[Federal Register Volume 65, Number 47 (Thursday, March 9, 2000)]
[Notices]
[Pages 12603-12606]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-5759]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-42487; File No. SR-NYSE-99-34]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 Thereto by the New York Stock Exchange, Inc.
To Amend the Exchange's Allocation Policy
March 2, 2000.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), \1\ notice is hereby given that on July 20, 1999, the New
York Stock Exchange, Inc. (``NYSE'' or ``Exchange'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change. On February 7, 2000, the Exchange submitted Amendment No. 1 to
its proposal.\2\ The proposed rule change, as amended, is described in
Items I, II and III below, which Items have been prepared by the
Exchange. The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
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\1\ 5 U.S.C. 78s(b)(1).
\2\ In Amendment No. 1, the Exchange provided additional
information regarding the allocation of target stocks and merged
companies; clarified the selection process for institutional
investors and the definition of a senior officer; and revised its
procedures so that members of the committee eligible for election as
chairman include brokers with four months remaining in their
committee term. See Letter from James E. Buck, Senior Vice President
and Secretary, NYSE, to Terri Evans, Attorney, Commission, dated
February 4, 2000 (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The proposed rule change consists of changes to the Exchange's
Allocation Policy and Procedures (``Policy'').
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below and is set forth in Sections A, B, and C below.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The intent of the Exchange's Policy is to (1) ensure that the
allocation process for securities is based on fairness and consistency
and that all specialist units have a fair opportunity for allocations
based on established criteria and procedures; (2) provide an incentive
for ongoing enhancement of performance by specialist units; (3) provide
the best possible match between a specialist unit and security; and (4)
contribute to the strength of the specialist system.
Since 1987, the Exchange's Quality of Markets Committee has
appointed a number of Allocation Review Committees (``ARCs'') to review
the Policy and make recommendations with respect to changes.\3\ In
February, 1999, the Quality of Markets Committee again appointed in
ARC, ARC V, to review the Policy and make recommendations with respect
to improvements in the allocation process. Those recommendations, which
the Exchange is proposing as changes to the Policy, are discussed
below.
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\3\ See Securities Exchange Act Release No. 38372 (March 7,
1997), 62 FR 13421 (March 20, 1997) (containing recommendations made
by ARCs I through IV).
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Composition of Allocation Committee
Currently, the Allocation Committee is composed of nine members,
consisting of seven floor brokers (including three broker Governors
(one of whom may be an independent/two dollar broker) and four other
floor brokers from the Allocation Panel (one of whom must be an
independent/two dollar broker)) and two allied members \4\ from the
Market Performance Committee \5\ or the Allocation Panel. The
Allocation Committee presently does not have representation from
institutional investor organizations. The Exchange believes that these
organizations are significant participants in the securities markets,
including the Exchange and therefore, that such representation enhances
the expertise and objectivity of the Allocation Process. The proposal
would add one institutional investor representative member to the
Allocation Committee drawn from the Allocation Panel or from the
institutional investor members of the Market Performance Committee.
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\4\ See Sec. 3(c) of Art. I of the NYSE Constitution.
\5\ The Market Performance Committee is appointed by the
Exchange's Board of Directors to develop and administer procedures
designed to improve the performance of members on the floor. It
consists of floor Directors, floor Governors, allied members and
representatives of institutional investor organizations.
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In connection with this change, however, the Exchange does not
believe it is necessary to expand the size of the Committee. Therefore,
the NYSE proposes to decrease the number of floor brokers on the
Committee from seven to six. This would be accomplished by decreasing
from four to three the number of other floor brokers from the
Allocation Panel (one of whom must be an independent/two dollar
broker).
Composition of Allocation Panel
The Allocation Panel (``Panel'') is the resource from which the
Allocation Committee is assembled. A Panel is appointed by the
Exchange's Quality of Markets Committee from among
[[Page 12604]]
individuals nominated by the Exchange's membership. The Panel consists
of 28 floor brokers; twelve allied members (including the four allied
members serving on the Market Performance Committee); the eight floor
broker Governors who are part of the Panel by virtue of their
appointment as Governors; and a minimum of five Senior Floor Official
brokers. The Exchange proposes three changes to the composition of the
Panel.
First, the Exchange proposes to expand the Panel to add nine
institutional investor organization representatives, including the five
serving on the Market Performance Committee, to be consistent with the
proposal to add institutional investor representatives to the
Allocation Committee. Representatives from institutional investor
organizations will be chosen in the same manner as other Panel members
(i.e., through nominations from the membership and appointment by the
Quality Markets Committee).\6\
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\6\ See Amendment No. 1, supra note 2.
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The second proposed change relates to the number of floor Governors
on the Panel. Floor Governors are Floor Officials who have been
appointed as Governors by the Chairman of the Exchange. In 1998, the
Exchange increased the number of floor Governors appointed under
Exchange Rule 46 from 16 to 20.\7\ These 20 governors consist of ten
specialists active on the floor and ten-floor brokers. The floor broker
Governors are automatically members of the Market Performance Committee
and the Panel. The Exchange now proposes to increase the number of
floor broker Governors on the Panel from eight to ten to reflect the
increased number of floor Governors. In addition, at the time the
number of floor Governors was increased, the number of allied member
representatives on the Market Performance Committee was increased from
four to five. The Exchange proposes to amend the composition of the
Panel to reflect this increase.
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\7\ See Securities Exchange Act Release No. 40539 (October 9,
1998), 63 FR 56281 (October 21, 1998). The Exchange stated at the
time the increase was needed to maintain sufficient levels of floor
Governor supervision and timely response, in the face of an increase
in trading volume and number of listed securities in recent years.
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The new composition of the Allocation Panel would be 28 floor
brokers; 13 allied members (including the five allied members serving
on the Market Performance Committee); nine institutional members
(including the five representatives of institutional investor
organizations serving on the Market Performance Committee); the ten
floor broker Governors who are part of the Panel by virtue of their
appointment as Governors; and a minimum of five Senior Floor Official
brokers.
Allocation Committee Quorum Requirement
The Exchange is not proposing to alter the Committee's existing
quorum requirement that there be at least six floor brokers, at least
two of whom are Governors, and one allied member. The presence of the
institutional representative would not be required for a quorum
because, at times, it may be difficult to obtain the participation of a
representative of an institutional investor organization.
Contact Between Listing Companies and Specialist Units
Currently, specialist units or any individual acting on their
behalf are prohibited from having any contact with a company that has
applied for listing from the date applications (known as ``green
sheets'') are solicited from specialists for the purpose of allocating
the stock to a specialist organization. The Exchange proposes to change
this non-contact period to the earlier of the date written notice is
given that the listing company filed its listing application with the
Exchange or the date allocation applications are solicited, (i.e., the
date the ``green sheet'' is posted). The Exchange presently publishes
this notice of listing application in its Weekly Bulletin. This
proposal would move the start of the period as to when contact is
prohibited to an earlier date in those cases where the ``green sheet''
is issued after the Weekly Bulletin notice of an application to list
has been published. The Exchange believes this is appropriate since
once the application is made public, the listing process has begun, and
specialist contact with the listing company should be prohibited during
this period.
Listing Company Request for Additional Specialist Information
Following Interviews
Under the Policy, a listing company may choose to pick its
specialist unit after interviewing a pool of three, four, or five units
selected by the Allocation Committee. Currently, any follow-up
questions conveyed to the Exchange from a listing company regarding
specialist unit(s) it interviewed are restricted to questions regarding
publicly-available information. The Exchange must approve the request
and all units in the group of units interviewed must be notified by the
Exchange of the request.
The NYSE proposes that if a listing company has a follow-up
question for any specialist unit(s) it interviewed, it must be conveyed
to the Exchange. The Exchange will contact the unit(s) to which the
question pertains and will provide any information received from the
unit(s) to the listing company. The NYSE purposes to eliminate the
requirement that only publicly-available information be provided and
the language requiring Exchange approval. The requirement that the
Exchange notify other units of the company's request also would be
deleted to make the process more efficient. The Exchange believes that
the listing company should have the ability to selectively request
information of a unit it has interviewed. For example, at times, an
issue may be discussed at subsequent interviews and the listing company
would like similar information from a unit it had already interviewed.
Or, a listing company may have further questions of the units it has
selected for final consideration. The Exchange believes that it would
be an unnecessary burden on the listing company and all the units to
require information that is not of interest to the listing company.
Common Stock Listing After Preferred
Currently, the Policy does not address the situation involving a
common stock being listed after its preferred stock has been allocated.
The Exchange is proposing that the allocation of the common stock of a
company listing after its preferred stock has been listed would be open
to all units. The company may select Option 1 (in which the Allocation
Committee selects the specialist unit to be allocated the company's
stock) or Option 2 (in which the company selects a specialist unit from
among a group of units chosen by the Allocation Committee). If Option 2
is selected, the specialist unit that trades the preferred stock must
be included in the group of units comprising the interview pool. The
company will not be able to select the specialist unit trading the
preferred stock without going through the allocation process.
Listed Company Mergers
Currently, when two listed companies merge, the merged entity is
assigned to the specialist in the company that is determined to be the
survivor-in-fact (dominant company). Where no surviving entity can be
identified, the matter is referred to the Allocation Committee and all
specialists are invited to apply. The merged company may request either
Option 1 or Option 2, with no provisions to include or exclude any unit
from consideration by
[[Page 12605]]
the Allocation Committee. There is no provision for the merged company
to select a unit that trades one of the listed companies which is
merging without going through the allocation interview process.
The Exchange is proposing several changes to the Policy. Where no
surviving entity can be identified, the listing company would be
permitted to select one of the units trading the merging companies
without going through the allocation interview process. This would make
the allocation process more efficient and less time consuming for the
listing company in those instances in which the company ultimately may
have decided that it will select one of the units which traded the
merging companies. The Exchange believes that requiring the interview
process would be more form over substance. If the listing company
determines to go to allocation, it may select Option 1 or Option 2.
Under Option 1, the company would not be able to request that the
Allocation Committee not allocate the stock to one of the units trading
the merging companies. If the company chooses Option 2, the interview
pool would consist of the specialist units of the merging companies and
must include additional units. The number of additional units must be
consistent with the Policy requirement that each pool consists of three
to five units. Under Option 2, the company would not be permitted to
request that any of the units trading the merging companies be excluded
from the interview pool.
The Exchange believes that this approach strikes an appropriate
balance between the interests of specialist units, who have developed a
relationship and a history of market making performance with a listed
company, and the interests of listed companies in choosing the most
appropriate unit to be their specialist. Should be merged entity choose
to remain with the current specialist (or either of the current
specialists), it is free to do so. The distinction in this situation
from the one discussed below regarding target stocks is that the merged
entity's management team is customarily a combination of the two
existing management terms, and the Exchange believes that the current
specialist(s) ought to have a reasonable opportunity to present its
case to this new management, without, of course, any guarantee of
receiving the allocation. A portion of the management team from the
pre-merged entities should not have the right to exclude a
specialist(s) from even being considered for the allocation. The
Exchange believes that such specialist should be given the opportunity
to be considered for the allocation, and if it is determined not to be
the best candidate for the allocation, then the unit will not be
selected. In the viewpoint of the Exchange, based on experience gained
over a long history of managing stock allocations, the proposed
approach is the fairest to all parties, while furthering the overall
objectives of the Policy. \8\ The Exchange believes that these changes
will make the Policy more consistent in its approach in providing the
opportunity for input and choice on the part of the listing company.
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\8\ See Amendment No. 1, supra note 2.
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Listed/Unlisted Company Mergers
Currently, if the unlisted company is the survivor-in-fact, the
company may chose to remain registered with the unit that traded the
listed company involved in the merger or may request that the matter be
referred to allocation, with applications invited from all units. The
company may request that the unit trading the listed company not be
allocated the stock (and, as a result, not be included in the pool of
units under Option 2) and the Allocation Committee must honor that
request.
The Exchange is proposing to conform this Policy to the proposed
Policy involving listed company mergers with no survivor-in-fact.
Therefore, the Policy would be amended to preclude the unlisted company
from excluding the specialist unit that trades the listed company from
consideration by the Allocation Committee. Further, the Policy would
require that if the unlisted company chooses Option 2, the unit trading
the listed company must be included in the allocation pool.
Issuance of Tracking (``Target'') Stock
These securities (also known as ``letter stock'') typically are
``targeted'' to a specific aspect of an issuer's overall business.
There are two instances in which ``target'' stocks are being listed.
The first involves situations in which the ``target'' stock is being
``uncoupled'' from the listed company, and itself listing on the
Exchange. Under the current Policy, when such a security is
``uncoupled'' and becomes an independent listing, it remains with the
specialist registered in the stock prior to its separate listing
(``original stock''), unless the listing company requests that the new
stock be referred to the Allocation Committee. The Allocation Committee
must honor the company's request not to be allocated to the specialist
unit that had traded the original stock. This provision will remain
unchanged. However, the Policy is being amended to require the
Allocation Committee to honor the listing company's request to include
as well as exclude from the allocation pool, the specialist unit that
had traded the original stock. This will conform this Policy to that
proposed for the second type of ``target'' stock situation.
The second type of ``target'' stock involves a listed company
issuing a ``target'' stock to track a separate business line. In these
instances, the issue is assigned by Exchange staff to the specialist in
the listed company issuing the ``target'' stock. As a result, the new
listing company (the ``target'' stock) has no input in the allocation
decision. The Exchange proposes to amend the Policy to conform with the
spin off/related company policy. The Exchange believes that these
situations should be treated consistently under the Policy, since they
are similar situations.
Target stocks, whether the target stock itself is joining the
Exchange as a separate listing (e.g., Con Edison Inc. issuing distinct
securities of Con Edison of New York) or where the target stock
represents a tracking of a bsuiness line of the current listed company
(e.g., GM and GMH), will be treated in the same manner as spin-offs and
listing of related companies. This is due to the existing relationship
of the specialist with the currently listed company (herein-after
referred to as the ``Parent'') and to the management of the Parent. The
policy for allocating such securities is that the listing company may
choose to stay with the specialist unit registered in the related
listed company or be referred to the Allocation Committee. In the
latter case, the company may request not to be allocated to the
Parent's specialist and the Allocation Committee will honor such
request. Alternatively, the listing company may request the exclusion
or inclusion of the Parent's specialist in the allocating pool if the
listing company elects Option 2.\9\
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\9\ See Amendment No. 1, supra note 2.
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Target stocks have a similar relationship with the Parent's
specialist and the Exchange believes they should have the option to
either include or exclude the Parent's specialist from the pool of
specialists determined by the Allocation Committee. According to the
Exchange, the rationale for this is two-fold. First, if the Parent
company is unsatisfied with the specialist's performance to date, the
Exchange believes it is unnecessary to include this unit in the pool if
the company so requests. In the same vein, if the Parent company is
satisfied with the specialist's performance but wishes to avail itself
of the opportunity to
[[Page 12606]]
interview other units, the company should have the option of including
such specialist in the interview pool along with other specialists
determined by the Allocation Committee. Finally, it is important to
bear in mind that, often, senior management of the subject companies is
the same as that of the Parent (or there is substantial overlap), and,
therefore, the choice of a specialist will be influenced by an
assessment of the current relationship and market making
performance.\10\
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\10\ See Amendment No. 1, supra note 2. In terms of listing
standards, target stocks are treated in the same way as any other
second class of stock of the issuer. See Amendment No. 1, supra
note.
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Allocation Sunset Policy
When the Exchange allocates a company that is listing its shares
from its initial public offering, that allocation decision remains
effective for three months. If the company does not list within that
time, the matter is referred again to the Allocation Committee. The
policy balances the interests of the Exchange in preventing a listing
company from delaying listing in order to select a different specialist
versus the legitimate economic interests of a listing company to delay
an IPO due to market conditions. However, if the selected specialist
unit merges or is involved in a combination within the three-month
period, the Exchange is proposing to amend the Policy to permit the
listing company to choose whether to stay with the merged specialist
unit, or be referred to allocation. This recognizes that the listing
company may wish to reconsider its choice in light of the changed
circumstances regarding the specialist unit it chose.
Listing Company Attendees at Specialist Interviews
The current Policy requires that a senior official of the listing
company of the rank of Corporate Secretary or above be present at the
interviews with specialists under Option 2. In the case of structured
products' listings,\11\ the corporate makeup contemplated by the
existing requirement often does not exist. The Exchange proposes to
amend the Policy to clarify that any senior officer \12\ of the issuer
may be present at the interview to satisfy the requirement.
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\11\ A structured product is a security whose value is based on
the value of another security.
\12\ The structured product company will designate which of its
officers is a senior officer. See Amendment No. 1, Supra note 2.
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2. Statutory Basis
The Exchange believes that the basis under the Act for the proposed
rule change is the requirement under Section 6(b)(5) \13\ that an
Exchange have rules that are 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 Exchange believes that the
proposed changes are consistent with these objectives in that they
would enable the Exchange to ensure fairness and equal opportunity in
the allocation process.
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\13\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approved the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
changeshould be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change, as amended, is consistent with the Act. Persons making written
submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street N.W., Washington,
D.C. 20549-0609. 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 in 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-99-34 and should be submitted by March 30, 2000.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\14\
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\14\ 17 C.F.R. 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-5759 Filed 3-8-00; 8:45 am]
BILLING CODE 8010-01-M