[Federal Register Volume 65, Number 172 (Tuesday, September 5, 2000)]
[Rules and Regulations]
[Pages 53560-53565]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-22591]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-43217; File No. S7-29-99]
RIN 3235-AH85


Unlisted Trading Privileges

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission is amending Rule 12f-2 
under the Securities Exchange Act of 1934 (``Exchange Act''), which 
governs unlisted trading privileges (``UTP'') in listed initial public 
offerings (``IPOs''). Under the amendment, a national securities 
exchange extending UTP to an IPO security listed on another exchange 
will 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 will be permitted to begin 
trading an IPO issue immediately after the first trade in the security 
is reported by the listing exchange to the Consolidated Tape.

EFFECTIVE DATE: This final rule is effective November 6, 2000.

FOR FURTHER INFORMATION CONTACT: 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 Exchange Act \1\ governs when a national 
securities exchange may extend UTP to a security, i.e., allow trading 
in a security that is not listed and registered on that exchange.\2\ 
The UTP Act of 1994 (``UTP Act'') \3\ substantially amended Section 
12(f). Prior to that time, exchanges had to apply to the Commission for 
approval before extending UTP to a particular security. The UTP Act 
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, under Section 12(f) 
of the Exchange Act, exchanges may immediately extend UTP to a security 
listed on another exchange unless it is a listed IPO security.\4\ For 
listed IPO securities, Rule 12f-2 of the Exchange Act requires 
exchanges to wait one full day before they can extend UTP to such 
securities.
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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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    On December 9, 1999, the Commission proposed for comment an 
amendment to Rule 12f-2 under the Exchange Act that would eliminate the 
one-day waiting period and permit a national securities exchange to 
extend UTP to an IPO security immediately after the first trade in the 
IPO security on the listing exchange is reported to the Consolidated 
Tape.\5\
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    \5\ Exchange Act Release No. 42209 (Dec. 9, 1999), 64 FR 69975 
(Dec. 15, 1999) (``Proposing Release''). Commission staff also 
issued a no-action letter to several regional exchanges narrowing 
the scope of transactions that should be considered IPOs for 
purposes of Rule 12f-2. See note 32, infra.
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A. Current Rule 12f-2

    The UTP Act established a temporary two-day waiting period for 
extending UTP to an IPO security, but allowed the Commission to adopt a 
rule providing for a shorter waiting period.\6\ On April 21, 1995, the 
Commission adopted Rule 12f-2 under the Exchange Act to provide for a 
shorter waiting period. The final rule differed from the original 
proposed rule, which would have allowed a UTP exchange to trade a 
listed IPO as soon as the first trade on the listing exchange was 
reported to the Consolidated Tape. The final rule instead established a 
one-day trading delay for extending UTP to listed IPOs.\7\
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    \6\ While providing temporarily for a two-day waiting period, 
the Act required the Commission to prescribe, by rule or regulation 
within 180 days of its enactment, the duration of the interval, if 
any, that the Commission would determine to be ``necessary or 
appropriate for the maintenance of fair and orderly markets, the 
protection of investors and the public interest'' or otherwise in 
furtherance of the purposes of the Act.
    \7\ 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 
comments of the regional exchanges that early UTP in IPO securities 
would enhance the ability of multiple markets to compete for this 
volume. However, in response to concerns raised by the NYSE and two 
underwriting firms that IPO pricing could be at risk if there were no 
opportunity for early centralized trading, the Commission decided to 
require the one-day waiting period. In making this determination, the 
Commission noted the 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. Another 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

[[Page 53561]]

which to assess the potential impact of immediate IPO trading in 
multiple markets.
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    \35\ See supra, note 8 and accompanying text.
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    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.\8\
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    \8\ Id. at 20894.
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B. The 1998 Study

    In August 1998, the Chicago Stock Exchange (``CHX''), the 
Cincinnati Stock Exchange (``CSE''), and the Pacific Exchange (``PCX'') 
presented to the Commission for review a new study (``1998 Study'') 
examining the effects of immediate multiple trading of IPO 
securities.\9\ The study was conducted at the request of the CHX 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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    \9\ 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 \10\ that traded on more than one 
exchange \11\ with a similar group of IPO securities and spin-offs that 
were not dually or multiply listed. The two groups of offerings were 
issued during the same general time period,\12\ 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 Exchange Act includes 
both traditional IPOs and spin-offs, the study included both in its 
analysis. The sampling for comparison was small because IPOs are rarely 
listed on more than one exchange.
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    \10\ 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.
    \11\ Spin-offs and IPOs that were not considered IPOs under 
Section 12 of the Act could be traded immediately on other 
exchanges.
    \12\ 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.
    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 revealed any evidence of 
damage to market quality caused by immediate trading of IPOs on a 
second exchange.
    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 the latter group did not include securities of a private 
company going public for the first time, the reorganizations were 
considered ``technical IPOs'' because they met the Section 12(f) 
definition of an IPO for the purposes of the statutory one-day trading 
delay.\13\ 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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    \13\ 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.\14\
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    \14\ 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 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 the 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 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.

II. Proposed Rule Change

A. Description of Proposal

    Under the proposed amendment to Rule 12f-2, a national securities 
exchange could extend UTP to an IPO security immediately after the 
first trade

[[Page 53562]]

in the IPO security on the listing exchange is reported to the 
Consolidated Tape.
    In the Proposing Release, the Commission stated that it 
preliminarily believed that there was little evidence that the one-day 
delay protects the markets and that, accordingly, there was no 
justification for retaining the one-day trading delay. In proposing the 
revision to Rule 12f-2, the Commission relied, in part, on the 1998 
Study. The Commission noted that the 1998 Study, as well as the lack of 
any problems with reducing the waiting period from two days to one day 
during the preceding four years, provided support for amending the 
rule. The Commission also observed that the 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. The Proposing 
Release solicited comment on, among other things, the one-trade waiting 
period and asked commenters whether some other interval was 
appropriate.

B. Summary of Comments

    The Commission received seven comment letters, all of which were 
favorable and supported the adoption of the proposed rule change.\15\ 
Several regional exchanges commented that the one-day trading delay 
serves as a barrier to competition and has existed for five years with 
no justification.\16\ These commenters all cited the 1998 Study's 
conclusion that dually listed IPOs were not more volatile on the first 
day of trading than non-dually listed IPOs as proof that the one-day 
waiting period is unnecessary and unjustified. In addition, the BSE 
noted that specialist obligations and the framework of the Intermarket 
Trading System work to ensure that securities are trading in a fair and 
orderly market.\17\ The PHLX argued that no adverse effects were 
observed following the change from a two-day to a one-day delay, due in 
part to the automated execution systems used on most exchanges which 
provide guaranteed liquidity.\18\ The regional exchanges also argued 
that the waiting period is unjustified because electronic communication 
networks (``ECNs'') and the third market are not subject to the delay 
and have traded IPO securities immediately with no evidence of harm to 
the market.\19\
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    \15\ The comment letters are in Public File No. S7-29-99, which 
is available for inspection in the Commission's Public Reference 
Room. The Commission received comment letters on behalf of the 
following: Universal Trading Technologies Corporation (``UTTC''), 
the PCX, the CHX, the Boston Stock Exchange, Inc. (``BSE''), the 
Philadelphia Stock Exchange, Inc. (``PHLX''), the North American 
Securities Administrators Association (``NASSA''), and Charles 
Schwab & Co., Inc. (``Schwab''). An additional comment letter, sent 
via e-mail, referenced File No. S7-29-99, but did not address any 
issues concerning the proposed rule.
    \16\ PCX Letter, CHX Letter, BSE Letter, PHLX Letter.
    \17\ BSE Letter. See also Schwab Letter.
    \18\ PHLX Letter.
    \19\ PCX Letter, CHX Letter, BSE Letter, PHLX Letter.
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    One commenter submitted a study completed in 1998 that examines the 
effects on volatility of regional exchange participation in IPOs.\20\ 
The study compared the volatility on the second and third trading days 
after an IPO with regional exchange participation to the second and 
third trading days after an IPO without regional exchange 
participation.\21\ While the study did not directly examine the 
question of a one-day delay as compared to a one-trade delay, the study 
did provide some evidence regarding the more general question of the 
benefits of regional exchange participation in trading IPO securities. 
The study concluded that the decrease in volatility from the first day 
of trading in an IPO to the second and third day was greater in 1997 
with regional exchange participation than in 1993 without regional 
exchange participation.\22\ The study indicated that regional exchange 
participation does not negatively impact volatility and may, in fact, 
make the IPO market less volatile. Based on the findings, the commenter 
urged the Commission to amend Rule 12f-2 to allow competition by 
regional exchanges on the first day of trading in a listed IPO 
security. NASAA also supported the amendment, noting that it would 
enhance investor access to all securities markets without delay and 
boost investor confidence.\23\
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    \20\ UTTC Letter. A copy of the study is available in the Public 
Reference Room.
    \21\ The study examined all IPOs from 1993 (99 IPOs) and 1997 
(54 IPOs) that traded greater than one million shares per day.
    \22\ As noted above, the notice and approval process for UTP 
prior to the UTP Act essentially precluded regional exchanges from 
trading such securities pursuant to UTP until the second or third 
day after an IPO.
    \23\ NASSA Letter.
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    Schwab also commented in support of the amendment. Schwab argued 
that the current delay is an impediment to free and open competition in 
the listed markets, noting that it insulates the primary market from 
competition and precludes valuable price discovery.\24\ In this 
context, Schwab noted that, although the willingness of firms to route 
order flow has improved with just a one-day waiting period, the 
anticompetitive effects of the waiting period still remain. Schwab also 
noted that the delay will hamper ECNs that choose to register as 
exchanges, and provides an unfair advantage to ECNs that are not 
regulated as exchanges.
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    \24\ Schwab Letter.
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III. Discussion

    The Commission has decided to adopt the amendment to Rule 12f-2(a) 
\25\ as proposed to allow exchanges to extend UTP to IPO securities 
after the first trade on the listed market is reported to the 
Consolidated Tape. Specifically, as amended, Rule 12f-2(a) provides 
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 Exchange Act.\26\
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    \25\ 17 CFR 240.12f-2(a).
    \26\ 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 the current one-day trading delay 
provides no real benefits and actually inhibits competition among 
markets. The Commission's conclusions are based on recent experience, 
as well as the results of the 1998 Study. The 1998 Study showed no 
evidence that the one-day trading delay provides any tangible benefits 
to market quality. As discussed in the Proposing Release, the 1998 
Study suggested that greater price volatility might actually exist 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 was unable to 
determine that there was an adverse impact on market quality resulting 
from the trading of IPO securities in multiple markets.\27\ We also 
note that no commenters submitted data to the contrary in response to 
the Commission's specific request for comments on this issue.\28\
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    \27\ While 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 believes that the 
study's methodology is reasonable. For the definition of ``IPO,'' 
see note 5, supra.
    \28\ In the Proposing Release, the Commission requested that 
commenters submit data illustrating the need to retain the current 
one-day waiting period or support using a different interval, 
including data that might include any potential negative effects on 
the pricing of an IPO.
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    Accordingly, the Commission sees no compelling reason to maintain a 
restriction that inhibits competition among the exchanges. Removing the

[[Page 53563]]

one-day trade delay will enhance competition among linked markets, 
consistent with Section 11A(a)(1)(D) of the Exchange Act.\29\ As one 
commenter noted, the enhanced competition in an IPO should benefit 
investors by providing increased opportunities for order execution.\30\ 
The amended rule should enhance the ability of exchanges to compete for 
order flow in IPO securities consistent with Section 
11A(a)(1)(C)(ii),\31\ especially in light of the fact that over-the-
counter dealers and ECNs may already trade IPO securities immediately 
upon effective registration with the Commission. 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. With no evidence to the 
contrary justifying the one-day waiting period, the Commission believes 
it is time to lift this regulatory restraint.
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    \29\ 15 U.S.C. 78k-1(a)(1)(D).
    \30\ PHLX Letter.
    \31\ 15 U.S.C. 78k-1(a)(1)(C)(ii).
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    The final rule continues to require non-listing exchanges to wait 
for one trade before they begin trading an IPO. None of the 
commentators opposed the one trade delay. The Commission believes the 
one trade delay is justified because 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 
among 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 the 
preparation for the IPO had been completed before public trading in the 
security commenced.\32\
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    \32\ 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 permits 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 offering securities to an existing class of security holders 
in exchange for stock they already own that has been subject to 
Exchange Act reporting requirements, rather than an initial offering 
of shares to the general public in exchange for cash.
    Specifically, the examples address the following instances in 
which new securities are issued and offered to existing 
shareholders: (1) a reporting company reforms itself as a new entity 
to change its state of incorporation; (2) a reporting company 
reorganizes into a single subsidiary holding company; (3) a 
reporting company incorporates one of its existing divisions as a 
separate public company; (4) two reporting companies consolidate to 
form a new corporate entity, thereby becoming wholly-owned 
subsidiaries of the new company; (5) a reporting company becomes a 
wholly-owned subsidiary of a non-reporting company; and (6) a 
reporting company and a non-reporting company consolidate to form a 
new corporation, thereby becoming wholly-owned subsidiaries of the 
new company. See letter from Annette L. Nazareth, Director, Division 
of Market Regulation, SEC, to Paul B. O'Kelly, Executive Vice 
President, Market Regulation & Legal, The CHX, dated December 9, 
1999. The Commission notes that the adoption of the amendments to 
Rule 12f-2 has no impact on the no-action letter, and the relief 
granted for the transactions described in the no-action letter is 
still in effect.
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    In the Proposing Release the Commission requested comment on 
whether changes to the consolidated quotation system would have to be 
made as a result of lifting the one-day waiting period, as well as 
whether any additional procedures would be necessary to ensure that a 
UTP market does not commence trading prior to the first trade. The 
commenters addressing these issues stated that no changes to the 
consolidated quotation system were necessary to comply with the one-
trade delay.\33\ These commenters also stated that existing procedures 
now in place on regional exchanges to identify IPOs will continue to be 
used to identify IPOs subject to the first trade restriction.
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    \33\ PCX Letter, CHX Letter.
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    The Commission agrees that existing procedures should be adequate 
to identify those IPO securities subject to the one-trade delay. The 
Commission will continue to work with the regional exchanges to ensure 
that their procedures continue to appropriately identify IPO securities 
for purposes of the rule. Further, the Commission, at this time, has 
not identified any necessary changes to the consolidated quotation 
system that would be necessary to implement the rule.
    In summary, the Commission believes it is appropriate to remove the 
one-day trading delay for extending UTP to IPO securities. The 
Commission has carefully considered all of the comments and issues. All 
of the data submitted supports the conclusion that the one-day trading 
delay is an unnecessary restraint on competition. The Commission 
believes that, consistent with Section 11A of the Exchange Act, 
reducing the trading delay will enhance competition among the markets 
to the benefit of all investors.

IV. Paperwork Reduction Act

    The Paperwork Reduction Act does not apply because the 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.

V. Costs and Benefits of the Amendment

    The Commission is sensitive to the costs and benefits of its 
regulations. To assist the Commission in its evaluation of the costs 
and benefits and the effect on competition, efficiency, and capital 
formation that may result from the amendment, commenters were requested 
to provide analysis and data, if possible, relating to the costs and 
benefits associated with the proposal. Commenters supported the 
proposed rule change, citing the benefits of reducing barriers to 
competition and opening the market for trading IPO securities to more 
market participants. Some commenters also said that investors would 
benefit from lower transaction costs caused by increased competition. 
None of the commenters suggested any potential costs to the proposed 
amendment.
    The amended rule will benefit market participants by allowing UTP 
exchanges to compete with the listing exchange and the third market for 
order flow on the first day an IPO starts trading. Investors could 
benefit when more participants offer liquidity to the market. In 
addition, issuers could benefit from wider distribution of IPO 
securities and greater opportunities for price discovery.
    In 1998 and 1999, total first day trading volume for IPOs on the 
NYSE that were not dually traded on the first day was about 454 million 
shares and 515 million shares, respectively.\34\ Comparable figures for 
the American Stock Exchange (``Amex'') were 8.9 million first day 
shares in 1998 and 3.9 million first day shares in 1999. Under the rule 
change, the exchange where such shares are listed would now be subject 
to competition from other national securities exchanges on the first 
day of trading.
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    \34\ Sources for the NYSE and Amex figures were the Center for 
Research in Securities Prices and Securities Industry Automation 
Corp.
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    The above-cited 1998 Study \35\ compared IPOs listed on one 
exchange with dual-listed IPOs and showed that the dual-listed IPOs did 
not have

[[Page 53564]]

statistically significant differences in bid-ask spreads in the first 
day of trading, and that price volatility, if anything, was higher for 
singly-listed IPOs. This indicates that increasing competition in IPO 
listings will not increase costs to investors.
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    \35\ See supra, note 8 and accompanying text.
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    The Commission recognizes that there are some potential costs 
associated with this amendment. Listing exchanges could be impacted 
because they will lose a one-day trading advantage over other 
exchanges, but they will probably retain a large percentage of the 
first day trading volume in any case. The 1998 Study showed that, in a 
sample of dually traded stocks, regional exchanges attracted about 1.8% 
of the first day trading volume. This result suggests that the 
elimination of the one-day trading advantage will affect only a small 
percentage of the first day trading volume.
    The NYSE reported total trading fees of $138.4 million in 1999, 
which on the basis of 204 billion shares traded \36\ is an average of 
less than .1 cents per share. Although the overall effect of the 
proposal cannot be determined with precision, assuming a first day 
migration of IPO share trading of 3 percent (higher than the 1.8 
percent found in the 1998 Study) and a trading fee loss of 1 cent per 
share (more than 10 times higher than average calculated above \37\) 
the trading fee loss to the NYSE for the first day would have been, at 
most, $154,500 (= .03  x  515 million first day shares traded  x  $.01/
share) in 1999; and $136,200 (=.03  x  454 million first day shares 
traded  x  $.01/share) in 1998.\38\
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    \36\ Source: New York Stock Exchange 1999 Fact Book.
    \37\ Thus, the 1 cent per share figure should account for any 
other fees collected based on trading volume.
    \38\ It appears from the 1998 Study that when an IPO was dually 
traded on the first day, the market share of the regional exchanges 
on subsequent days was also higher. It is difficult to quantify this 
effect, however.
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    Specialists also will be affected by the rule. The NYSE reports 
that in 1999 the unweighted average spread was $.22 per share, and that 
specialists handled about 13.1% of the volume. \39\ Using the previous 
assumption of 3 percent first day IPO trading volume migration to other 
exchanges, the revenue loss to NYSE specialists would be $445,269 (= 
.03  x  515 million first day shares traded  x  .131 specialists' share 
 x  $.22 spread/share) per year. These revenue losses would likely 
result in comparable revenue gains to specialists on regional 
exchanges.
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    \39\ New York Stock Exchange 1999 Fact Book.
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    Similar assumptions for the Amex--where first day trading in IPO 
shares was less than 2% of that on the NYSE in 1998, and less than 1% 
in 1999--would yield much smaller figures.
    Finally, the Commission does not anticipate any direct or indirect 
costs to U.S. investors or other market participants because the rule 
imposes no recordkeeping or compliance burdens.

VI. Consideration of Burden on Competition and Promotion of 
Efficiency, Competition, and Capital Formation

    Section 23(a)(2) of the Exchange Act \40\ requires the Commission, 
when adopting or amending rules under the Exchange Act, to consider the 
anti-competitive effects of such rules, if any, and refrain from 
adopting a rule that would impose any burden on competition not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act. Moreover, Section 3(f) of the Exchange Act,\41\ as amended by the 
National Securities Markets Improvement Act of 1996,\42\ 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. In the Proposing Release, the Commission 
solicited comment on the effects of the proposed amendment to Rule 12f-
2 on competition, efficiency and capital formation as cited in Sections 
3(f) and 23(a)(2). Six of the seven comment letters received directly 
argued in support of the amendment because, in part, it would remove a 
barrier to competition. The remaining comment letter asserted that 
reducing the trading delay would reduce volatility in IPO trading.
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    \40\ 15 U.S.C. 78w(a)(2).
    \41\ 15 U.S.C. 78c.
    \42\ Pub. L. No. 104-290, 110 Stat. 3416 (1996).
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    The Commission has considered the amendment to Rule 12f-2 in light 
of the comments received and the standards cited in Sections 3(f) \43\ 
and 23(a)(2) \44\ of the Exchange Act. The Commission believes that, by 
permitting all exchanges to compete for IPO order flow, the amendment 
removes an artificial barrier to competition. Accordingly, the 
Commission does not believe that the amendment would impose any burden 
on competition not necessary or appropriate in furtherance of the 
purposes of the Exchange Act. In addition, enhancing the environment 
for trading IPO securities will work to benefit issuers, remove a 
barrier to greater efficiency in the markets, and encourage capital 
formation.
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    \43\ 15 U.S.C. 78c(f).
    \44\ 15 U.S.C. 78w(a)(2).
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VII. Final Regulatory Flexibility Analysis

    This Final Regulatory Flexibility Analysis (``FRFA'') is being 
prepared in accordance with Section 4 of the Regulatory Flexibility Act 
(``RFA'').\45\ It relates to an amendment to Rule 12f-2(a) \46\ under 
the Exchange Act. The amendment will 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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    \45\ 5 U.S.C. 604.
    \46\ 17 CFR 240.12f-2(a).
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A. Reasons for and Objectives of the Proposed Actions

    This amendment is intended to further the purposes of Section 
11A(a)(1)(D) of the Exchange Act \47\ 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 amendment addresses 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 ECNs and the third market for order flow. The rule change 
will facilitate competition among various markets for order flow 
consistent with Section 11A(a)(1)(C)(ii) \48\ of the Exchange Act and 
enhance investor options for order execution.
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    \47\ 15 U.S.C. 78k-1(a)(1)(D).
    \48\ 15 U.S.C. 78k-1(a)(1)(C)(ii).
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B. Significant Issues Raised by Public Comments

    No public comments were received in response to the IRFA and no 
comments specifically addressed that analysis. Commenters did, however, 
offer support for the amendment on the basis that the current one-day 
trading delay imposes a burden on competition. In response to the 
commenters and based in part on empirical evidence, the Commission has 
decided to adopt the rule amendment as proposed.

C. Small Entities Subject to the Rule

    The amendment will directly affect the national securities 
exchanges, none

[[Page 53565]]

of which is a small entity. Paragraph (e) of the Rule 0-10 \49\ 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. Because no exchange has been exempted from the 
reporting requirements of Sec. 240.11Aa3-1, there will be no impact for 
purposes of the RFA on small businesses.
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    \49\ 17 CFR 240.0-10(e).
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D. Reporting, Recordkeeping, and Other Compliance Requirements

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

E. 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 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 amendment.

VIII. Statutory Authority

    The rule amendments in this release are being adopted pursuant to 
15 U.S.C. 78 et seq., particularly Sections 11A(a)(1)(C)(ii), 
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 amends Part 
240 of Chapter II of Title 17 of the Code of Federal Regulations to 
read 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, 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.
* * * * *

    1. 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: August 29, 2000.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-22591 Filed 9-1-00; 8:45 am]
BILLING CODE 8010-01-U