[Federal Register Volume 65, Number 183 (Wednesday, September 20, 2000)]
[Notices]
[Pages 56974-56976]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-24129]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34 43288; File No. SR NYSE 99 50]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Order Approving Proposed Rule Change Relating to Continued Listing 
Standards

September 13, 2000.

I. Introduction

    On December 21, 1999, the New York Stock Exchange, Inc. (``NYSE'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to revise the Exchange's 
continued listing standards. On March 27, 2000, the Exchange submitted 
Amendment Nos. 1 and 2 to the proposed rule change.\3\ The proposed 
rule change was published for comment in the Federal Register on April 
7, 2000.\4\ No comments were received on the proposal. This order 
approves the NYSE's proposal, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the NYSE made several clarifications to 
the intent and proposed interpretation of the proposed rule change. 
The Exchange expanded its discussion regarding the use of 
convertible securities in calculating the market capitalization of 
an issuer, and provided several examples of the proposed rule's 
application. The Exchange also explained the IRS-related basis for 
the proposed changes to the calculation of market capitalization for 
partnerships. Finally, the Exchange clarified that the proposed 
change to the bankruptcy provision would not restart the eighteen-
month clock for an Exchange-approved plan. See Letter to Belinda 
Blaine, Associate Director, Division of Market Regulation 
(``Division''), SEC, from James E. Buck, Senior Vice President and 
Secretary, NYSE, dated March 21, 2000 (``Amendment No. 1''). In 
Amendment No. 2, the Exchange made several technical changes to the 
rule text which were reflected in the notice. See Letter to Belinda 
Blaine, Associate Director, Division, SEC, from James E. Buck, 
Senior Vice President and Secretary, NYSE, dated March 24, 2000 
(``Amendment No. 2'').
    \4\ Securities Exchange Act Release No. 42579 (March 27, 2000), 
65 FR 18412.
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II. Description of The Proposal

    The proposal would modify several of the Exchange's existing 
continued listing criteria.\5\ First, the Exchange proposes to define 
the term ``market capitalization'' in so far as it applies to the 
continued listing standards. Second, the Exchange proposes to clarify 
what is meant by ``shareholders equity'' in the context of 
partnerships. Third, the Exchange proposes to specify a set of 
circumstances in which it will exercise some discretion in determining 
the listing status of a company that has filed or has announced an 
intent to file for bankruptcy, and that is below the financial 
continued listing standards specified in Para. 802.01B of the Listed 
Company Manual.
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    \5\ The Exchange recently revised its continued listing 
standards, and to this point several issues have come to light that 
necessitate clarification. See Securities Exchange Act Release No. 
42194 (December 1, 1999), 64 FR 69311 (December 10, 1999).
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(A) Market Capitalization Definition

    The proposal specifies that for purposes of its continued listing 
standards, the term ``market capitalization'' will encompass all common 
stock outstanding, whether publicly traded or not, so long as the 
Exchange is able to accurately attribute a value to it \6\ on the day 
the market capitalization is calculated. Thus, if such a security is 
publicly traded common stock, the closing price from the previous 
trading day will be the price used for purposes of the calculation.
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    \6\ For example, a privately-held Class B common stock 
convertible into the listed Class A common stock would be included 
and valued on an as-converted basis.
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    In addition, the proposal would permit the Exchange to provide its 
staff with the discretion to evaluate the capital structure of the 
issuer and include common stock that would be issued upon conversion of 
an instrument that constitutes the issuer's capital. Traditional debt, 
related to financing activities, will be excluded. Similar to the 
procedure discussed above, but for convertible publicly-traded 
securities other than common stock, the applicable price will be the 
closing price of the common stock into which it is convertible from the 
previous trading day.\7\
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    \7\ For example, if a convertible preferred security trades at 
$15 and the common stock into which it is convertible trades at $10, 
the price utilized would be the closing price of the common stock on 
the previous day (not the higher price of the preferred security) 
and the market capitalization would be computed on an as-converted 
basis.

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[[Page 56975]]

    Finally, if the issuer has outstanding privately-held securities, 
the calculation would be made as described above for convertible 
securities based upon the previous day's closing price of the publicly-
traded security. Thus, a privately held Class B common stock 
convertible into the publicly-traded Class A would be valued at the 
price of the Class A. Likewise, a privately-held preferred Series A 
convertible into the publicly-traded Class A would be valued at the 
price of the Class A on an as-converted basis.
    The proposal would also permit the Exchange to review any 
applicable conversion restrictions when conducting its market 
capitalization analysis and factor any such restrictions into the 
computations as appropriate.

(B) ``Shareholders' Equity'' and ``Market Capitalization'' of 
Partnerships

    The proposal would enable the Exchange to evaluate the formation of 
the current capital structure of a partnership and, where appropriate, 
to include other publicly-traded securities in the calculation as a 
substantial equivalent to common stock. Furthermore, the proposal would 
amend the stockholders' equity test to clarify that both general and 
limited partners' capital is the measure for the applicable 
calculation. The Exchange believes that this clarification is necessary 
because the concept of ``shareholders' equity'' is not applicable to 
partnerships. Instead, the notion of capital captures the appropriate 
analogous concept with respect to partnerships.
    The Exchange's intent in codifying the concept of analyzing the 
creation of the current capital structure stems primarily from the 
recent expiration of an IRS grandfather provision that resulted in 
numerous recapitalizations of partnerships. The Exchange believes it is 
not equitable to penalize these partnerships for restructuring in order 
to prevent, among other things, double taxation. Thus, for instance, if 
a holder of $50 of partnership units prior to the conversion were to 
receive $25 in partnership units and $25 in debt, the ``market value'' 
of the holdings has not changed and should be calculated at $50 for 
purposes of determining the continued listing status of the company. 
Consistent with the principles articulated above, the proposal would 
require that the non-equity instrument be publicly traded so as to 
assure the ability to value the instrument.

(C) Companies That Have Filed for Bankruptcy and That Are Below the 
Financial Continued Listing Criteria

    The proposal would give the Exchange the authority to analyze the 
financial status of companies that have filed or that have announced an 
intent to file for bankruptcy, and that are also below the Exchange's 
financial continued listing criteria, on a case-by-case basis.\8\ 
However, if a company has previously filed an Exchange approved plan to 
meet the Exchange's continued listing standards within 18 months, 
application of this provision to the company does not restart the 18-
month clock. Thus, for instance, a company that declares bankruptcy 
mid-stream through an Exchange-approved plan would still only have the 
remainder of the plan to come into compliance. It would not be afforded 
an additional 18 months, but would incorporate the projected effect of 
the bankruptcy into its Plan and resubmit it for consideration.
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    \8\ The Exchange represents that there are instances where 
companies meeting these criteria should be afforded the opportunity 
to submit a financial plan for evaluation. For instance, a company 
that is profitable (or that has a positive cash flow), or is 
demonstrably in sound financial health despite the bankruptcy 
proceedings, should not be delisted if it can demonstrate that, 
within 18 months, it will be in compliance with the Exchange's 
financial criteria.
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III. Discussion

    The Commission finds that the proposal is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\9\ Specifically, the 
Commission believes that the proposal is consistent with the 
requirements of Section 6(b)(5) of the Act \10\ in that it clarifies 
certain maintenance criteria for listing on the NYSE. Listing standards 
serve as a means for a marketplace to screen issuers and to provide 
listed status only to bona fide companies with sufficient float, 
investor based, and trading interest to maintain fair and orderly 
markets. Once an issuer has been approved for initial listing, the 
maintenance criteria allow a marketplace to monitor the status of that 
issuer. Accordingly, the Commission believes that by clarifying the 
NYSE's continued listing standards, the proposal should prevent 
fraudulent and manipulative acts and practices, promote just and 
equitable principles of trade, remove impediments to, and perfect the 
mechanism of a free and open market and, in general, to protect 
investors and the public interest.\11\
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    \9\ In approving this Rule, the Commission has considered the 
proposed rule change's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78f(b)(5).
    \11\ Id.
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    First, the proposal would elucidate the term ``market 
capitalization'' as used in the Listed Company Manual. The proposal 
would explain that market capitalization encompasses all common stock 
outstanding, whether publicly traded or not, so long as the exchange is 
able to accurately attribute a value to it on the day the market 
capitalization is calculated. In addition, the proposal would give 
Exchange staff the discretion to evaluate the capital structure of an 
issuer and include common stock that would be issued upon conversion of 
an instrument that constitutes the issuer's capital, excluding 
traditional debt related to financing activities. Outstanding 
privately-held securities also would be considered in the market 
capitalization computation. Finally, the proposal would allow the 
Exchange to review any applicable conversion restrictions when 
conducting its market capitalization analysis and factor any such 
restrictions into the computations as appropriate. The Commission finds 
that the proposed clarifications and the additional discretion given to 
the Exchange's staff to evaluate a company's financial status are 
reasonable. Specifically, the Commission believes that such changes to 
the Exchange's existing rules are not inappropriate measures for 
determining a company's market capitalization and should aid the 
Exchange by producing a more accurate determination of a company's 
market capitalization.
    Second, the proposal would enable the Exchange to evaluate the 
formation of the current capital structure of a partnership and, where 
appropriate, include other publicly-traded securities in the 
calculation as a substantial equivalent to common stock. The proposal 
would also amend the stockholders' equity test to clarify that both 
general and limited partners' capital is the measure for the applicable 
calculation. Given the unique nature of a partnership, the Commission 
finds that the proposed clarifications explaining which measures should 
be used to evaluate a partnership's financial status are reasonable.
    Finally, the proposal would give the Exchange the authority to 
analyze the financial status of companies that have filed or that have 
announced an intent to file for bankruptcy, and that are also below the 
Exchange's financial continued listing citeria, on a case-by-case 
basis. However, if a company has previously filed an Exchange-approved

[[Page 56976]]

plan to meet the Exchange's continued listing standards within 18 
months, application of this provision to the company does not restart 
the 18-month clock. The Commission believes that certain flexibility in 
applying continued listing standards may occasionally be necessary when 
establishing procedures to uphold the quality of the market. 
Accordingly, the Commission believes it is reasonable to provide the 
Exchange with the discretion to evaluate a company's status to prevent 
premature, automatic delisting of a company otherwise qualified for 
continued listing. The Commission also believes that it is appropriate 
that a company that has previously submitted a plan to come into 
compliance with the Exchange's continued listing criteria not be 
extended additional time to come into compliance by filing or declaring 
an intent to file for bankruptcy. The Commission believes that this 
strikes a reasonable balance between providing companies an opportunity 
to cure any deficiencies and continue to list on the Exchange and 
protecting investors and the public interest by not continuing to list 
companies that cannot meet the Exchange's continued listing criteria 
during the initial 18 month period.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\12\ that the proposed rule change (SR-NYSE-99-50), as amended, is 
approved.
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    \12\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-24129 Filed 9-19-00; 8:45 am]
BILLING CODE 8010-01-M