[Federal Register Volume 63, Number 18 (Wednesday, January 28, 1998)]
[Notices]
[Pages 4337-4341]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-1974]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39564; File No. SR-NYSE-97-30]
Self-Regulatory Organizations; New York Stock Exchange, Inc.;
Order Granting Approval to Proposed Rule Change and Notice of Filing
and Order Granting Accelerated Approval of Amendment No. 1 to Proposed
Rule Change To Amend and To Make Permanent the Allocation Policy and
Procedures Pilot Program
January 20, 1998.
I. Introduction
On October 20, 1997, 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\ a
proposed rule change to amend and to obtain permanent approval of the
Exchange's Allocation Policy and Procedures pilot program.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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The proposed rule change was published for comment in the Federal
Register on November 7, 1997.\3\ No comments were received on the
proposal. On January 2, 1998, the NYSE submitted Amendment No. 1 to the
proposed rule change.\4\ This order approves the proposed rule change
and approves Amendment No. 1 on an accelerated basis.
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\3\ See Securities Exchange Act Release No. 39288 (October 30,
1997) 62 FR 60297.
\4\ See Letter from Agnes M. Gautier, Vice President, Market
Surveillance, NYSE to Sharon Lawson, Senior Special Counsel,
Division of Market Regulation (``Division''), Commission, dated
December 26, 1997 (``Amendment No. 1''). In Amendment No. 1, the
NYSE clarified the proposal with respect to: (1) Exchange
representation at interviews between specialist units and listing
companies; (2) Exchange review of written materials supplied by
specialist units to listing companies; and (3) specialist unit
contact with a listing company. In addition, Amendment No. 1 deletes
the sentence inviting listing companies to express in a letter sent
to the Exchange's Allocation Committee any preference not to be
traded by specialist units which trade the stock of the listing
companies' competitors.
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II. Background and Description of the Proposal
The Exchange's Allocation Policy and Procedures (``Policy'') are
intended: (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
[[Page 4338]]
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. On February 28, 1997, the Exchange proposed to
change the Policy to allow greater listing company input. On March 7,
1997, the Commission approved the proposal as a seven-month pilot
program, effective until October 7, 1997.\5\ Subsequently, the
Commission has approved two extensions of the Exchange's pilot program;
the current extension expires January 16, 1998.\6\
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\5\ See Securities Exchange Act Release No. 38372, 62 FR 13421
(March 21, 1997) (notice of filing and immediate effectiveness of
File No. SR-NYSE-97-04). On April 16, 1997, the Exchange filed
another proposed change to its Policy not covered under the pilot
program. See Securities Exchange Act Release No. 38828 (July 9,
1997) 62 FR 39043 (July 21, 1997) (order approving File No. SR-NYSE-
97-12).
\6\ See Securities Exchange Act Release Nos. 39206 (October 6,
1997) 62 FR 53679 (October 15, 1997) (notice of filing and order
granting accelerated approval of File No. SR-NYSE-97-27); and 39368
(November 26, 1997) 62 FR 64613 (December 8, 1997) (notice of filing
and immediate effectiveness of File No. SR-NYSE-97-32).
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Under the pilot program, listing companies may: (1) Have the
Allocation Committee select their specialist unit (``Option 1''); or
(2) make the final selection of a specialist unit from among a group of
three of five specialist units selected by the Allocation Committee
(``Option 2''). In either case, the listing company may submit a
generic letter to the Allocation Committee which may describe desired
general characteristics of a specialist unit, but may not mention
particular specialist units. Under Option 2, the listing company meets,
either in person or by teleconference, with the specialist units
selected by the Allocation Committee within two business days after
their selection. The listing company must make its decision as to a
specialist unit by the next business day.
The Exchange is proposing several changes to the Policy in addition
to requesting permanent approval of the pilot permitting Option 2.
First, when the listing company selects Option 2, currently the
Allocation Committee will select a group of three, four or five units
that are the most qualified specialist units among the units that
apply. It is proposed that if three units are selected, the Allocation
Committee may select an alternate specialist unit to be among the group
of units that a company may interview in the event a unit is
eliminated. A specialist unit could be eliminated if it cannot meet
with the listing company at the appointed time. A unit chosen as an
alternate will be informed of its status as such. Currently, the policy
is silent regarding this procedure.
Second, the Exchange is proposing several changes covering contacts
between specialist units and listing companies. The NYSE is proposing
to codify in its Policy its prohibition on contact between listing
companies and specialist units from the time allocation applications
are solicited until Allocation Committee meetings. The current Policy
is silent regarding contact between listing companies and specialist
units. However, the NYSE's Information Memo No. 97-13 states that once
allocation applications are distributed, the Exchange expects that
specialist units will have no contact with the listing companies. The
proposed change would codify this existing restriction into the Policy
itself.\7\
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\7\ The current Policy does require specialist units to describe
in their allocation applications any contacts with the listing
company with regard to its prospective listing on the Exchange
within six months prior to the date that allocation applications are
solicited. According to the NYSE, such contacts are among the
factors considered by the Allocation Committee in allocating a stock
to a specialist unit or selecting a unit to be interviewed by the
listing company. See Amendment No. 1, supra note 4.
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The proposal also would allow specialist units to provide written
material to Exchange staff from the time of selection of an
interviewing pool to no later than two hours before the scheduled
interview. Exchange staff would provide the written material to the
listing company on the day of the interview. The proposal further would
require written material to be limited to information pertaining to the
specialist unit, and would not permit any reference to another
specialist unit or units, except overall floorwide statistics. In
addition, the amended proposal would require periodic, random reviews
of such material by Exchange staff after the allocation process has
been completed. The NYSE represents that it will take appropriate
regulatory action should problems with the written materials provided
to listing companies be disclosed.\8\
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\8\ See Amendment No. 1 supra note 4.
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Under the terms of the proposal, a specialist unit may not supply
information at the interview \9\ concerning another specialist unit or
units either orally or in writing, except it may refer to overall
floorwide statistics. The proposal would permit any information
contained in Exchange documents to be provided by the unit orally or in
writing on the unit's letterhead. Following its interview, the proposal
would prohibit a specialist unit from having any contact with listing
company and any follow-up questions by the company regarding publicly
available information on a unit would be required to be sent to the
Exchange. If the Exchange approves, a response would be provided. The
proposal provides that the specialist units in the group of units
interviewed would be advised of such requests.
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\9\ According to the NYSE, staff of its Listing Department will
continue to attend interviews between listing companies and
specialist units. In addition, Exchange Regulatory staff will
randomly attend interviews for two listings each month and conduct
meetings with members of the Exchange's Listings staff to educate
them on regulatory issues. See Amendment No. 1, supra note 4.
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Third, under the Policy, the listing company's letters to the
Allocation Committee can describe characteristics that focus on the
specialist unit rather than the listing company. According to the NYSE,
letters which describe the listing company are more helpful to the
Allocation Committee in assessing the type of specialist unit that
would be appropriate for the company. Therefore, the Exchange proposes
to change the Policy to require that any letter submitted by the
listing company to the Allocation Committee focus on the history and
background of the company and its industry; how the company
historically has funded its operations; characteristics of its
shareholder base and any unusual trading patterns that may result
therefrom; and any public information regarding the company's plans for
the future. The letter may also include the company's specific views on
being traded by a specialist unit with experience in trading in its
industry or country.\10\
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\10\ The NYSE also proposed to amend the Policy to invite a
listing company to include in its letter any preference that its
stock not be traded by specialist units which trade competitors'
stock. In Amendment No. 1, the NYSE deleted all reference to any
preferences the listing company may have with respect to the units
trading competitors' stock. Listing companies will not, however, be
prohibited from stating such a preference in letters sent to the
Allocation Committee. See Amendment No. 1, supra note 4.
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Fourth, under the current policys within two business days after
the selection of a group of specialist units by the Allocation
Committee, the listing company must meet with the specialist unit's
representative. In addition, the listing company must select its
specialist unit within one business day of the interview. The Exchange
believes that these time frames have been, at times, too compressed for
company travel arrangements or preparation by the specialist units.
Accordingly, the NYSE is proposing to amend this portion of the policy
to permit the listed company to meet with the selected group of
specialist units' representatives up until the close of business on the
last Exchange business day of the week in which the selection of the
group was
[[Page 4339]]
made by the Allocation Committee. Further, the amended proposal
provides that as soon as practicable, following its meeting with
representatives of the specialist units, the listing company would be
required to select its specialist unit. If a listing company meets with
any of its specialist units on the last Exchange business day of the
week, it would be required to make its decision on that day.
Fifth, the Policy currently permits telephone interviews at the
request of a listing company. According to the NYSE, in-person
interviews have been shown to be more effective. Therefore, under the
proposal, telephone interviews would not be permitted for domestic
listing companies, unless approved by the Exchange for compelling
circumstances. Telephone interviews would continue to be permitted for
non-U.S. listing companies.
Finally, the NYSE is proposing to change the Policy concerning
spin-offs and related companies. Under the proposed revisions to the
Policy, a listing company that is a spin-off or related company may
choose to stay with the specialist unit registered in the related
listed company. Currently, situations in which a listing company is a
spin-off of or related to a listed company are handled as new listings,
with allocation open to all specialist units. Under the terms of the
proposal, if a listing company that is a spin-off or related company
chooses to have the Allocation Committee select its specialist, the
listing company may request, and the Allocation Committee will honor,
that it not be traded by the unit that trades the related listed
company. Alternatively, the proposal would permit the listing company
to choose Option 2 and request that the Allocation Committee include or
exclude the specialist unit registered in the related listed stock from
the pool of specialist units.\11\
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\11\ This is similar to the Policy's current approach to
relisting and listed company mergers.
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III. Discussion
The Commission finds that the proposed rule change, as amended, is
consistent with the requirements of Section 6 of the Act \12\ and the
rules and regulations thereunder applicable to a national securities
exchange.\13\ The Commission believes that the proposed rule change is
consistent with and furthers the objectives of Section 6(b)(5) of the
Act \14\ in that it is designed to perfect the mechanism of a free and
open market and to protect investors and the public interest.
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\12\ 15 U.S.C. 78f.
\13\ In approving this rule, the Commission notes that it has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
\14\ 15 U.S.C. 78f(b)(5).
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From the outset, the Commission has had two primary concerns
relating to the Exchange's pilot program: (1) whether the resulting
allocations would be based on objective factors, such as specialist
performance, or influenced by such factors as promotional efforts of
specialist units; and (2) whether this new procedure would create the
appearance of impropriety between the specialist and the listing
company and thereby undermine public confidence in the integrity of the
marketplace. The Commission approved the new procedures as a pilot
program to give the NYSE time to gain experience with the new
procedures and to allow both the Exchange and the Commission additional
time to evaluate the merits of the program.
After assessing the results of the NYSE's pilot program, the
Commission has determined to approve on a permanent basis the proposed
changes to the Policy. The Commission notes that there is no evidence
of any problems with the pilot program during its ten months of
operation and the Commission believes that the Exchange is applying the
established criteria appropriately. In addition, the Commission
believes that the proposed amendments implement and enforce safeguards
which should ensure that inappropriate or prohibited relationships
between specialist units and listing companies do not develop.
Specifically, the Commission believes that it is appropriate to
continue to permit listing companies to have the choice to have greater
input in the selection of the specialist unit that will trade the
companies' stock. The Commission notes that listing companies retain
the right to request the Allocation Committee to select a specialist
unit on their behalf based on the criteria specified in the Policy.\15\
The Commission further notes that under Option 2, where a listing
company has the opportunity to select its own specialist unit, it must
do so from a group of three to five units that are selected by the
Allocation Committee as the most qualified specialist units among the
units that apply based on the criteria in the Policy.\16\ Because under
either Option, the allocation criteria, which focuses primarily on
specialist performance, must be applied by the Allocation Committee,
the Commission believes that the allocation process will continue to
ensure that the best qualified and performing units will be rewarded
with allocations.
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\15\ Under the Policy, the Allocation Committee is required to
base allocation decisions on: (1) the results of the Specialist
Performance Evaluation Questionnaire (``SPEQ''); (2) objective
performance measures; and (3) the Allocation Committee's expert
professional judgment in considering the SPEQ, objective measures of
performance, and other enumerated criteria, such as professional
judgment, listing company input, allocations received, capital
deficiency, disciplinary actions, justifiable complaints and foreign
listing considerations. The SPEQ includes several facets, including
ratings in the current quarter, improved ratings, and ratings over
time. Objective measures of performance considered by the Allocation
Committee include dealer participation rates, stabilization, capital
utilization, and near neighbor analysis, as well as timeliness of
regular openings, promptness in seeking Floor official approval of
non-regulatory delayed openings, timelessness of DOT turnaround, and
response to administrative messages.
\16\ Id.
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Second, the NYSE's proposal contains several safeguards to ensure
the continued integrity of the allocation process and that contacts
between specialists and listing companies are appropriately monitored
when Option 2 is used. In this regard, the NYSE's proposal codifies in
its Policy its prohibition on contact between listing companies and
specialist units from the time allocation applications are solicited
until Allocation Committee meetings. This should help to maintain the
integrity of the allocation process and ensure that inappropriate
contacts and solicitations are not permitted. The Commission also notes
that the current Policy requires specialist units to disclose all
contacts with the listing company within six months of the date that
allocation applications are solicited. The Commission believes that it
is appropriate for the Allocation Committee, in allocating a stock to a
specialist unit or selecting units to be interviewed by the listing
company, to consider prior contacts between the listing company and the
specialist units as a factor in the decisionmaking process.\17\
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\17\ See Amendment No. 1, supra note 4.
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The Commission further believes that the provisions of the proposal
restricting written material to information pertaining to the
specialist unit, except overall floorwide statistics, is reasonable as
it allows specialist units to provide evidence of their own perceived
strengths and historical performance, and will help to prevent
unsubstantiated claims against other units also competing for the
allocation. The NYSE has stated that it will randomly review the
written materials supplied by specialist units to listing companies
after the allocation process
[[Page 4340]]
has been completed to discover any inaccuracies in the material.\18\
While the Commission believes that prior review by Exchange staff of
all written materials provided to listing companies would help to
ensure that information provided by specialist units is not false,
misleading, or ambiguous, we note that specialists are still under a
duty to ensure that their statements, both oral and written, are not
misleading or false. In light of the NYSE's representations that
appropriate regulatory action will be taken in the event that any
problems are discovered, the Commission believes that it is reasonable
for the NYSE to initially start with a random review by Exchange staff
of written material provided to listing companies by specialist units
after the allocation process has been completed.\19\ If such reviews
disclose problems with communications, we would expect the NYSE to
consider replacing its review process with a more comprehensive one to
be conducted prior to the allocation.
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\18\ See Amendment No. 1, supra note 4.
\19\ Regulatory action which the NYSE could consider would
include reallocation of the stock.
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In addition, the NYSE represents that all interviews between
specialist units and listing companies will continue to be attended by
staff of the Exchange's Listing Department. Moreover, members of the
Exchange's Regulatory staff will randomly attend interviews for two
listings each month and conduct meetings with members of the Exchange's
Listings staff to educate them on regulatory issues. The Commission
believes that the proposed procedures, without placing too great of an
administrative burden on the Exchange's Regulatory staff, should ensure
that any specialist units making inappropriate remarks to listing
companies at interviews will be subject to appropriate regulatory
action.
Third, the Commission notes, as described above, that the proposal
would change the requirements for listing company letters submitted to
the Allocation Committee. Instead of requiring such letters to describe
the desired characteristics of the specialist unit, the Policy would be
amended to require such letters to contain detailed information
regarding the background and operations of the listing company and its
industry. The Commission agrees with the NYSE that specific information
about the listing company may better assist the Allocation Committee in
selecting the appropriate specialist unit(s). The Policy also will
continue to prohibit the listing company from identifying a specific
specialist unit in its letter to the Allocation Committee. These
requirements together should ensure that the Allocation Committee will
be able to select the most qualified units based on the allocation
criteria. Accordingly, the Commission finds that the proposed
provisions relating to the company's letter are consistent with the
Act.
Fourth, the Commission notes that the proposal would generally
relax the time frames during which a listing company must meet with and
select a specialist unit from the group of units selected by the
Allocation Committee. The proposed rule allows the listing company to
meet with the selected group of specialist units' representatives by
the close of business on the last Exchange business day of the week in
which the selection of the group was made, rather than within two
business days. In addition, the Policy is being changed to permit the
listing company to select its specialist unit as soon as practicable,
as opposed to within one business day, following its meeting with
representatives of the specialist units.\20\ The NYSE has represented
that most Allocation Committee meetings occur on Mondays.\21\
Accordingly, for most allocations, listing companies will have more
time to meet (a total of five business days between Monday and Friday,
rather than two) and select their specialist unit. The Commission
further notes that should compelling circumstances prevent the required
meetings within the established time frames, the proposal grants the
Exchange discretion to permit telephone interviews for domestic listing
companies.\22\ Otherwise, the proposal would permit telephone
interviews solely for non-U.S. listing companies. The Commission
believes that the proposed time frames are reasonable and should allow,
in most cases, sufficient opportunity for specialist units to prepare
for the interviews and for listing companies to arrange to meet with
representatives of the selected specialist units.
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\20\ As noted above, under the amended Policy, if a listing
company meets with any of its specialist units on the last Exchange
business day of the week, it must make its decision on that day.
\21\ Telephone conversation between Donald Siemer, Director,
Rule Development, NYSE, and Deborah Flynn, Attorney, Division,
Commission, on November 3, 1997.
\22\ The Exchange stated in its filing that in-person interviews
have shown to be more effective. Accordingly, telephone interviews
generally are not permitted unless the NYSE approves of it for
compelling circumstances. The Exchange has stated that compelling
circumstances would include bad weather, which may severely hamper a
listing company's ability to attend a scheduled interview. Telephone
conversation between Donald Siemer, Director, Rule Development,
NYSE, and Deborah Flynn, Attorney, Division, Commission, on November
3, 1997.
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Fifth, the Commission believes that the Exchange's deletion of the
proposed sentence in the Policy inviting a listing company to include
in its letter to the Allocation Committee its preference not to be
traded by specialist units trading competitors' stock is appropriate
and consistent with the Act. The Commission believes that the existence
of the provision would serve only to encourage the expression of such
preferences and consequently, to unnecessarily limit the pool of
specialist units to be selected by the Allocation Committee. In
addition, the Commission does not believe there is any regulatory
reason to prohibit a specialist unit from trading competitors' stock.
Indeed, a specialist's market making expertise in a certain industry
may actually prove to be a benefit to a listing company. Although the
Policy will not prohibit listing companies from expressing such
preferences in letters to the Allocation Committee, the Commission
believes that the absence of the provision in the Exchange's Policy
should enhance competition among specialist units to the benefit of
both listing companies and the Exchange.
Sixth, the proposal allows the Allocation Committee to select an
alternate unit in cases in which only three units are selected to be
interviewed. The Commission recognizes that based on the established
time frames, situations may arise in which either the listing company
or a particular specialist unit cannot meet at the appointed time.
Accordingly, the Commission believes that when only three specialist
units are selected by the Allocation Committee, the selection of an
alternate unit to be interviewed by the listing company is reasonable
and will ensure an adequate pool from which to select a specialist.
Finally, the Commission believes that the NYSE's proposal to allow
a listing company that is a spin-off of or related to a listed company
to choose to stay with the specialist unit for the related company is
reasonable because of the relationship between the spun-off company and
the former company. The proposal also requires the Allocation Committee
to honor the spin-off company's request not to be allocated to the
specialist unit that had traded the related company's stock. The
Commission recognizes that both allowing the spin-off company to stay
with the original specialist unit and barring the original specialist
unit from receiving the listing does raise some concerns about ensuring
that all specialist units will be allowed to
[[Page 4341]]
compete for the allocation on an equal basis. Nonetheless, the
Commission believes that there may be legitimate reasons why an
unlisted company may want to remain with the related company's
specialist unit or may believe it is more appropriate to be allocated
to a new specialist unit rather than the one that has dealings with the
related company. For the same reasons, the Commission believes that the
provisions which allow a listing company to choose Option 2 and request
that the Allocation Committee include or exclude the specialist unit
registered in the related listed stock are reasonable. Accordingly, the
Commission finds these provisions are consistent with the Act.
The Commission finds good cause for approving proposed Amendment
No. 1 prior to the thirtieth day after the date of publication of
notice of filing thereof in the Federal Register. The Commission notes
that Amendment No. 1 further clarifies the process by which listings
are allocated to specialist units and raises no new regulatory issues.
Specifically, Amendment No. 1 interprets the Policy's provisions
relating to interviews between listing companies and specialist units,
written materials provided to listing companies by specialist units,
and specialist units' contact with listing companies during the six
month period prior to the solicitation of allocation applications and
helps to strengthen the proposal and ensure compliance with the Policy.
Regarding the deletion of the proposal to permit listing companies to
state their preference not to be traded by units trading competitors'
stock, the Commission notes that the elimination of this provision,
which would have further restricted the pool of specialist units to be
allocated a particular listing, raises no issues of regulatory concern.
Finally, the Commission notes that no comments were received on the
publication of the proposal or at the time of the approval and
subsequent extensions of the pilot program. Accordingly, the Commission
believes that good cause exists, consistent with Section 6(b)(5) of the
Act,\23\ to approve Amendment No. 1 to the NYSE's proposed rule change
on an accelerated basis.
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\23\ 15 U.S.C. 78f(b)(5).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 1. 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 in the Commission's Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies of all such filings will also be
available for inspection and copying at the principal office of the
NYSE. All submissions should refer to File No. SR-NYSE-97-30 and should
be submitted by February 18, 1998.
V. Conclusion
The Commission believes that the Exchange's amended pilot program,
which allow greater listing company input, has been crafted to ensure
that allocation decisions continue to be based primarily on specialist
performance and objective criteria. In addition, the Commission
believes that the procedures adopted by the NYSE in the Policy will
help to identify, minimize and penalize potential conflicts arising out
of the relationships between specialist units and listing companies and
ensure the continued integrity of the allocation process. Based on
this, we believe the permanent approval of Option 2, along with the
amendments to the Policy, are reasonable and consistent with the
requirements of the Act applicable to a national securities exchange,
and in particular, with the requirements of Section 6 of the Act \24\
and the rules and regulations thereunder.
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\24\ 15 U.S.C. 78f.
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It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\25\ that the proposed rule change (SR-NYSE-97-30), including
Amendment No. 1, is approved.
\25\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\26\
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\26\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-1974 Filed 1-27-98; 8:45 am]
BILLING CODE 8010-01-M