[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