[Federal Register Volume 64, Number 240 (Wednesday, December 15, 1999)]
[Proposed Rules]
[Pages 69975-69981]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-32472]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-42209; File No. S7-29-99]
RIN 3235-AH85


Unlisted Trading Privileges

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission is proposing a change 
to Rule 12f-2 under the Securities Exchange Act of 1934, which governs 
unlisted trading privileges (``UTP'') in listed initial public 
offerings (``IPOs''). Under the proposed rule change, a national 
securities exchange extending UTP privileges to an IPO security listed 
on another exchange would no longer be required to wait until the day 
after trading has commenced on the listing exchange to allow trading in 
that security. Instead, a national securities exchange would be 
permitted to begin trading in an IPO issue pursuant to UTP immediately 
after the first trade in the security is reported by the listing 
exchange to the Consolidated Tape.

DATES: Comments should be submitted on or before January 31, 2000.

ADDRESSES: Interested persons should submit three copies of their 
written data, views and opinions to Jonathan G. Katz, Secretary, 
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, 
DC 20549-0609. Comments may also be submitted electronically to the 
following e-mail address: [email protected]. All comment letters 
should refer to File No. S7-29-99. All submissions will be made 
available for public inspection and copying at the Commission's Public 
Reference Room, 450 Fifth Street, N.W., Washington, DC 20549. 
Electronically-submitted comments will be posted on the Commission's 
Internet website (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: Kevin Ehrlich, Attorney, at (202) 942-
0778 or Ira Brandriss, Attorney, at (202) 942-0148, Division of Market 
Regulation, Securities and Exchange Commission, 450 Fifth Street, N.W., 
Washington, DC 20549-1001.

SUPPLEMENTARY INFORMATION:

I. Background

    Section 12(f) of the Act \1\ governs when a national securities 
exchange (``exchange'') may extend UTP to a security, i.e., allow 
trading in a security

[[Page 69976]]

that is not listed and registered on that exchange.\2\ Section 12(f) 
was substantially amended by the UTP Act of 1994 (``UTP Act'').\3\ 
Prior to that time, exchanges had to apply to the Commission for 
approval before extending UTP to a particular security. This process 
entailed notice of the application in the Federal Register, a period 
for interested parties to comment on the application, and formal 
Commission approval based on a finding that extension of UTP to the 
security would be consistent with the maintenance of fair and orderly 
markets and the protection of investors. The UTP Act, among other 
matters, removed the application, notice, and Commission approval 
process from Section 12(f) (except in cases of Commission suspension of 
UTP in a particular security on an exchange). Accordingly, the UTP Act 
eliminated the extensive UTP approval process for all securities listed 
and registered on an exchange. Nevertheless, as discussed in detail 
below, the exchanges must wait one full day before they can extend UTP 
to a listed IPO security as defined in Section 12(f)(1)(G)(i) and 
(ii).\4\
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    \1\ 15 U.S.C. 78l(f).
    \2\ Section 12(a) generally prohibits trading on an exchange of 
any security that is not registered (listed) on that exchange. 
Section 12(f) excludes from this restriction securities traded 
pursuant to UTP that are registered on another national securities 
exchange. When an exchange ``extends UTP'' to a security, the 
exchange allows its members to trade the security as if it were 
listed on the exchange. Over-the-counter (``OTC'') dealers are not 
subject to the Section 12(a) registration requirement because they 
do not transact business on an exchange.
    \3\ Pub. L. No. 103-389, 108 Stat. 4081 (1994).
    \4\ Section 12(f)(1)(B), read jointly with 
Section12(f)(1)(A)(ii), as amended, provides this exception for 
listed IPO securities. In defining securities that fall within the 
exception, subparagraphs 12(f)(1)(G)(i) and (ii) provide:
    (i) a security is the subject of an initial public offering if--
    (I) the offering of the subject security is registered under the 
Securities Act of 1933; and
    (II) the issuer of the security, immediately prior to filing the 
registration statement with respect to the offering, was not subject 
to the reporting requirements of Section 13 or 15(d) of this title; 
and
    (ii) an initial public offering of such security commences at 
the opening of trading on the day on which such security commences 
trading on the national securities exchange with which such security 
is registered.
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A. The Waiting Period

    In passing the UTP Act, Congress considered the question of whether 
a waiting period should be imposed on exchanges trading an IPO security 
pursuant to UTP. During the legislative process, conflicting views 
arose among interested parties concerning the appropriate waiting 
period, if any, for extending UTP to an IPO security.\5\
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    \5\ At Congressional hearings, testimony and evidence were 
presented, on one hand, to show the negative impact that a mandatory 
waiting period for UTP would have on competition. An interested 
party in favor of a mandatory waiting period asserted, on the other 
hand, that listed IPO securities should trade in a central location 
for a ``short'' period of time to help ensure market efficiency 
immediately following an IPO, and that immediate UTP in listed IPO 
securities could increase the cost of raising capital for issuers.
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    As a result, Congress temporarily permitted UTP exchanges to trade 
an IPO security only after two days of trading had occurred on the 
exchange on which the security was registered and listed. It also 
required the Commission to prescribe, by rule or regulation within 180 
days of the legislation's enactment, the duration of the interval, if 
any, that UTP exchanges would be required to wait before trading in 
listed IPOs.\6\ In a report to Congress on the UTP Act, the House 
Committee on Energy and Commerce described the interim waiting period 
as ``a temporary exception'' to the general authority it granted to 
exchanges to extend UTP immediately. In leaving the ultimate decision 
on the issue in the hands of the Commission, the Committee expressed 
the view that the rulemaking process would afford an opportunity for 
the conflicting concerns and suggestions to be examined and 
resolved.\7\
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    \6\ Amended Section 12(f)(1)(C) required exchanges (until the 
earlier of the effective date of a Commission rule, or 240 days 
after the enactment of the UTP Act) to wait until the third trading 
day in a listed IPO security before trading the security pursuant to 
UTP.
    \7\ The Committee stated that:
    The Committee expects that, in undertaking the IPO rulemaking 
authorized under the bill, the Commission will seek comments on the 
benefits associated with streamlining the regulatory process and 
enhancing competitive opportunities among market centers with 
respect to UTP in IPOs, and the identification of the negative 
effects if any that granting immediate UTP might have on the 
distribution of these securities. The Committee further expects the 
Commission to consider the experience of the third market trading in 
listed IPOs in the course of its examination of these questions. 
Finally, the Committee expects the markets to cooperate in providing 
the Commission with data regarding the nature and effect of trading 
activity (including, for example, any volatility effects on the 
security) in connection with IPO listings in order to enable the 
Commission to determine whether the benefits of confining early 
trading in IPOs to one marketplace are outweighed by the benefits of 
removing regulatory delays that inhibit competition among markets.
    H.R. Rep. No. 626, 103d Cong., 2d Sess. (1994).
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B. The Commission's Original Proposal: Elimination of the Waiting 
Period

    Accordingly, on February 9, 1995, the Commission proposed for 
comment Rule 12f-2,\8\ which would have virtually eliminated the 
waiting period.\9\ Under the proposal, rather than continuing the 
temporary requirement to wait two days, UTP exchanges would have been 
permitted to begin trading in a listed IPO immediately after the first 
trade executed on the listing exchange was reported by that exchange to 
the Consolidated Tape. In proposing a one-trade interval for UTP in IPO 
securities, the Commission stated that:

    \8\ 17 CFR 240.12f-2.
    \9\ Exchange Act Release No. 35323 (Feb. 2, 1995), 60 FR 7718 
(Feb. 9, 1995).

    Shortening the interval for UTP in listed IPO securities should 
enhance the ability of exchanges to compete for order flow in the 
subject securities, especially in light of the fact that OTC dealers 
may trade IPO securities immediately upon effective registration 
with the Commission. Accordingly, in the absence of a compelling 
reason to impose a restriction that would inhibit competition among 
exchanges, the Commission initially believes that competing 
exchanges should be able to extend UTP to a listed IPO security 
after the first trade in the security on the listing exchange has 
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been effected and reported.\10\

    \10\ Exchange Act Release No. 35323 (Feb. 2, 1995), 60 FR 7718, 
7720 (Feb. 9, 1995).
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    The Commission noted that testimony and evidence were presented 
during the legislative process preceding the UTP Act to show the 
negative impact that a mandatory waiting period has on competition. The 
Commission also pointed out that the third market traded listed IPO 
securities with no delay. The Commission solicited comment on the 
potential impact on markets and the distribution of securities, as well 
as the experience of the third market.
    The Commission received eight letters in response to the original 
proposal, five of which supported the proposed rule, and three of which 
opposed it.\11\ In addition, shortly before the proposed rules were 
published, the Commission received a study from the Philadelphia Stock 
Exchange (``Phlx''), submitted on behalf of itself, the Boston Stock 
Exchange, the Chicago Stock Exchange, and the Pacific Stock Exchange 
(now known as the Pacific Exchange).
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    \11\ Favoring the proposal were the Boston Stock Exchange, Inc., 
the Chicago Stock Exchange, Inc., the Pacific Stock Exchange, Inc. 
(one letter commenting directly on the proposal, and one letter 
responding to negative comments), and the Philadelphia Stock 
Exchange, Inc. (letter responding to negative comments). Opposing 
the proposal were the New York Stock Exchange, Inc., CS First 
Boston, and Lehman Brothers. For a summary of the comments, see 
Exchange Act Release No. 35637 (April 21, 1995), 60 FR 20891 (April 
28, 1995).
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    The Phlx study showed high trading volume in IPOs during the early 
days of trading, particularly the first and second days of trading. 
Citing this data, the regional exchanges argued that a restriction on 
extending UTP to IPO securities created a substantial negative effect 
on competition, both in relation to the listing exchange and OTC 
dealers

[[Page 69977]]

trading listed securities (the ``third market'').\12\
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    \12\ The Chicago Stock Exchange also stated that it had listed 
IPOs simultaneously with the NYSE and had seen no adverse effect. 
Similarly, the Phlx study found, in the case of five IPOs that were 
dually or multiply listed on at least one regional exchange and the 
NYSE, that the regional trades on the first two days virtually 
always were within the NYSE daily trading range.
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    On the other hand, the commenters opposing a reduced waiting 
period--the New York Stock Exchange (``NYSE'') and two underwriting 
firms--maintained that immediate regional exchange trading of IPOs 
would increase price volatility in the trading of IPO securities. With 
IPOs trading immediately on UTP exchanges, they argued, underwriters 
would not have sufficient time to ensure an orderly distribution of the 
securities.\13\ A study produced by Lehman Brothers at the time showed 
higher volatility in some Nasdaq IPOs than in selected NYSE IPOs. 
Opponents of the proposal cited this data in asserting that dispersed 
initial trading of IPOs is more volatile than initial centralized 
trading.\14\
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    \13\ Two commenters advocated at the time that Congress's 
temporary two-day delay should continue in place, while the third 
recommended the retention of, at the very least, a one-day trading 
delay.
    \14\ Supporters countered that any increase in price volatility 
in early trading of IPOs is limited to upward price movement. 
Supporters also argued that price volatility is generated by supply 
and demand, and, as a natural by-product of a free and open market, 
should never be used as a reason to exclude some equally-regulated 
competitors from the marketplace.
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C. Adoption of a Revised Version

    On April 21, 1995, the Commission adopted a revised version of its 
original proposal. Instead of allowing UTP exchanges to trade a listed 
IPO as soon as the first trade on the listing exchange was reported to 
the Consolidated Tape, the revised rule required them to wait until the 
opening of business on the day following the IPO. In other words, a 
one-day trading delay was established for UTP in listed IPOs.\15\
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    \15\ See Exchange Act Release No. 35637 (April 21, 1995), 60 FR 
20891 (April 28, 1995).
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    In arriving at this position in 1995, the Commission acknowledged 
the substantial volume of trading that occurs on the initial trading 
days of IPOs. As a general matter, the Commission agreed with the 
regional exchanges that early UTP in IPO securities would enhance the 
ability of multiple markets to compete for this volume. However, it 
also recognized a possibility that virtually immediate UTP in IPO 
securities could complicate the pricing and orderly distribution of IPO 
securities by increasing the risk of price volatility as the securities 
are distributed to the public. The Commission noted particularly the 
concern raised by the underwriters that believed that IPO pricing could 
be at risk if there was no opportunity for early centralized trading. 
Finally, a significant factor in the Commission's decision to adopt a 
one-day trading delay in 1995 was the fact that insufficient data was 
available with which to assess the potential impact of immediate IPO 
trading in multiple markets.
    The Commission stated at the time, however, that it would continue 
to monitor the trading of IPOs, and that it would be willing to 
consider revisiting the question of the appropriate waiting period for 
extending UTP to listed IPO securities after experience had been gained 
with the amended rules.\16\ The Commission believes that it is now 
appropriate to revisit the one-day waiting period based on its 
experience over the last four years, as well as results of a new study 
submitted to the Commission by several regional exchanges.
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    \16\ Id. at 20894.
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D. The 1998 Study

    In August 1998, the Chicago Stock Exchange, the Cincinnati Stock 
Exchange, and the Pacific Exchange presented to the SEC for review a 
new study (``1998 Study''), examining the effects of immediate multiple 
trading of IPO securities.\17\ The study was conducted at the request 
of the Chicago Stock Exchange in response to the Commission's 1995 
indication that it would be open to reconsidering the issue when new 
data became available.
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    \17\ Jay Ritter, Joe B. Cordell Eminent Scholar, University of 
Florida, ``Unlisted Trading Privileges in Listed IPOs: Analysis of 
the One-Day Delay,'' June 1998, available in public File No. S7-29-
99.
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    The study comprised two sets of inquiries. Each compared a group of 
newly issued securities that were permitted to trade immediately on 
more than one exchange, with a group of IPO securities that were 
similar in type but that were subject to the one-day trading delay. The 
study examined whether bid-ask spreads and intraday price volatility 
were greater for the IPOs that were dually or multiply traded than for 
the IPOs that were not, compiling data from the first five days of 
trading for each of the securities.
    Specifically, the first analysis compared a group of nine dually 
listed IPOs and six spin-offs \18\ that traded on more than one 
exchange \19\ with a similar group of IPO securities that were not 
dually or multiply listed. The two groups of offerings were issued 
during the same general time period,\20\ and were similar in terms of 
the industry of the issuer and the amount of proceeds from the 
offering. Because an IPO as defined under the Act includes both 
traditional IPOs and spin-offs, the study attempted to include both in 
its analysis. Moreover, like IPOs, the spin-offs involve an issuance of 
shares where there is no previous basis to establish an opening price. 
The sampling for comparison was small because IPOs are rarely listed on 
more than one exchange.
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    \18\ In the spin-offs, the shareholders of a parent company were 
issued IPO shares in a subsidiary company. Spin-offs are considered 
to be ``technical IPOs''--i.e., transactions that are not 
traditional initial issuances of shares to the general public in 
exchange for cash, but that are currently included within the 
definition of IPO in Section 12 of the Act.
    \19\ Spin-offs and IPOs that were not considered IPOs under 
Section 12 of the Act could be traded immediately on other 
exchanges.
    \20\ The dually or multiply listed IPOs and spin-offs examined 
in this section of the study began trading between 1993 and 1997. 
The comparison group of IPOs and spin-offs listed on only one 
exchange were selected from among IPOs and spin-offs that began 
trading between 1995 and 1997 because the one-day delay for UTP 
trading of such securities first went into effect in 1995. The 
comparison group was selected on the basis of similar industries and 
proceeds. The sample group of dually-listed IPOs included the 
following companies: Dr. Pepper/Seven-Up, Dean Witter/Discover, 
Allstate, Urban Shopping Centers, Pac-Tel, Guidant Corp., PMI Group, 
Hambrecht & Quist, Dominick's Supermarkets, Western Atlas Inc., 
Lehman Bros. Holdings, Promus Hotel Corp., Host Marriott Services, 
360 deg. Communications, and Imation Corp. The control group of non-
dually listed IPOs included: Fresh Del Monte Produce, Donaldson 
Lufkin Jenrette, American States Financial, Prentiss Properties 
Trust, Excel Communications, Global DirectMail, capMAC Holdings, 
Friedman Billings Ramsey, Circle K, Diamond Offshore Drilling, 
Contifinancial, Renaissance Hotel Group, Red Roof Inns, Berg 
Electronics, and Bell & Howell.
    In terms of intraday price volatility (the daily standard 
deviation of returns), the sample group produced volatility of 5.3% 
while the control group had volatility of 6.89%. This difference 
suggests that non-dually listed IPOs tend to be 30% more volatile 
than dually listed IPOs. The study also showed that the bid-ask 
spreads for each group were similar. The bid-ask spreads for the 
dually listed group were a statistically insignificant 10% higher 
than the control group for the first day of trading and only 5% 
higher by the second day of trading.
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    This first inquiry found that price volatility was higher on the 
first day of trading for both groups of IPOs and spin-offs than on any 
of the subsequent four days. However, the price volatility of IPOs and 
spin-offs traded on only one exchange was approximately 30% higher than 
that of the IPOs and spin-offs that were traded on at least two 
exchanges. In addition, in its comparison of bid-ask spreads, the study 
showed that there was no statistically significant difference between 
the two groups. Thus, the study concluded, neither an analysis of price 
volatility nor a survey of bid-ask spreads

[[Page 69978]]

revealed any evidence of damage to market quality caused by immediate 
trading of IPOs on non-listing exchanges.
    The second analysis compared a group of securities issued by 
companies that underwent some type of restructuring and could be dually 
or multiply traded because they were not subject to the UTP 
prohibition, with a group of stocks that similarly were issued as a 
result of reorganizations but that were subject to the UTP prohibition. 
Although this sampling did not include securities of a private company 
going public for the first time, the reorganizations are considered 
``technical IPOs'' because they meet the Section 12(f) definition of an 
IPO for the purposes of the statutory one-day trading delay.\21\ The 
analysis compared data between 1994 and 1997 for eleven companies that 
were not subject to the UTP prohibition with six companies that were.
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    \21\ See note 4, supra.
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    This second inquiry found that the price volatility on the first 
day of trading in either group of securities was not exceptionally 
high. Moreover, the price volatility of new issuances that traded on 
more than one exchange the first day did not differ significantly from 
that of the technical IPOs trading on only one exchange. The study also 
found no significant differences in the bid-ask spreads between the 
technical IPOs and the comparison group that traded on more than one 
exchange the first day.\22\
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    \22\ The second analysis compared eleven stocks of issuers that 
underwent some form of restructuring between May 1994 and October 
1997 that were not deemed to be an IPO, with six stocks that 
underwent a restructuring between April 1997 and October 1997 but 
that were deemed to be an IPO. The control group of stocks that were 
not considered to be an IPO included: Illinova Corp., Rexel Corp., 
Burlington Northern Santa Fe, Walt Disney, Rockwell International, 
Tenneco, Enron Corp., Rough Industries, Texas Utilities Co., First 
Republic Bancorp, and Excel Communications. The sample group of 
stocks that were considered to be an IPO included: CTG Resources, 
New Century Energies, Pioneer Natural Resources, Fred Meyer Inc., 
Keyspan Energy, and U.S. Restaurant Properties.
    The sample group of technical IPOs was less volatile than the 
control group for four of the first five days of trading after the 
restructuring. The ratio of volatility of the sample group compared 
to the control group for the first five days of trading was: 0.96, 
1.55, 0.59, 0.80 and 0.81. A ratio of 1 shows identical volatility. 
Likewise, the bid-ask spreads were closer for the sample group than 
the control group for the first five days of trading after a 
restructuring. The ratio of bid-ask spreads of the sample group 
compared to the control group for the first five days of trading 
was: 0.80, 0.88, 0.69, 0.81, and 0.93. Again, a ratio of 1 shows 
identical bid-ask spreads.
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    The study concluded from these analyses that there is no empirical 
basis for the contention that multiple exchange trading on the first 
day of an IPO adversely affects market quality, either by increasing 
price volatility or widening bid-ask spreads. In fact, the evidence 
indicated that listed IPOs that are not traded on more than one 
exchange can be more volatile than dually or multiply listed IPOs. The 
study further noted that the third market, which is not subject to the 
one-day delay, currently competes with the listing exchange in trading 
IPOs on the first day with no visible adverse effect.
    In addition, the study contained data demonstrating that regional 
exchanges have been unable to attract a substantial share of first day 
trading volume in IPOs even when not barred by the statute from 
participating. For example, in the case of the dually or multiply 
listed IPOs studied, the regional exchanges garnered an average of only 
1.8% of the total trading volume on the first day. Although the 
proportion increased over the next four trading days, it still remained 
comparatively small. In the case of IPOs subject to the one-day trading 
delay, the regional exchanges accounted for no more than an average 5% 
of the total trading volume for days two through five. In view of the 
small amount of volume at issue, the study concluded that eliminating 
the one-day delay should not have a major impact on the market as a 
whole. The study also observed that the current ban on first day 
trading puts regional exchanges at a competitive disadvantage vis-a-vis 
the third market, which is not subject to the one-day delay.

II. Discussion

A. Introduction

    The Commission preliminarily believes that there is an absence of 
significant evidence that the delay protects the markets and that, 
accordingly, there is no justification for the continuance of the one-
day trading delay. Recent experience appears to support changing the 
rule. The one-day trading delay appears to provide no real benefits to 
the market for IPOs and actually inhibits competition among markets. 
The lack of any problems over the last four years with reducing the 
waiting period from two days to one day supports this conclusion.\23\ 
In addition, the 1998 study discussed above provides further evidence 
that the one-day trading delay should be eliminated or reduced.
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    \23\ While there have been frequent questions regarding which 
transactions qualify as IPOs under the rule, there have not been 
significant problems in terms of IPO pricing.
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    As noted above, when the Commission first considered this issue in 
1995, two commenters supported a two-day waiting period for IPOs, 
arguing that IPOs would not have an orderly distribution and that there 
would be increased price volatility on these two days. This, however, 
has not turned out to be a concern on the second trading day as 
evidenced by the successful trading since 1995 of IPO securities on the 
second trading day by multiple markets. Therefore, based on this 
experience and the 1998 Study, the Commission proposes to allow 
exchanges to extend UTP to IPO securities after the first trade on the 
listing market is reported to the Consolidated Tape.

B. Proposed Amendment

    The Commission is proposing an amendment to Rule 12f-2(a) \24\ to 
provide that an exchange may extend UTP to a listed IPO security when 
at least one transaction in the subject security has been effected on 
the listing exchange and the transaction has been reported pursuant to 
an effective transaction reporting plan as defined in Rule 11Aa3-1 
under the Act.\25\ The proposed rule would reduce the mandatory waiting 
period (or ``interval,'' as it is described in the Act) for extending 
UTP in listed securities from one trading day, as specified in the 
current Rule 12f-2(a), to the time that it takes to effect and report 
the initial trade in the security on the listing exchange.
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    \24\ 17 CFR 240.12f-2(a).
    \25\ 17 CFR 240.11Aa3-1. The remaining paragraphs of Rule 12f-2, 
paragraphs (b) and (c), which currently define subject securities 
and require that the extension of UTP to an IPO security comply with 
all the other provisions in Section 12(f), and the rules thereunder, 
would remain unchanged.
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    The Commission believes that it is appropriate to minimize 
regulatory restraints on competition for trading listed IPO securities. 
The proposed rule change should enhance the ability of exchanges to 
compete for order flow in these securities, especially in light of the 
fact that OTC dealers and alternative trading systems may already trade 
IPO securities immediately upon effective registration with the 
Commission. The Commission sees no compelling reason to maintain a 
restriction that inhibits competition among the exchanges.
    Moreover, the 1995 and 1998 studies show no evidence that the one-
day trading delay provides any tangible benefits to market quality. In 
fact, the 1998 Study suggests that greater price volatility actually 
exists on the first day of an IPO with the trading delay in place. The 
1998 Study examined both bid-ask spreads and price volatility and

[[Page 69979]]

was unable to determine that there was an adverse impact on market 
quality resulting from the trading of IPO securities in multiple 
markets.\26\ Especially in view of the rapidly expanding choices that 
investors have for trade execution, placing unnecessary restrictions on 
some markets in favor of others tends to hamper competition. While the 
listing exchange should have the benefit of listing the IPO, other 
markets should be permitted to provide a place for investors to trade 
those securities.
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    \26\ The Commission recognizes that the number of IPOs studied 
was limited due to the low number of multiple IPO listings and the 
current restrictions. The Commission still preliminarily believes 
that the study's methodology is reasonable. For the definition of 
``IPO,'' see note 4, supra.
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    In 1995, the Commission expressed concern about maintaining the 
delay but decided that prudence dictated a cautious approach. After 
several years of experience with the one-day trading delay and analysis 
of the impact, the Commission preliminarily believes that it is now 
appropriate to lift the one-day trading delay for IPOs.
    At the same time, the Commission preliminarily believes it 
necessary to retain a minimal, one trade waiting requirement before 
non-listing exchanges may begin trading. The first transaction in an 
IPO, as disseminated on the Consolidated Tape, conveys essential 
information to the public concerning the price of the security set by 
the underwriting process. In addition, the timing of the initial trade 
and commencement of trading in a new issue entail significant 
coordination involving the issuer, the listing exchange, and the 
underwriters of the public offering of the security. If competing 
exchanges were to allow their members to trade a listed IPO security 
before it initially traded on the listing exchange, it could be 
difficult to ensure that all the preparation for the IPO had been 
completed before public trading in the security commenced.\27\
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    \27\ On December 9, 1999, Commission staff issued a no-action 
letter to the regional exchanges clarifying the definition of IPO 
for purposes of Rule 12f-2. The no-action letter would permit the 
regional exchanges to begin trading securities in certain 
``technical IPO'' transactions on the same day those securities 
begin trading on another exchange on which they are listed. The no-
action letter identifies six examples of offerings that meet the 
definition of IPO under Section 12(f) of the Act, but that are not 
traditional, first time capital raising efforts. These examples 
involve offerings of securities to an existing class of security 
holders rather than an initial offering of shares to the general 
public in exchange for cash. See letter from Annette L. Nazareth, 
Director, Division of Market Regulation, SEC, to Paul B. O'Kelly, 
Executive Vice President, Market Regulation and Legal, The Chicago 
Stock Exchange, dated December 9, 1999.
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C. Solicitation of Comments

    The Commission seeks comment on the one trade waiting period as 
proposed. To the extent that commenters believe that the current one 
day waiting period should remain unchanged, the Commission encourages 
commenters to submit specific data illustrating the need to retain the 
current waiting period. In addition, should a commenter believe that a 
different interval should be used, the commission encourages commenters 
to submit specific data supporting that belief. Relevant data might 
include the potential negative effects on the pricing of an IPO. The 
Commission also seeks comment on whether any changes to the 
consolidated quotation system or trade reporting systems should be made 
as a result of reducing the waiting interval from one day to the first 
trade on the listing exchange. In addition, the Commission solicits 
comment on the possible impact in trading and whether additional 
procedures or enhancements may be necessary to ensure that a UTP market 
does not commence trading prior to the first trade on the listing 
exchange.

III. Costs and Benefits of the Proposed Amendments

    The Commission is considering the costs and benefits of the 
proposed amendment to the Rule. In terms of potential benefits to 
market participants should the proposal be adopted, the proposed 
amendment would allow UTP exchanges to compete with the listing 
exchange and the third market for order flow on the first day an IPO 
starts trading. Investors benefit when more participants offer 
liquidity to the market. The proposed amendment would also reduce 
compliance costs for UTP exchanges because they would not be required 
to analyze transactions to determine which ones are IPOs under the 
statutory definition and subject to the current one-day delay. As long 
as they wait for one trade on the listing exchange, UTP exchanges would 
be free to extend UTP to that security. In addition, issuers would 
benefit from wider distribution of IPO securities and greater 
opportunities for price discovery.
    The proposed amendment could impact the listing exchanges because 
they would lose a one-day trading advantage over other exchanges. In 
addition, the members of the listing exchange could lose business 
because order flow might be lost to other exchanges. The Commission 
does not anticipate any other direct or indirect costs to U.S. 
investors or other market participants because the rule would impose no 
recordkeeping or compliance burdens.
    The Commission requests comment on the costs and benefits of the 
proposed amendment to Rule 12f-2(a). In particular, the Commission asks 
commenters to address what, if any, effect the proposed rule amendment 
could have on exchanges and their members and whether the proposed 
amendment would generate the anticipated benefits or impose any costs 
on market participants. In addition, the Commission asks commenters to 
address what, if any, effect the proposed rule amendment could have on 
issuers and other market participants.

IV. Initial Regulatory Flexibility Analysis

    This Initial Regulatory Flexibility Analysis (``IRFA'') is being 
prepared in accordance with Section 3(a) of the Regulatory Flexibility 
Act (``RFA'').\28\ It relates to a proposed amendment to Rule 12f-2(a) 
\29\ under the Exchange Act. The proposed amendment would permit 
exchanges to extend UTP to an IPO security listed on another exchange 
after the first trade on the listing exchange is reported to the 
Consolidated Tape, rather than waiting one full trading day as 
currently required.
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    \28\ 5 U.S.C. 603(a).
    \29\ 17 CFR 240.12f-2(a).
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A. Reasons for and Objectives of the Proposed Actions

    This amendment is proposed to further the purposes of Section 
11A(a)(1)(D) of the Exchange Act \30\ by fostering efficiency, 
enhancing competition, increasing the amount of information available 
to brokers, dealers, and investors, facilitating the offsetting of 
investors' orders, and contributing to best execution of those orders. 
The proposal would address a barrier to competition that currently 
operates as a restriction on trading activity. Under the current one-
day trading delay, exchanges that do not list IPOs are unable to 
compete with electronic trading systems and the third market for order 
flow. The proposed rule change would facilitate competition among 
various markets for order flow and enhance investor options for order 
execution. The one-day trading delay does not appear to provide any 
significant benefit to the marketplace, but rather appears to create a 
barrier to competition. The proposed rule amendment would improve 
competition and investor choice.
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    \30\ 15 U.S.C. 78k-1(a)(1)(D).

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[[Page 69980]]

B. Legal Basis

    Sections 12(f)(1)(C) and 12(f)(1)(D) provide the Commission with 
rulemaking authority to prescribe procedures or requirements for 
extending UTP to any security. In addition, Section 11A(a)(1)(D) sets 
forth objectives for linked markets that the Commission should pursue. 
These include fostering efficiency, enhancing competition, increasing 
the amount of information available to brokers, dealers, and investors, 
facilitating the offsetting of investors' orders, and contributing to 
best execution of those orders. The changes to Rule 12f-2(a) are also 
proposed under the Commission's authority set forth in Section 23(a) of 
the Exchange Act.

C. Small Entities Subject to the Rule

    The proposal would directly affect the national securities 
exchanges, none of which is a small entity. Paragraph (e) of the Rule 
0-10 \31\ states that the term ``small business,'' when referring to an 
exchange, means any exchange that has been exempted from the reporting 
requirements of Sec. 240.11Aa3-1. Thus there would be no impact for 
purposes of the RFA on small businesses.
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    \31\ 17 CFR 240.0-10(e).
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D. Reporting, Recordkeeping, and Other Compliance Requirements

    The proposal would not impose any new reporting, recordkeeping, or 
other compliance requirements on exchanges, or entities indirectly 
affected by the proposal.

E. Duplicative, Overlapping or Conflicting Federal Rules

    The Commission believes that there are no rules that duplicate, 
overlap, or conflict with the proposed rules.

F. Significant Alternatives

    The RFA directs the Commission to consider significant alternatives 
that would accomplish the stated objectives, while minimizing any 
significant economic impact on small entities. In connection with the 
proposal, the Commission considered the following alternatives: (1) The 
establishment of differing compliance or reporting requirements or 
timetables that take into account the resources available to small 
entities; (2) the clarification, consolidation, or simplification of 
compliance and reporting requirements under the Rule for small 
entities; (3) the use of performance rather than design standards; and 
(4) an exemption from coverage of the Rule, or any part thereof, for 
small entities.
    The Commission believes that none of the above alternatives is 
applicable to the proposed amendment. The exchanges are directly 
subject to the requirements of Rule 12f-2(a) and are not ``small 
entities'' because they are all national securities exchanges that do 
not meet the definition of small entity. Therefore, the Commission does 
not believe the alternatives are applicable in the present proposal.

G. Solicitation of Comments

    The Commission encourages the submission of comments with respect 
to any aspect of this Initial Regulatory Flexibility Analysis. In 
particular, the Commission seeks comment on: (i) The number of small 
entities, if any, that would be affected by the proposed rule; and (ii) 
the impact that the proposed amendment would have, if any, on such 
entities. Such comments will be considered in the preparation of the 
Final Regulatory Flexibility Analysis, if the proposed amendment is 
adopted, and will be placed in the same public file as comments on the 
proposed rules themselves. Comments should be submitted in triplicate 
to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 
Fifth Street, N.W., Washington, D.C. 20549-0609. Comments also may be 
submitted electronically at the following E-mail address: rule-
[email protected]. All comment letters should refer to File No. S7-29-
99; this file number should be included on the subject line if E-mail 
is used. Comment letters will be available for public inspection and 
copying in the Commission's Public Reference Room, 450 Fifth Street, 
N.W., Washington, D.C. 20549. Electronically submitted comment letters 
also will be posted on the Commission's Internet web site (http://
www.sec.gov).

V. Paperwork Reduction Act

    The Paperwork Reduction Act does not apply because the proposed 
amendment does not impose recordkeeping or information collection 
requirements, or other collections of information that require the 
approval of the Office of Management and Budget under 44 U.S.C. 3501 et 
seq.

VI. Effects on Competition, Efficiency, and Capital Formation

    Section 23(a)(2) of the Exchange Act \32\ requires the Commission, 
when promulgating rules under the Act, to consider the anti-competitive 
effects of such rules. Moreover, Section 3 of the Exchange Act,\33\ as 
amended by the National Securities Markets Improvement Act of 1996,\34\ 
provides that whenever the Commission is engaged in a rulemaking and is 
required to determine whether an action is necessary or appropriate in 
the public interest, the Commission must consider, in addition to the 
protection of investors, whether the action will promote efficiency, 
competition, and capital formation. The Commission notes that the 1998 
Study submitted by the regional exchanges in support of their 
rulemaking petition appears to indicate that the rule change would 
promote competition.
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    \32\ 15 U.S.C. 78w(a)(2).
    \33\ 15 U.S.C. 78c.
    \34\ Pub. L. No. 104-290, 110 Stat. 3416 (1996).
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    The Commission requests comment on any anti-competitive effects the 
proposed rule change may have on national securities exchanges, 
associations, third markets, order routing firms, investors, issuers, 
and other market participants. As stated above, the Commission also 
notes that it has received a study that appears to indicate that the 
proposed rule change would promote competition. The Commission requests 
comment on, and appropriate data regarding the impact of, the proposed 
rule change would promote efficiency, competition, and capital 
formation.
    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, the Commission is also requesting information regarding 
the potential impact of the proposed rule on the economy on an annual 
basis. Commentators should provide empirical data to support their 
views.

VII. Statutory Authority

    The rule amendments in this release are being proposed pursuant to 
15 U.S.C. 78 et seq., particularly Sections 11A(a)(1)(D), 12(f)(1)(C), 
12(f)(1)(D), and 23(a) of the Exchange Act, 15 U.S.C. 78k-1, 
78l(f)(1)(C), 78l(f)(1)(D), 78w(a).

List of Subjects in 17 CFR Part 240

    Reporting and recordkeeping requirements, Securities.
    For the reasons set out in the preamble, the Commission proposes to 
amend Part 240 of Chapter II of Title 17 of the Code of Federal 
Regulations as follows:

PART 240-GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    1. The authority citation for Part 240 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77eee, 
77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78j-1, 78k, 
78k-1, 78l,

[[Page 69981]]

78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll(d), 78mm, 79q, 
79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4 and 80b-11, unless 
otherwise noted.
* * * * *
    2. Section 240.12f-2 is amended by revising paragraph (a) to read 
as follows:


Sec. 240.12f-2  Extending unlisted trading privileges to a security 
that is the subject of an initial public offering.

    (a) General Provision.--A national securities exchange may extend 
unlisted trading privileges to a subject security when at least one 
transaction in the subject security has been effected on the national 
securities exchange upon which the security is listed and the 
transaction has been reported pursuant to an effective transaction 
reporting plan, as defined in Sec. 240.11Aa3-1.
* * * * *
    Dated: December 9, 1999.

    By the Commission.
Jonathan G. Katz,
Secretary.
[FR Doc. 99-32472 Filed 12-14-99; 8:45 am]
BILLING CODE 8010-01-U