[Federal Register Volume 64, Number 116 (Thursday, June 17, 1999)]
[Notices]
[Pages 32588-32594]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-15351]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41502; File No. SR-NYSE-99-13]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Approving Proposed Rule Change and Amendment No. 1 and Notice of 
Filing and Order Granting Accelerated Approval of Amendment Nos. 2 and 
3 Relating to Original Continued Listing Criteria

June 9, 1999.

I. Introduction

    On March 31, 1999, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with 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 relating to amendments to the 
NYSE's Listed Company Manual (``Manual'') regarding the original and 
continued listing criteria and procedures of the Exchange. On April 21, 
1999, the Exchange submitted Amendment No. 1 to the proposed rule 
change.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from James E. Buck, Senior Vice President and 
Secretary, NYSE, to Richard Strasser, Assistant Director, Division 
of Market Regulation (``Division''), SEC, dated April 21, 1999. In 
Amendment No. 1, the NYSE resubmitted the entire filing to clarify 
several aspects of the proposal.
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    Notice of the proposal was published in the Federal Register on May 
3, 1999.\4\ The Commission did not receive any comment letters on the 
proposal. On May 27, 1999, the NYSE submitted Amendment No. 2 to the 
proposed rule change.\5\ On June 8, 1999, the NYSE submitted Amendment 
No. 3 to the proposed rule change.\6\ In this notice

[[Page 32589]]

and order, the Commission is seeking comment from interested persons on 
Amendment Nos. 2 and 3 and is approving the proposed rule change and 
Amendment No. 1 as well as Amendment Nos. 2 and 3 on an accelerated 
basis.
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    \4\ See Securities Exchange Act Release No. 41324 (April 22, 
1999), 64 FR 23710.
    \5\ See Letter from James E. Buck, Senior Vice President and 
Secretary, NYSE, to Richard Strasser, Assistant Director, Division, 
SEC, dated May 27, 1999. In Amendment No. 2, the NYSE proposes to 
amend the international ``cash flow standard'' in the original 
proposal to require $100 million in aggregate earnings for the last 
three fiscal years instead of $25 million as is currently the case. 
Companies would also be required to report a minimum of $25 million 
in earnings for each of the two most recent years, instead of simply 
reporting a positive amount of earnings for the last three fiscal 
years.
    \6\ See Letter from James E. Buck, Senior Vice President and 
Secretary, NYSE, to Richard Strasser, Assistant Director, Division, 
SEC, dated June 8, 1999. In Amendment No. 3, the NYSE proposes to 
codify the Exchange's policy regarding the use of financial data to 
grant eligibility clearance to an issuer that has less than three 
years of operating history and to clarify that real estate 
investment trusts and closed-end management investment companies 
listing with a three-year operating history must satisfy the 
original listing standards, set forth in paragraph 102.01 of the 
Manual.
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II. Description of the Proposal

    The proposal clarifies and codifies the Exchange's criteria and 
procedures for evaluating a company's original and continued listing 
eligibility.

A. Original Listing Criteria and Procedures

    The NYSE proposes to revise the size component of the Exchange's 
issuer financial eligibility criteria and the general eligibility 
listing criteria. The proposal also would codify the Exchange staff's 
authority to analyze the suitability of an applicant company for 
listing on the Exchange even if the applicant meets the Exchange's 
quantitative criteria. Currently, this authority is codified only in 
the suspension and delisting section of the Manual.
    The proposal also would raise the minimum requirement for aggregate 
market value of publicly-held shares from $40 million to $100 million 
for all listings other than spin-offs and initial public offerings 
(``IPOs'') \7\ (including carve-outs \8\). The NYSE proposes to raise 
the standard for spin-offs and IPOs to $60 million.
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    \7\ The Exchange proposes to define an IPO as a company that, 
prior to its original listing, did not have a class of common stock 
registered under the Act. The Exchange notes that this definition 
differs from the definition of an IPO in Section 12(f)(1)(G)(i) of 
the Act, which turns on whether a company has a reporting obligation 
under the Act prior to a stock offering. Because the Exchange is 
applying its definition of IPO in the context of the original 
listing of common stock, the Exchange believes it is more 
appropriate to focus on the existence of U.S. publicly-traded stock 
rather than on prior reporting requirements. For example, while a 
company may have a reporting requirement under the Act if it 
conducted a public sale of debt securities, that would not be 
relevant in considering the appropriateness of listing a company's 
first public class of common stock.
    \8\ The Exchange proposes to define a carve-out as the initial 
offering of an equity security to the public by a publicly-traded 
company for an underlying interest in its existing business (which 
may be a subsidiary, division, or business unit). In the case of a 
``target stock,'' the security is treated in the same way as any 
other second class of stock of the issuer.
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    In addition, the proposal replaces the existing net tangible assets 
(``NTAs'') test, which is currently the additional measure of a 
company's size, with a stockholders' equity test ($460 million for IPOs 
or spin-offs and $100 million for all other domestic listings).\9\ The 
Exchange in determining whether a company satisfies the stockholders' 
equity test would look to the composition of the stockholders' equity 
to determine the origination of such equity. The proposal also would 
clarify that the test is an alternate measure of size to be relied upon 
where circumstances warrant an alternate measure and where the 
applicant's public market capitalization is no more than 10 percent 
below the public market value listing standard. Such circumstances may 
include situations in which large private holdings drive down the 
public market capitalization or changing market forces drive down the 
price of the stock.
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    \9\ For non-U.S. companies, the $100 million requirement applies 
to all issuers and will be measured under this proposal in 
stockholders' equity instead of the current NTA valuation.
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    Finally, the proposal codifies the NYSE's practice of accepting a 
written commitment from the underwriter for IPOs (for spin-offs, from 
the parent company's investment banker or other financial advisor) to 
demonstrate whether the company satisfies the public market value 
requirement of $60 million ($100 million worldwide for non-U.S. 
issuers).

B. Original Financial Listing Criteria and Procedures

    The proposal codifies and amends the Exchange's current policies 
and practices with respect to the financial criteria and policies for 
domestic companies seeking to list with the Exchange. Currently, a 
company that seeks to qualify for listing on the Exchange under its 
domestic standards must meet one of three financial tests. Two of these 
tests call for an analysis of the company's ``demonstrated earning 
power under competitive conditions.'' The third test, which only 
applies to companies with at least $500,000,000 in market 
capitalization and $200,000,000 in revenues during the most recent 
fiscal year, analyzes the company's ``demonstrated earning power--
adjusted net income,'' as such term is currently defined in the 
footnotes accompanying the rules.
    According to the NYSE, in conducting its review of the financial 
condition of an applicant company, the Exchange historically has relied 
upon financial statements presented to it by the company as obtained 
from SEC filings. If the Exchange relied on the adjustments presented 
in SEC filings in granting financial clearance to the company, the 
company would be required to include these adjustments in its original 
listing application as a condition of eligibility clearance. The 
proposal codifies the Exchange's financial listing standards and 
current practices, as well as clarifies and modifies the relevant 
interpretations.
1. ``Pre-Tax Adjusted Earnings'' Standard
    The proposal replaces the current requirement that applicants 
``demonstrate * * * earning power under competitive conditions'' with a 
standard intended to provide more specificity.The proposed standard is 
``pre-tax earnings from continuing operations and after minority 
interest and equity in the earnings or losses of investees as 
adjusted.'' The term, ``pre-tax earnings'' incorporates the current 
standard of ``income before federal income taxes.'' The phrase, ``from 
continuing operations,'' focuses the analysis on ongoing operations and 
excludes any discontinued operations included in the company's 
historical financial statements.\10\
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    \10\ The Exchange notes that accounting rules specify that, upon 
management's commitment to discontinue an operation, financial 
statements for all relevant periods presented must be restated. If a 
commitment is made after the period under Exchange review and the 
historical financial statements have not yet been restated, the 
Exchange will rely on the company to prepare a presentation of the 
adjusted data and provide an agreed upon procedures letter provided 
by the company's outside audit firm. The auditor's letter will state 
the procedures performed with respect to calculating the pre-tax 
earnings from continuing operations and after minority interest and 
equity in the earnings or losses of investees as adjusted giving 
effect to the discontinuance for each period under review.
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    The clause, ``after minority interest'' removes the interest of an 
affiliate of the applicant company accrued to owners other than the 
applicant company due to its less than 10 percent ownership.\11\ The 
phrase, ``after equity in the earnings or losses of investees,'' arises 
when an applicant company has an ownership interest in another 
corporation, the results of which are not consolidated into the 
applicant company's financial statements due to the application of the 
governing accounting principles. The results of investments that accrue 
to the company will be accounted for in the Exchange's analysis to 
determine

[[Page 32590]]

whether or not the company is eligible for listing.\12\
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    \11\ For example, where a subsidiary that has a 20 percent 
privately held (minority) interest, only 80 percent of the interest 
in the subsidiary is reflected in the public stock. In this 
scenario, although 100 percent of the subsidiary is consolidated 
into the applicant parent's operations, the Exchange would make the 
appropriate adjustment in its analysis to include 80 percent of the 
earnings in the subsidiary by adjusting the pre-tax income for the 
reported minority interest provided such minority interest is not 
included as part of the company's pre-tax income on the face of the 
financial statement.
    \12\ This will be effected by including these results from the 
company's income statement provided such results are not included as 
part of the company's pre-tax income on the face of the financial 
statement.
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    Finally, the proposal enumerates certain adjustments that 
applicants will make to the amount computed pursuant to pre-tax 
earnings. These adjustments would be part of the proposed standard and, 
as such, would apply to every listing applicant. Applicant companies 
may only apply those adjustments arising from events specifically 
identified in the company's SEC filing(s) as to both categorization and 
amount. Thus, in order for an adjustment to be appropriately applied, 
it must be specifically identified and the amount applied must be 
specifically disclosed in the SEC filing, or subject to an agreed upon 
procedures letter in certain cases.\13\
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    \13\ The above-referenced adjustments are measured and 
recognized in accordance with the relevant accounting literature, 
such as that published by the Financial Accounting Standards Board 
(``FASB''), the Accounting Principles Board (``APB''), the Emerging 
Issues Task Force (``EITF''), the American Institute of Certified 
Public Accountants (``AICPA''), and the SEC.
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a. Use of Proceeds for Retiring Debt or Making Acquisitions

    The Exchange currently relies on the use of proceeds anticipated 
from an equity offering in determining the financial eligibility of a 
company seeking to list its securities on the Exchange. The Exchange 
evaluates companies under a three-year eligibility review. In reviewing 
a company's historical results, the Exchange will continue to consider 
the effect of the offering on that three-year review period where the 
proceeds are used to pay existing indebtedness or to fund an 
acquisition. For deleveragings (i.e., using the proceeds of an offering 
to pay off debt), the Exchange will conduct its review as if the 
recapitalization occurred on the first day of the first year of its 
three-year analysis. In applying the standard, the actual historic 
interest paid each year on the debt to be retired by the application of 
the proceeds will be removed, and the principal amount of the debt will 
be retired. The pro forma effects (i.e., the effects ``as if'' the debt 
had been retired in an earlier period) of the deleveraging for the 
latest fiscal year and the interim period will be reflected in the 
company's SEC filing. If that specific debt was incurred prior to that 
period, the company would need to prepare adjusted financial statements 
to account for the relevant preceding periods.\14\
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    \14\ Adjustments will not be made on any interest or principal 
payment(s) made on indebtedness other than that specifically being 
retired. The proposal requires that this adjustment be accompanied 
by an agreed upon procedures letter provided by the company's 
outside audit firm. The auditor's letter will state the procedures 
performed with respect to the existence of the debt and the accuracy 
of the adjustments applied to the company's historical pre-tax 
earnings reflecting the retirement of the principal amount of the 
debt and the actual historic interest payments made.
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    Similarly, with regard to the use of proceeds for acquisitions, the 
Exchange conducts its review as if the acquisition occurred on the 
first day of the first year of its analysis, provided the historical 
financial statements of the acquiree for such period are included in 
the company's SEC filings. The starting point for this analysis is the 
company's SEC filing, which will include a pro forma presentation for 
the latest fiscal year and the subsequent interim period.\15\ The 
Exchange then reviews the historical financials of the company included 
in the registration statement and treats the acquisition for listing 
eligibility purposes as if it were consummated on the first day of the 
earliest fiscal year included in the acquiree's financial statements 
presented in the filing. The Exchange combines the historical results 
of the company with the historical results of the acquiree and reflects 
the purchase accounting of the acquisition for the periods presented. 
Specifically, the adjustments would be limited to the combination, as 
well as the allocation of the purchase price including adjusting assets 
and liabilities of the acquiree to fair value recognizing any 
intangibles (and associated amortization and depreciation) and the 
effects of any additional financing to complete the acquisition.\16\
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    \15\ This pro forma presentation will give effect to those 
acquisitions that meet the significance test of SEC Rule 3-05 of 
Regulation S-X (``Rule 3-05''). Generally, the historical financial 
statements of the acquiree included in the filing also will be 
limited to the requisite periods disclosed pursuant the Rule 3-05 
significance test.
    \16\ The Exchange proposes to require that these adjustments, if 
not set forth in the SEC filing, be accompanied by an agreed upon 
procedures letter provided by the company's outside audit firm at 
the request of the company. The auditor's letter would state the 
procedures performed with respect to showing the effect of the 
relevant acquisition on the applicant company.
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b. Acquisitions and Dispositions

    In instances other than those associated with the use of proceeds, 
the proposal limits the Exchange's analysis to those acquisitions and 
dispositions that are disclosed as such in a company's financial 
statements in accordance with Rule 3-05 and Article 11-01(b)(2) of 
Regulation S-X. Unlike the use of proceeds to fund an acquisition, in 
this instance, the adjustment for the acquisition or disposition will 
be limited to those periods for which pro forma financial data are 
presented in the SEC filing.\17\ If no detailed disclosure is provided 
for a particular acquisition or disposition, and the acquisition or 
disposition is only a factual, non-material, un-qualified reference, 
then the acquisition or disposition will not be given effect because it 
cannot be substantiated within the four corners of the company's SEC 
filing.
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    \17\ If there is a pro forma presentation included in the 
company's SEC filing that does not specify pre-tax earnings from 
continuing operations, minority interest, and equity in the earnings 
or losses of investees, the company must prepare the relevant data. 
The presentation of the adjusted data will need to be accompanied by 
an agreed upon procedures letter provided by the company's outside 
audit firm. The auditor's letter will state the procedures performed 
with respect to showing the effect of the expansion of the pro forma 
presentation from the SEC filing into a more comprehensive income 
statements.
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    If the event that the applicant company has less than three years 
of operating history and is acquiring (either completed or committed) 
an entity with the requisite operating history, the Exchange will 
consider the combined operating history of the acquiror and acquiree 
for the preceding period(s) in conducting its financial eligibility 
review. If it is necessary to combine historical financial statements 
of the acquiree and acquiror to enable the Exchange to conduct its 
analysis (e.g., overlapping fiscal years), then the combined data would 
need to be accompanied by an agreed upon procedures letter provided by 
the company's outside audit firm at the request of the company.
    The NYSE proposes not to require the agreed upon procedures letter 
if the SEC filing under review makes it self-evident that the company 
would qualify for listing on the Exchange irrespective of the 
acquisition or disposition.

c. Merger or Acquisition Related Costs Recorded Under Pooling of 
Interests

    The proposal excludes legal and accounting fees and other costs 
incurred by a company in effecting a merger or acquiring another entity 
accounted for as a pooling of interests (whether or not the transaction 
is consummated).

d. Certain Charges or Income Specifically Disclosed in the Filing

    Consistent with the NYSE's past practice, the proposal excludes 
several items in assessing the applicant company's earnings strength or 
its cash

[[Page 32591]]

flow. These items have been excluded either because they are associated 
with a company's adopted exit plan (as defined in the accounting 
literature) or, based on the Exchange's experience in assessing ongoing 
earnings strength, they are not necessarily recurring.

 Charges or Income Related to an Adopted Exit Plan

    When a company adopts a specified exit plan, the following charges 
or income, if disclosed in the company's SEC filing, recorded in the 
company's financial statements in accordance with generally accepted 
accounting principles (``GAAP''), and associated with the 
implementation of that plan, would be excluded by the Exchange in its 
proposed financial analysis: (1) the costs of severance and termination 
benefits that are incurred as part of an exit plan; (2) costs and 
associated revenues and expenses associated with the elimination or 
reduction of product lines for which an exit plan has been adopted; (3) 
costs incurred to consolidate, close, or re-locate plant or office 
facilities associated with an exit plan; and (4) loss or gain on 
disposal of long-lived assets, which, by its definition, relates to 
assets that will no longer be held by the company.

Environmental Clean-Up Costs

    The NYSE proposes to remove environmental clean-up costs incurred 
in the remediation of environmental problems from the company's 
historical financial results. However, companies may not make 
adjustments for annual maintenance or on-going costs of compliance with 
environmental laws.

Litigation Settlements

    Litigation settlement costs, including any settlement amounts, 
interest payments and penalties so disclosed in a company's filings 
would be removed from the company's historic financial results. 
Companies may not make an adjustment for on-going, customary legal 
fees.

e. Impairment Charges on Long-Lived Assets

    Asset write downs that reflect the net realizable value of a long-
lived asset would be excluded from historic financial results.

f. Gains or Losses Associated with Sales of a Subsidiary's or 
Investee's Stock

    If a company has an ownership interest in another entity, or has a 
wholly-owned subsidiary, any gain or loss associated with the sale of 
all or part of the company's interest would be excluded from the 
company's historic results.

g. Regulation S-X Article 11 Adjustments

    Pro forma adjustments contained in a company's pro forma financial 
presentation provided in a current filing with the SEC are required to 
be made in accordance with SEC rules and regulations governing Article 
11 ``Pro forma Financial Information.'' The Exchange will review the 
company's financial statements in the context of any such adjustments, 
which are subject to SEC review. These adjustments would be limited to 
the current registration statement as to types of adjustments, amounts 
and years disclosed (except for use of proceeds as discussed above).
2. ``Adjusted Cash Flow'' Standard
    In addition to the Pre-Tax Adjusted Earnings standard discussed 
above, a second standard is available to companies with at least $500 
million of market capitalization and $200 million of revenues in the 
most recent 12-month period. Companies that meet the size criteria may 
currently use an ``adjusted net income'' test for the last three fiscal 
years of at least $25 million in the aggregate, with all years being 
positive.
    The proposal codifies the standard applicable to the companies 
meeting the above-stated $500 million/$200 million threshold by 
incorporating the fundamental aspects of the footnote in the current 
Manual into the rule. In addition, the standard will explicitly 
indicate that the test includes adjustments for two purposes: the use 
of proceeds and acquisitions, discussed above. The Exchange is 
proposing to limit the adjustments incorporated into this standard 
because the remaining adjustments may or may not have cash-flow 
implications for a particular company. Those that do have a cash flow 
effect will already have been accounted for in the operating activity 
section of the company's cash flow statement.

C. Policy Clarifications

    The proposal also adopts several policies clarifying the use of the 
adjustments enumerated above, requiring the issuance of a press release 
by companies whose adjusted financial data were relied upon by the 
Exchange in granting eligibility clearance, and delineating the 
consequences of restated financial statements.
    First, all adjustments must be disclosed as such in the SEC filing 
of the applicant company--the amount must be within the four corners of 
the SEC filing or subject to an agreed upon procedures letter, as 
discussed above. Second, except as noted above,\18\ as a general rule, 
the Exchange will only accept the application of an adjustment in the 
year in which the event giving rise to the adjustment occurred. Thus, 
no event can give rise to an adjustment in the financial statements for 
any prior year.
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    \18\ The two exceptions are: (1) The use of proceeds for 
deleveraging and acquisitions and dispositions (for companies 
currently in registration for an equity offering) and (2) 
acquisitions and dispositions.
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    Third, any company for which the Exchange relies on adjustments to 
historical financial data in granting financial eligibility clearance 
must take steps to ensure full public disclosure of how it qualified. 
The Exchange recognizes that, although listing applications are a 
matter of public record, many investors may not be aware that they are 
available and may believe that only the most recent publicly available 
SEC document is relied upon in evaluating a company. Thus, the proposal 
imposes two requirements on issuers. First, it codifies the Exchange's 
requirement that any adjusted financial data relied upon by the 
Exchange in granting financial clearance to the company must be 
included in the company's listing application. Second, the proposal 
requires these issuers to issue a press release stating that pro forma 
financial adjustments were used to qualify the company and all relevant 
additional information is available to the public upon request.
    With respect to companies that restate financial statements due to 
a change from unacceptable accounting principles and/or correction of 
errors, the proposal codifies the Exchange's policy of reviewing the 
company's status at the time of the restatement. Once a company issues 
a restatement that affects one of the years used by the Exchange to 
qualify the company for listing, the Exchange will determine whether or 
not the company would have qualified at the time of its original 
financial clearance with the restated numbers. If not, the company will 
be subject to suspension and delisting procedures unless the company 
meets the original listing standards at the time of the restatement 
using the most recent three fiscal years of financial statements as 
restated.

D. Standards for Non-U.S. Issues

    The proposal makes several changes to Section 103 of the Manual 
pertaining to non-U.S. companies to clarify the rules and to carry 
forward relevant

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items from the revisions pertaining to domestic companies. 
Specifically, the NYSE proposed to make adjustments for foreign 
currency for non-U.S. companies because their operations are inherently 
tied to the underlying fundamentals of their respective national 
economies. For purposes of this adjustment, the Exchange deems a 
currency devaluation of more than ten percent as against the U.S. 
dollar to be significant. The proposal also increase the aggregate 
amount from $25 million to $100 million for its adjusted cash flow 
standard and narrows to two years the requisite itemized annual 
financial analysis for non-U.S. companies to the two most recent fiscal 
years, which would be required to be reported at a minimum of $25 
million. Reconciliation to U.S. GAAP of the third year back would only 
be required if the Exchange determines that it is necessary to 
demonstrate that the aggregate $100 million threshold is satisfied. In 
addition, for non-U.S. companies, the definition of IPOs is the same as 
for domestic issues, but the representation of market value to be 
received in connection with a spin-off may also come from the parent 
company's transfer agent.

E. Real Estate Investment Trusts

    The proposal also codified a policy the Exchange has applied 
regarding the original listing criteria for real estate investment 
trusts (``REITs''). The Exchange generally lists REITs either in 
connection with IPO or shortly thereafter, when the REIT does not have 
a three-day operating history, so long as the REIT has at least $60 
million is stockholders' equity.\19\ REITs listing with a three-year 
operating history must qualify under the standard equity original 
listing standards.\20\
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    \19\ For those REITs listing in conjunction with an offering, 
this requirement would need to be evidenced by a written commitment 
from the underwriter (or, in the case of a spin-off or carved-out, 
from the parent company's investment banker or other financial 
advisor). The Exchange, however, retains the discretion to deny 
listing to a REIT if it determines that, based upon a comprehensive 
financial analysis, it is unlikely to be able to maintain its 
financial status.
    \20\ See Amendment No. 3, supra note 6 (adding rule language to 
clarify that both REITs and closed-end funds with a 3 year operating 
history must meet original financial listing standards set forth in 
paragraph 102.01 of the Manual).
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F. Continued Listing Procedures

    The NYSE proposes to revise its continued listing criteria by 
codifying existing practice with respect to companies that qualify for 
listing based, at least in part, upon adjusted historical data. 
Specifically, under the proposed continued listing criteria a company 
would be subject to delisting if it had NTAs or an aggregate market 
value of its common stock of less than $12 million and average net 
income of less than $600,000 for the past three years. In calculating 
average net income for a company during the initial three years 
following its listing, the Exchange takes into consideration those 
specific adjustments made to the company's historical financial data 
for the relevant year in the original listing application. This 
consideration is limited both as to the specific adjustment made during 
the initial clearance as well as to the year in which the adjusted was 
made.
    The Exchange also proposes to revise and codify the procedures 
instituted when a company is identified by Exchange staff as being 
below the continued listing criteria. The proposal imposes specific 
time frames with respect to the notification, monitoring, and 
suspension and delisting, where appropriate, of these companies' 
securities. In addition, the proposal modifies the Exchange's current 
practice of requiring companies to return to original listing standards 
within 36 months. Instead, the proposal requires these companies to 
return to good standing within six quarters of being notified of this 
status.

III. Discussion

    The Commission finds that the proposal is consistent with the Act 
and in particular with those provisions applicable to a national 
securities exchange.\21\ Specifically, the Commission believes that the 
proposal is consistent with the requirements of Section 6(b)(5) of the 
Act \22\ because it is designed to promote just and equitable 
principles of trade, to remove impediments to, and perfect the 
mechanism of a free and open market and, in general, to protect 
investors and the public interest. The Commission believes that the 
proposal, by codifying, expanding, and clarifying existing listing 
criteria and procedures, strikes a reasonable balance between the 
Exchange's obligation to protect investors and investor confidence in 
the market, and its parallel obligation to perfect the mechanism of a 
free and open market. The proposal establishes reasonable procedures 
for issuers, while giving the Exchange the ability to deny, limit, or 
delist an issuer that has failed to meet the substantive standards 
outlined in the NYSE's Manual.
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    \21\ In approving this rule, the Commission has considered the 
proposed rule change's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
    \22\ 15 U.S.C. 78f(b)(5).
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    Primarily, the proposal codifies the Exchange's present listing 
practices and procedures. The general system of Exchange review of 
applicant companies remains essentially unchanged. In the past, many of 
these procedures were not codified. As a result, it was often unclear 
to issuers and other market participants how the Exchange's listing 
procedures were applied in particular cases. As the proposal sets forth 
more clearly the listing criteria applicable to issuers, the Commission 
believes that it should enhance transparency in listing decisions, 
thereby promoting just and equitable principles of trade and removing 
impediments to a free and open market.
    Specifically, the Exchange clarifies and codifies the size 
component of the financial eligibility and general eligibility listing 
criteria and establishes the NYSE's authority to investigate the 
suitability of an applicant company beyond the Exchange's quantitative 
criteria. The requisite aggregate market value of publicly-held shares 
would increase from $40 million to $60 million for spin-offs and IPOs 
(including carve-outs) and $100 million for all other listings. To 
demonstrate that the company will satisfy the public market value 
requirement of $60 million, the proposal codifies the practice of 
accepting a written commitment from the underwriter for IPOs. Lastly, 
the proposal replaces the NTA test with a stockholders' equity test, 
retaining the $60 million and $100 million thresholds and clarifying 
that the stockholders' equity test is an alternative test for measuring 
a company's size.
    The Commission believes the proposed increases to the threshold 
requirements should ensure that only companies of a certain minimum 
size are included among those listed on the Exchange, thereby 
protecting investors by raising the minimum standard for listed 
companies. The Commission also believes that it is reasonable for the 
Exchange to accept a written commitment from the underwriter for IPOs, 
which, by definition, could not satisfy the requisite minimum aggregate 
market value of publicly-held shares. Additionally, the Commission 
believes that the proposed stockholders' equity test is simpler than 
the existing NTA test and could better reflect a company's value in the 
current economy because it accounts for intangibles and hard assets, 
which are frequently found on companies' balance sheets.
    The NYSE also proposes to codify and revise its financial 
eligibility standards for original listing. First, the proposal 
replaces the current requirement that

[[Page 32593]]

applicants ``demonstrate * * * earnings power under competitive 
conditions'' with a new standard, the ``pre-tax earning from continuing 
operations and after minority interest and equity in the earnings or 
losses of investees as adjusted.'' The proposal then enumerates the 
adjustments to be made to the amount computed under the new standard, 
clarifying that applicant companies may only apply those adjustments 
arising from events specifically identified in the company's SEC 
filings as to both categorization and amount. The permissible 
adjustments include: use of proceeds (for paying off existing debt or 
funding an acquisition), acquisitions and dispositions, exclusion of 
merger or acquisition related costs recorded under pooling of 
interests, exclusion of charges of income specifically disclosed in the 
applicant's SEC filing for certain enumerated costs, exclusion of 
impairment charges on long-lived assets, exclusion of gains or losses 
associated with sales of a subsidiary's or investee's stock, regulation 
S-X Article 11 adjustments, and exclusion of the cumulative effect of 
adoption of a New Accounting Standard. These adjustments are measured 
and recognized in accordance with the relevant accounting literature.
    The Commission believes that the new standard more explicitly 
defines the analysis conducted by the Exchange in evaluating applicant 
companies. The Commission also believes that by codifying its current 
practice regarding adjustments, the Exchange increases the transparency 
of the financial criteria applied to companies seeking to list on the 
Exchange. The codification of the adjustments also ensures that the 
financial criteria are applied consistently and are easily auditable, 
thereby protecting investors and reducing the possibility of unfair 
discrimination between companies seeking to list on the Exchange.
    Second, the proposal clarifies and codifies a second listing 
standard, available to companies with at least $500 million of market 
capitalization and $200 million of revenues in the most recent 12-month 
period. By incorporating the current footnote into the standard itself, 
the NYSE transforms the ``adjusted net income'' test into the new 
``adjusted cash flow'' standard. The new standard also specifies that 
the adjustments included in this standard are limited to the use of 
proceeds and acquisitions because the remaining adjustments may not 
have cash-flow implications for a particular company. The Commission 
believes that codifying these listing standards increases the 
transparency of the listing criteria for companies seeking to list on 
the Exchange. Providing an alternative standard for listing also 
encourages a free and open market by giving companies that are of a 
sufficient size an opportunity to list that do not meet the ``pretax 
earnings'' standard but are otherwise qualified.
    The NYSE also proposes several policy clarifications regarding the 
use of adjustments in the listing process. First, all adjustments must 
be disclosed as such in the SEC filing of the applicant company, either 
within the four corners of the SEC filing or subject to an agreed upon 
procedures letter. Second, adjustments will only be applied in the year 
in which the event giving rise to the adjustment occurred, except for 
the use of proceeds for deleveraging and acquisitions and dispositions, 
and acquisitions and dispositions. Third, companies whose adjusted 
financial data was relied on by the Exchange in granting eligibility 
clearance must include all adjusted financial data in the company's 
listing application and issue a press release to the same effect. The 
proposal also delineates the Exchange's procedure for reviewing a 
company's status at the time of a restatement of financial statements, 
due to a change from unacceptable to acceptable accounting principles 
and/or correction of efforts, including the consequences of restating 
financial statements.
    The Commission believes that the NYSE's proposal to codify and 
modify the use of each of these adjustments in the evaluation of 
applicant companies should provide greater transparency in the listing 
process. This enhanced transparency should assist all market 
participants, including prospective companies and investors, in better 
understanding the significance of the NYSE's decision to list a given 
issuer on the Exchange.
    Specifically, the Commission believes that it is appropriate for 
the Exchange to limit all adjustments to those disclosed as such in the 
issuer's filings with the Commission or as subject to an agreed upon 
procedures letter provided by the issuer's independent outside auditor. 
Any other adjustments could lack sufficient reliability to be 
considered by the Exchange in its listing decision. The Commission also 
believes that it is reasonable to limit the use of adjustments to the 
year in which the event giving rise to the adjustment occurred, with 
the two delineated exceptions, because generally, applying such 
adjustments to prior periods may, to some extent, distort a particular 
company's financial picture. Finally, the Commission believes that the 
NYSE's proposal to require companies that were evaluated using adjusted 
financial data to include all adjusted financial data in their listing 
applications and to issue press releases about the adjustments is 
appropriate because such actions should enable potential investors to 
better understand the companies' financial situation and the manner in 
which such companies were granted clearance to list on the Exchange.
    The NYSE also proposes to revise several aspects of the listing 
criteria for non-U.S. companies which carry forward relevant items from 
the revisions pertaining to domestic companies, including: (1) 
Replacing the NTA test with the stockholder's equity test as an 
alternative measure of size; (2) using the same definition of IPO's as 
for domestic issuers, but also allowing the representation of market 
value required in connection with a spin-off to come from the parent 
company's transfer agent; and (3) allowing adjustments for foreign 
currency for a currency devaluation of more than ten percent. With 
respect to the ``adjusted cash flow'' standard, the proposal increases 
the aggregate amount to $100 million in operating cash flow, and 
narrows to two years the requisite itemized annual financial analysis 
for non-U.S. companies whereby each of the two most recent fiscal years 
would be required to be reported at a minimum of $25 million in 
operating cash flow. Reconciliation to U.S. GAAP of the third year back 
is required only if the Exchange determines that reconciliation is 
necessary to demonstrate that the aggregate $100 million threshold is 
satisfied.
    The Commission believes that the proposed changes should provide a 
better evaluation of a non-U.S. company's financial health, and also 
simplify the non-U.S. company listing criteria because they parallel 
the benchmark applied in the pre-tax adjusted earnings standard for 
non-U.S. companies.\23\ The Commission does not believe it is 
appropriate for the Exchange to impose different listing criteria on 
non-U.S. issuers given that they may face different financial 
challenges than those encountered by domestic issuers. The Commission 
believes that codifying these changes increases transparency for 
financial criteria applied to non-U.S. companies seeking to list on the 
Exchange.
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    \23\ See Securities Exchange Act Release No. 41459 (May 27, 
1999), 64 FR 30088.
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    The proposal also codifies the Exchange's policy regarding the 
original listing criteria for REITs. Generally, the Exchange will 
authorize the listing of a REIT if it has at least $60 million in

[[Page 32594]]

stockholders' equity, but will not consider those with less than $60 
million in stockholders' equity. For those REITs listing in conjunction 
with an offering, the requirement must be evidenced by a written 
commitment from the underwriter. Furthermore, the Exchange may deny 
listing to a REIT if the Exchange determines, based upon comprehensive 
financial analysis, but the REIT is unlikely to maintain its financial 
status. REITs with greater than a three-year operating history are 
subject to the listing criteria described in this proposal.
    The Commission recognizes that in many cases the applicant REIT is 
not a traditional operating entity and therefore, it may not be 
appropriate to apply the general earnings standards specified in the 
Exchange's Manual at the time of listing. Thus, the Commission believes 
that the Exchange's proposed minimum listing criteria of $60 million in 
stockholders' equity is an acceptable means for screening out those 
REITs that the Exchange believes are unsuitable for listing due to 
insufficient assets. The Commission recognizes that the stockholders' 
equity test is intended as a minimum standard and supports the 
Exchange's direction to determine that, with respect to a given REIT, 
notwithstanding sufficient sharholder's equity, the REIT may be 
unsuitable for listing.
    Finally, the NYSE proposes two amendments to its continued listing 
criteria. First, in calculating average net income for a company during 
the initial three years following its listing, the Exchange will 
consider those specific adjustments made to the company's historical 
financial data for the relevant year in the original listing 
application. The consideration will be limited to the specific 
adjustment made during the initial clearance and to the year in which 
the adjustment was made.
    Second, the proposal revises and codifies the procedures instituted 
when a company is identified by Exchange staff as being below the 
continued listing criteria by imposing specific time frames with 
respect to the notification, monitoring, and suspension and delisting 
of these companies' securities. The proposal also requires that the 
companies return to good standing by satisfying the continued listing 
standards within six quarters of being notified of this status.
    The Commission believes that proposed revisions and codification of 
the continued listing criteria should enhance investor protection by 
ensuring that companies that fail to satisfy the continued listing 
criteria are identified, reviewed, and then subjected to specified 
delisting procedures. Moreover, those companies falling below the 
NYSE's continued listing criteria are provided with transparent, 
detailed procedures for addressing their status. The Commission notes 
that proposed changes to NYSE Rule 499 are intended to confirm that 
rule to the changes proposed to the continued listing criteria in NYSE 
Rule 802.
    The Commission finds good cause for approving proposed Amendment 
Nos. 2 and 3 prior to the thirtieth day after the day after the date of 
publication of notice of filing in the Federal Register. Amendment No. 
2 addresses the ``adjusted cash flow'' standard with respect to non-
U.S. companies. The proposal increases the aggregate amount to $100 
million, narrows to two years the requisite itemized annual financial 
analysis for non-U.S. companies whereby each of the two most recent 
fiscal years would be required to be reported at a minimum of $25 
million, and requires reconciliation U.S. GAAP of the third year back 
only if the Exchange determines that reconciliation is necessary to 
demonstrate that the aggregate $100 million threshold is satisfied.\24\ 
The Commission believes Amendment No. 2 is a reasonable mechanism for 
addressing the differences between non-U.S. and U.S. companies, helps 
to ensure that the financial criteria applies to non-U.S. companies 
seeking to list on the Exchange are fully transparent and applied 
consistently, and encourages a free and open market by allowing non-
U.S. companies to list on the NYSE.
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    \24\ See, not 11, supra.
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    In Amendment No. 3, the NYSE proposes to codify the Exchange's 
policy regarding the use of financial data to grant eligibility 
clearance to an issuer that has less than three years of operating 
history and clarifies that REITs and Funds listing with a three-year 
operating history must qualify under the original listing standards for 
equity securities. As noticed, the proposed rule change discussed the 
Exchange's policy regarding the use of financial data to grant 
clearance to an issuer with less than three years of operating history 
but the proposal did not codify this policy. The Commission believes 
that codifying the policy is consistent with the purpose of the Act 
because it increases the transparency of the financial criteria applied 
to companies seeking to list on the exchange and ensures that the 
financial criteria are applied consistently across applicant companies. 
For these same reasons, the Commission believes it is appropriate for 
the Exchange to codify the applicable listing criteria for REITs and 
Funds listing with a three-year operating history, instead of 
addressing only those situations where a REIT or Fund has less than a 
three-year operating history. Accordingly, the Commission believes that 
it is consistent with Section 6 of the Act \25\ to accelerate approval 
of Amendment Nos. 2 and 3.
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    \25\ 15 U.S.C. 78f.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment Nos. 2 and 3, including whether those 
amendments are consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW, Washington, 
DC 20549-0609. 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 Room. 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-99-13 and should be submitted by July 8, 1999.

V. Conclusion

    It is therefore ordered, pursuant to Section 19((b)(2) of the 
Act,\26\ that the proposed rule change (SR-NYSE-99-13), as amended, 
codifying and revising the NYSE's original and continued listing 
criteria and procedures, is approved.

    \26\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-15351 Filed 6-16-99; 8:45 am]
BILLING CODE 8010-01-M