee. Similarly, by requiring that records of 
formal disciplinary action be retained for 12 months, rather than the 
current six months, after a Hearing Panel decision is final, the 
proposal should enhance the allocation process by providing the 
Allocation Committee with relevant information over a longer period of 
time.
    The Commission believes that the Exchange's proposal to amend Part 
V, Policy Notes, of its Allocation Policy and Procedures also is 
consistent with the Act for the reasons set forth below.
    The Commission believes that the NYSE's proposal to allow a 
company, resulting from a merger between a listed company and an 
unlisted company, to request that the Allocation Committee reallocate 
the stock of the unlisted company so long as the unlisted company is 
determined to be the survivor-in-fact is appropriate because the merged 
company is more analogous to a new company that has never been listed. 
The proposal also requires the Allocation Committee to honor the 
unlisted company's request the Allocation Committee to honor the 
unlisted company's request not to be allocated to the specialist unit 
that had traded the listed company's stock. This is also currently 
permitted in situations involving spin-offs, listings of related 
companies, and relistings. Although barring the original specialist 
unit from receiving the listing does raises some concerns about 
ensuring that all specialist units will be allowed to compete for the 
allocation on an equal basis, the Commission believes that there may be 
legitimate reasons why an unlisted company may believe it is more 
appropriate to be allocated to a new specialist unit rather than one 
that had dealings with the former listed company. Accordingly, the 
Commission finds this provision is reasonable under the Act. For the 
same reasons, the Commission believes that the NYSE's proposal to allow 
a listing company, whose targeted stock becomes listed separately, the 
request that the Allocation Committee reallocate the targeted stock and 
refrain from allocating the targeted stock to the specialist unit that 
had traded the targeted stock is reasonable.
    The Commission also believes that by codifying its allocation 
freeze policy, which provides that a specialist unit 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, the proposal provides an incentive to 
specialists to improve their performance or maintain superior 
performance while also ensuring that only those units performing well 
and likely to make good markets in a particular stock will receive 
allocations.
    The Commission also believes that the NYSE's allocation sunset 
policy, requiring allocation decisions to remain effective for three 
months with respect to any initial public offering (``IPO'') listing 
and, in the event a listing company does not list within three months, 
requiring that the matter be referred again to the Allocation 
Committee, with applications invited from all specialist units, is 
appropriate. The Commission recognizes that, after three months, the 
specialist unit assigned to make a market in the initial public 
offering listing company may no longer have the resources to make the 
best market and it would be prudent for the Allocation Committee to 
reevaluate its allocation decision. The prior policy of waiting one 
full year before an IPO was reallocated to another unit was, in the 
Commission's view, too long and did not allow the Allocation Committee 
to take into account changes in the unit that may have occurred during 
the one year.
    The Commission also believes that in considering the allocation 
application of an applicant that is not currently a specialist, the 
NYSE's proposal to add a provision requiring that the Allocation 
Committee consider, in addition to capital or operational problems, 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 will help to strengthen the allocation policy and 
ensure that only the best units are allocated stocks. Currently, the 
policy only requires consideration of those disciplinary matters or 
warnings related to any Floor-related activity. The Commission believes 
that this expansion to include any regulatory or disciplinary matters 
will ensure the quality of specialists assigned to make markets in 
NYSE-listed stocks.
    In summary, the Commission believes that the Exchange's Allocation 
Policy and Procedures can serve as an effective incentive for 
specialist units to maintain high levels of performance and market 
quality in order to be considered for, and ultimately awarded, 
additional listings. This in turn can benefit the execution of public 
orders and promote competition among the exchanges. In this regard, the 
Commission believes that the NYSE's proposals related to its Allocation 
Policy and Procedures help to further these purposes. The Commission 
will continue to support the NYSE's efforts to develop a meaningful and 
effective allocation policy and procedures that encourage improved 
specialist performance and market quality.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\16\ that the proposed rule change (SR-NYSE-97-12) is approved.

    \16\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

    For the Commission, by the Division of market Regulation, 
pursuant to delegated authority.\17\
---------------------------------------------------------------------------

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

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-19072 Filed 7-18-97; 8:45 am]
BILLING CODE 8010-01-M