[Federal Register Volume 70, Number 134 (Thursday, July 14, 2005)]
[Notices]
[Pages 40748-40756]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3742]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51998; File No. S7-06-05]


Notice of an Application of the New York Stock Exchange, Inc. for 
an Exemption Pursuant to Section 36 of the Securities Exchange Act of 
1934 and Request for Comment

July 8, 2005.
    On May 26, 2005, the Securities and Exchange Commission received an 
application from the New York Stock Exchange, Inc. (``NYSE'') for an 
exemption pursuant to Section 36 \1\ of the Securities Exchange Act of 
1934,\2\ in accordance with the procedures set forth in Exchange Act 
Rule 0-12.\3\ The NYSE requests exemptive relief from Section 12(a) \4\ 
of the Exchange Act to permit its members, brokers and dealers to trade 
certain unregistered debt securities on the NYSE's Automated Bond 
System.\5\ We are publishing this notice and a proposed exemptive order 
to provide interested persons with an opportunity to comment.\6\
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    \1\ 15 U.S.C. 78mm. Section 36 of the Exchange Act gives the 
Commission the authority to exempt any person, security or 
transaction from any Exchange Act provision by rule, regulation or 
order, to the extent that the exemption is necessary or appropriate 
in the public interest and consistent with the protection of 
investors.
    \2\ 15 U.S.C. 78a et seq.
    \3\ 17 CFR 240.0-12. Exchange Act Rule 0-12 sets forth the 
procedures for filing applications for orders for exemptive relief 
pursuant to Section 36.
    \4\ 15 U.S.C. 78l(a).
    \5\ The NYSE's application for exemptive relief is included as 
Appendix A.
    \6\ The Commission's proposed exemptive order is included as 
Appendix B.
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I. Background

    Section 12(a) of the Exchange Act provides in relevant part that it 
``shall be unlawful for any member, broker or dealer to effect any 
transaction in any security (other than an exempted security) on a 
national securities exchange unless a registration is effective as to 
such security for such exchange.'' Section 12(b) \7\ of the Exchange 
Act dictates how the registration referred to in Section 12(a) must be 
accomplished. Accordingly, all equity and debt securities that are not 
``exempted securities'' \8\ or are not otherwise exempt from Exchange 
Act registration must be registered by the issuer under the Exchange 
Act before a member, broker or dealer may trade that class of 
securities on a national securities exchange.
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    \7\ 15 U.S.C. 78l(b).
    \8\ An exempted security may be traded on a national securities 
exchange absent Exchange Act registration. Section 3(a)(12) of the 
Exchange Act [15 U.S.C. 78c(a)(12)] defines exempted security to 
include securities such as government securities, municipal 
securities, various trust fund interests, pooled income fund 
interests and church plan interests.
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    Contrarily, brokers or dealers who trade debt securities otherwise 
than on a national securities exchange may trade debt securities 
regardless of whether the issuer registered that class of debt under 
the Exchange Act. This is so because Exchange Act registration for 
securities traded other than on a national securities exchange is 
required only for certain equity securities. In particular, Section 
12(g) \9\ of the Exchange Act, the only Exchange Act provision other 
than Section 12(a) to impose an affirmative Exchange Act registration 
requirement, requires the registration of equity securities only.\10\
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    \9\ 15 U.S.C. 78l(g).
    \10\ Section 12(g)(1) of the Exchange Act and Rule 12g-1 [17 CFR 
240.12g-1] promulgated thereunder require an issuer to register a 
class of equity securities if the issuer of the securities, at the 
end of its fiscal year, has more than $10,000,000 in total assets 
and a class of equity securities held by 500 or more recordholders. 
When Congress amended the Exchange Act in 1964 to add Section 12(g), 
it extended the registration requirement to specified equity 
securities that are not exchange-traded. No comparable provision was 
provided for debt securities that are not exchange-traded.
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    As the Commission has stated in the past, we believe that this 
disparate regulatory treatment may have negatively and unnecessarily 
affected the structure and development of the debt markets.\11\ In 
1994, to reduce existing regulatory distinctions between exchange-
traded debt securities and debt securities that trade in the ``over-
the-counter'' (``OTC'') market, we adopted Exchange Act Rule 3a12-
11.\12\ Rule 3a12-11 provides for the automatic effectiveness of Form 
8-A \13\ registration statements for exchange-traded debt securities, 
exempts exchange-traded debt from the borrowing restrictions under 
Section 8(a) \14\ of the Exchange Act, and exempts exchange-traded debt

[[Page 40749]]

from most of the proxy and information statement requirements under 
Sections 14(a), (b) and (c) of the Exchange Act.\15\ Despite these 
efforts, the vast majority of secondary trading of debt securities 
continues to occur in the OTC market, which suggests that there still 
may be regulatory impediments that need to be addressed.\16\
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    \11\ See Release Nos. 34-34922 (November 1, 1994) [59 FR 55342], 
and 34-34139 (June 1, 1994) [59 FR 29398].
    \12\ 17 CFR 240.3a12-11. Release No. 34-34922 (November 1, 1994) 
[59 FR 55342].
    \13\ 17 CFR 249.208a.
    \14\ 15 U.S.C. 78h(a).
    \15\ 15 U.S.C. 78n(a), (b) and (c). Rule 3a12-11 states that 
Rules 14a-1, 14a-2(a), 14a-9, 14a-13, 14b-1, 14b-2, 14c-1, 14c-6 and 
14c-7 continue to apply to the exchange-traded debt securities for 
which Rule 3a12-11 provides exemptive relief [17 CFR 240.14a-1, 14a-
2(a), 14a-9, 14a-13, 14b-1, 14b-2, 14c-1, 14c-6 and 14c-7].
    \16\ The NYSE estimates that there are over 22,000 publicly 
offered corporate bond issues having a par value in excess of $3 
trillion but only 8% of the $3 trillion par value is registered 
under the Exchange Act and so may be traded on the NYSE's Automated 
Bond System. See the NYSE's application for exemptive relief.
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    In addition, we have sought to increase the level of transparency 
in the public debt markets. We have long believed that price 
transparency in the U.S. capital markets is fundamental to promoting 
the fairness and efficiency of our markets.\17\ In 1998, the 
Commission's staff conducted a review of the public debt markets and 
found that in the area of corporate debt securities, price transparency 
was deficient.\18\ Following the staff's 1998 review, the Commission 
requested the National Association of Securities Dealers, Inc. 
(``NASD'') to adopt rules requiring dealers to report transactions in 
corporate debt securities and preferred stock to the NASD and to 
develop a real-time price quotation system.\19\
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    \17\ See Testimony of Chairman Arthur Levitt Before the House 
Subcommittee on Finance and Hazardous Materials, Committee on 
Commerce, Concerning Transparency in the United States Debt Market 
and Mutual Fund Fees and Expenses (September 29, 1998).
    \18\ Id.
    \19\ Id. The NASD was asked to undertake this initiative for two 
reasons. First, the vast majority of debt securities are traded on 
the OTC market. Second, the Commission believed that the NASD 
possessed the required infrastructure to undertake the initiative 
and this would obviate the need to ``reinvent the wheel.'' See 
Testimony of Chairman Arthur Levitt Before the House Subcommittee on 
Finance and Hazardous Materials, Committee on Commerce, Concerning 
Hedge Fund Activities in the U.S. Financial Markets (March 18, 
1999).
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II. Summary of the Application

    The NYSE requests us to permit its members, brokers and dealers to 
trade certain classes of debt securities not registered under Section 
12(b) of the Exchange Act on the NYSE's Automated Bond System.\20\ The 
NYSE asserts that the statutory distinctions referred to above put the 
NYSE at a competitive disadvantage vis-[agrave]-vis the OTC market with 
respect to the trading of debt.\21\ Further, the NYSE asserts that 
investors are adversely impacted by this distinction. The NYSE believes 
that the adverse impact on investors is twofold.\22\ First, the NYSE 
asserts that investors are deprived of the advantage of competing 
markets. Second, the NYSE asserts that the Automated Bond System is 
generally more transparent than the OTC market.\23\ The NYSE states 
that, in contrast to OTC bond trading, the Automated Bond System 
reports bid and ask quotations and last sale prices, exclusive of any 
mark-ups, mark-downs or other charges. In addition, the NYSE states 
that all Automated Bond System trades are reported instantaneously. The 
NYSE further asserts that it is not aware of any comparable level of 
transparency that exists currently.
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    \20\ For purposes of the requested exemption, the term ``debt 
security'' would be defined as any security that, if the class of 
securities were listed on the NYSE, would be listed under Sections 
102.03 or 103.05 of the NYSE's Listed Company Manual. A debt 
security would not include any security that, if the class of 
securities were listed on the NYSE, would be listed under Sections 
703.19 or 703.21 of the NYSE's Listed Company Manual. Provided, 
however, under no circumstances would a debt security include any 
security that is defined as an ``equity security'' under Section 
3(a)(11) of the Exchange Act [15 U.S.C. 78c(a)(11)].
    \21\ See the NYSE's application for exemptive relief.
    \22\ See the NYSE's application for exemptive relief.
    \23\ The Automated Bond System is an automated trading and 
information system that allows member firms to enter directly into 
the system and execute debt security orders through remote terminals 
that match them on a price and time priority basis.
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    Notwithstanding any competitive disadvantage to the NYSE that may 
have resulted from existing statutory distinctions or the potential 
benefits to investors of increased competition and enhanced 
transparency,\24\ we believe that we must still balance these benefits 
against any loss of Exchange Act protections that could result if we 
determine to grant the requested exemptive relief. Further, as 
explained below, we believe that any proposed relief only should be 
granted in a way that mitigates any lost Exchange Act protections.
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    \24\ A May 2004 study entitled ``Transparency of Corporate Bond 
Markets'' by the Technical Committee of the International 
Organization of Securities Commissions found that transparency 
supports market efficiency, fosters investor confidence and 
strengthens investor protection. A similar study of U.S. corporate 
debt markets found that greater transparency reduces transaction 
costs of corporate bond trading. See ``Corporate Bond Market 
Transparency and Transaction Costs'' by Amy K. Edwards, Lawrence E. 
Harris and Michael S. Piwowar (March 2005). See http://papers.ssrn.com/sol3/papers.cfm?abstract_id=593823 593823.
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    We view the potential loss of the comprehensive public information 
that an issuer must provide under Section 13(a) of the Exchange Act as 
perhaps the most significant factor weighing against relief.\25\ To 
address this concern, the NYSE proposes that any exemption be 
conditioned on two important protections designed to prevent the loss 
of Exchange Act disclosure. First, relief would be limited to a class 
of debt securities whose offer and sale was registered under the 
Securities Act of 1933.\26\ This limitation is designed to ensure that 
investors would have access to the detailed disclosure in the 
Securities Act registration statement for the debt securities, 
including a trust indenture qualified under the Trust Indenture Act of 
1939.\27\
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    \25\ 15 U.S.C. 78m(a). Section 13(a) provides the Exchange Act's 
comprehensive disclosure standards that require an issuer of 
securities registered under the Exchange Act to file annual, 
quarterly and current reports with the Commission.
    \26\ 15 U.S.C. 77a et seq.
    \27\ 15 U.S.C. 77aaa-77bbbb.
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    Second, relief would be limited to issuers of debt securities with 
at least one class of equity securities registered under Section 12(b) 
and listed on the NYSE.\28\ This condition is designed to guarantee 
that substantially all of the public information that would be 
available if the debt securities were registered under Section 12(b) 
would remain available with respect to the issuer of the debt 
securities covered by the exemption. The only significant Exchange Act 
disclosure for debt registered under Section 12 that would not continue 
to be provided under the proposed exemptive relief would be:
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    \28\ The debt securities of a wholly-owned subsidiary of a 
company with at least one class of equity securities registered 
under Section 12(b) of the Exchange Act and listed on the NYSE also 
would be covered by the proposed relief. In addition to the Exchange 
Act disclosure obligations mentioned below that would no longer 
apply to a parent debt issuer whose debt could be traded under the 
exemption, all other Exchange Act disclosure obligations also would 
not apply to a wholly-owned subsidiary of that company, assuming 
that the wholly-owned subsidiary had no other class of securities 
registered or reporting under the Exchange Act. The NYSE asserts 
that the Exchange Act disclosures and other public information 
available with respect to the wholly-owned debt issuer's parent, the 
consolidation of a wholly-owned subsidiary's financial information 
into its parent's financial statements, as well as the information 
regarding the wholly-owned subsidiary's debt securities available 
under the trust indenture and otherwise, are designed to ensure that 
all interested parties receive necessary information regarding the 
debt securities.
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     The extremely limited information contained in the Form 8-
A required for Exchange Act registration; \29\
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    \29\ Form 8-A is the short-form registration statement used by 
companies to register a class of securities under the Exchange Act. 
The form requires a description of the registrant's securities 
pursuant to Item 202 of Regulation S-K or S-B, and in certain 
circumstances, the filing of all constituent instruments, including 
any contracts or other documents, that define, limit or qualify the 
rights of the holders of the class of securities. The disclosures 
required by the form may be furnished by incorporation by reference 
to other filings with the Commission.

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[[Page 40750]]

     The listing of the class of debt on the annual report's 
cover page;
     The disclosure of material modifications to instruments 
defining the rights of debt holders and material limitations or 
qualifications to the rights of debt holders required by Item 3.03 of 
Form 8-K; and
     Certain exhibits to an issuer's annual and quarterly 
reports defining the rights of debt holders as provided in Item 
601(b)(4) of Regulation S-K, although most of the exhibits required by 
Item 601 are filed as exhibits to the Securities Act registration 
statement for the debt securities.
    We preliminarily believe that the loss of this information is 
outweighed by the proposed relief's benefits to all interested parties, 
but will consider any public comment to the contrary. We also further 
note that this information is not required to be disclosed for debt 
traded in the OTC market. Further, the condition of the proposed 
exemptive order requiring the issuer of the debt security to have at 
least one class of common or preferred equity securities registered 
under Section 12(b) of the Exchange Act and listed on the NYSE is 
designed to assure that the issuer of debt securities has a significant 
and continuous listing (and oversight) relationship with the NYSE.\30\ 
This relationship will allow the NYSE to better monitor issuers whose 
debt is traded on the Automated Bond System and will ensure that the 
issuers of traded debt satisfy the NYSE's comprehensive listing 
standards for equity securities.
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    \30\ In the case of an issuer that is a wholly-owned subsidiary, 
the issuer's parent would need to have at least one class of common 
or preferred equity securities registered under Section 12(b) of the 
Exchange Act and listed on the NYSE.
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    In addition to the Exchange Act disclosure obligations that would 
no longer apply, holders of debt securities traded in reliance on the 
proposed relief would not be protected by the antifraud proscriptions 
of Exchange Act Rules 14a-9 and 14c-6 or the shareholder communications 
provisions in Exchange Act Rules 14a-13, 14b-1, 14b-2 and 14c-7, which 
govern the transmission of proxy and information statements to 
beneficial owners of securities. Although solicitations of debt holders 
are infrequent,\31\ in its 1994 rulemaking, the Commission determined 
that the exemptive relief afforded by Exchange Act Rule 3a12-11 should 
not encompass these antifraud and shareholder communications 
provisions.\32\ We believe that other requirements, the contractual 
terms of the trust indenture, and economic motivations for 
intermediaries to serve the needs of their customers would help to 
mitigate the loss of these protections. Specifically, the antifraud 
protection afforded by Exchange Act Rule 10b-5 \33\ would continue to 
apply to soliciting materials sent to holders of debt traded in 
reliance on the proposed exemption. In addition, NYSE Rule 451 \34\ 
requires NYSE member firms to transmit copies of all proxy and consent 
solicitation materials to beneficial owners.\35\ Furthermore, we note 
that none of these provisions applies to debt securities traded in the 
OTC market.
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    \31\ According to the NYSE, only six solicitations of debt 
holders of NYSE-listed debt securities occurred during 2004.
    \32\ In Release No. 34-34922, the Commission noted that the 
proxy rules relating to the transmission of materials to beneficial 
owners not only provide protection to investors, but also benefit 
issuers by facilitating their ability to communicate directly with 
their debtholders. Exchange Act Rules 14a-13, 14b-1 and 14b-2 
establish procedures by which companies can request a list of their 
non-objecting beneficial owners from banks, brokers and similar 
intermediaries holding shares on behalf of such owners.
    \33\ 17 CFR 240.10b-5.
    \34\ Paragraph 2451 of the NYSE Guide.
    \35\ Although banks and other intermediaries that are not NYSE 
member firms would not be subject to NYSE Rule 451, many of these 
intermediaries owe fiduciary obligations to their beneficial owner 
customers that would cause them to continue transmitting soliciting 
materials to their customers even in the absence of an explicit 
Commission requirement.
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    We also acknowledge that, if we grant the requested relief, the 
NYSE's listing standards generally would no longer apply to any debt 
traded, but not listed, on the Automated Bond System. This would 
include all debt currently listed on the system that qualifies for 
trading under the requested exemption because the NYSE intends to 
formally delist all debt securities that qualify for the exemption, if 
we approve its application.\36\ Without a listing requirement, issuers 
of debt securities would no longer be required to notify the NYSE about 
various corporate actions related to the issuer's debt. However, the 
following actions by the NYSE should alleviate concerns in this regard:
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    \36\ As noted, debt that trades on the NYSE that does not 
qualify for the exemptive relief would continue to be ``listed'' on 
the NYSE. To distinguish between ``listed'' debt and ``traded'' 
debt, the NYSE would: provide definitions of, and distinguish 
between, listed debt securities and traded debt securities on the 
Automated Bond System log-on screen and on the NYSE's web site; 
directly provide each NYSE member and each NYSE listed company with 
notification clarifying the distinction between listed and traded 
debt, as well as notification that eligible listed debt will be 
delisted and, instead, traded on the Automated Bond System; and 
issue a press release explaining the Section 36 relief.
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     The NYSE would engage a third party data vendor to provide 
the NYSE and its members with a customized on-line reference for 
corporate actions relevant to debt securities trading on the Automated 
Bond System.\37\ This information is similar to, although less 
comprehensive than, the information that the NYSE currently receives 
pursuant to its rules for the continued listing of debt securities.\38\ 
Unlike some of the information that the NYSE currently receives 
pursuant to its rules for the continued listing of debt, the 
information provided by the third party data vendor would be available 
only to the NYSE and its members. While the NYSE has undertaken to hire 
a third party data vendor, the vendor's engagement and availability of 
the contemplated information would not be a formal condition to the 
proposed relief; and
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    \37\ The NYSE intends to engage Xcitek, LLC as its third party 
data vendor.
    \38\ According to the NYSE, Xcitek, LLC's tracking service will 
provide notification of calls (redemptions), notice of defaults in 
the payment of interest, notice of consent solicitations and other 
corporate actions related to public debt including tender offers, 
issuer name changes and CUSIP number changes. The tracking service 
will not provide notification of changes in transfer agent or 
trustee, changes in the collateral deposited under a trust 
indenture, changes or unusual conditions related to the payment of 
interest, the issuance or authentication of duplicate bonds, all of 
which must be provided for listed debt securities. The NYSE asserts 
that the loss of certain information currently provided under the 
NYSE Listed Company Manual for listed debt securities is outweighed 
by the proposed relief's benefits to all parties with an interest.
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     The NYSE has filed proposed rule changes (SR-NYSE-2004-69) 
on Exchange Act Form 19b-4 that would specify the exchange's initial 
and continued requirements for trading unregistered debt securities on 
the Automated Bond System. In particular, the amended rules would state 
that trading on the NYSE's Automated Bond System could only commence 
for debt securities with an outstanding market value or principal 
amount of at least $10 million and trading would be suspended if the 
outstanding market value or principal amount fell below $1 million. In 
addition, the proposed rule would allow the NYSE to suspend trading in 
a debt security if, among other things, the issuer's assets were 
substantially reduced, the issuer declared bankruptcy, or the NYSE 
determined that the issuer engaged in operations that are contrary to 
the public interest. The Commission is publishing for comment the 
NYSE's

[[Page 40751]]

proposed rule changes concurrently with our publication of this 
notice.\39\
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    \39\ See Release No. 34-51999 (July 8, 2005).
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    In addition to the previously noted actions that the NYSE intends 
to take, and conditions to the exemption, the proposed exemptive relief 
would be available only for debt securities of an issuer whose transfer 
agent for the debt security is registered under Section 17A of the 
Exchange Act and for classes of debt securities whose indenture is 
qualified under the Trust Indenture Act. The first condition is 
designed to ensure that the transfer agents providing services to 
issuers of debt securities trading pursuant to the exemption would be 
subject to Section 17A of the Exchange Act and the rules thereunder and 
to the Commission's oversight. The second condition is designed to 
ensure that specific protections afforded to debt holders under the 
Trust Indenture Act are included in the debt securities' trust 
indenture.

III. Request for Comment

    We request and encourage any interested person to submit comments 
regarding the NYSE's application as well as the terms of our proposed 
exemptive order, including whether the request should be granted.\40\ 
In particular, we solicit comment on the following questions:
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    \40\ The Commission's proposed exemptive order is included as 
Appendix B.
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     Is the scope of the requested exemption appropriate?
     Would the requested exemption increase competition in the 
public debt markets?
     Would the requested exemption increase the transparency of 
the public debt markets?
     Would an issuer's Exchange Act reports for its equity 
securities and all other public information related to the issuer's 
class of debt adequately inform investors about the debt securities 
covered by the requested exemption?
     Should the requested exemption relieve issuers of debt 
securities and other applicable parties from the antifraud 
proscriptions of Exchange Act Rules 14a-9 and 14c-6 and/or from 
Exchange Act Rules 14a-13, 14b-1, 14b-2 and 14c-7, which govern the 
transmission to beneficial owners of proxy and consent materials and 
information statements, as proposed? Does Exchange Act Rule 10b-5 
provide adequate antifraud protection against misstatements or material 
omissions in proxy or information statements and related materials? Is 
there any significant concern that banks, brokers and similar 
intermediaries would refuse or fail to transmit proxy materials to 
beneficial owners if Rules 14b-1 and 14b-2 no longer expressly applied?
     Should the requested exemption apply to a wholly-owned 
subsidiary of a company with at least one class of equity securities 
registered under Section 12(b) and listed on the NYSE, if the wholly-
owned subsidiary independently does not satisfy the conditions for 
relief? Should the wholly-owned subsidiary's parent have to guarantee 
the subsidiary's debt securities for the requested exemption to apply?
     Are there any other differences between exchange-traded 
debt and debt traded in the OTC market that warrant a more restrictive 
regulatory treatment for exchange-traded debt?
     Are there any implications or concerns that may arise 
because NYSE members would be able to trade a debt security without the 
NYSE entering into a formal listing arrangement with the issuer of the 
debt security?
     Should we condition the proposed exemption on any 
additional NYSE listing standards?
     Are the conditions sufficiently designed so that investors 
are appropriately protected?
     Are the bases triggering suspension of trading (e.g., 
bankruptcy, substantial reduction in assets, or NYSE determination that 
the issuer engaged in operations contrary to the public interest) 
appropriate? Should any be removed? Are there any others that should be 
added?
     Is the use of a third party data vendor adequate to 
provide the NYSE and its members with sufficient information regarding 
corporate actions relevant to debt securities traded on the Automated 
Bond System? If not, what additional information or measures would be 
appropriate? Should any such information or measures be required as an 
additional condition of the exemption?
     Is the information to be provided by Xcitek, LLC to the 
NYSE and its members significant enough to justify its inclusion in the 
proposed exemptive order as a formal condition to relief?
    Comments should be received on or before August 15, 2005. Comments 
may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/other.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number S7-06-05 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.

All submissions should refer to File Number S7-06-05. This file number 
should be included on the subject line if e-mail is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's 
Internet Web site (http://www.sec.gov/rules/other.shtml). Comments are 
also available for public inspection and copying in the Commission's 
Public Reference Room, 100 F Street, NE., Washington, DC 20549. All 
comments received will be posted without change; we do not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly.
    For further information, you may contact Sean Harrison, Special 
Counsel, Office of Rulemaking, at (202) 551-3430, or Robert T. 
Plesnarski, Deputy Chief Counsel, Office of Chief Counsel, at 202-551-
3832 in the Division of Corporation Finance or Timothy Fox, Attorney, 
or Michael Gaw, Senior Special Counsel, Office of Market Supervision, 
at (202) 551-5643 and (202) 551-5602, respectively, in the Division of 
Market Regulation, at the U.S. Securities and Exchange Commission, 100 
F Street, NE., Washington, DC 20549.

    By the Commission.
J. Lynn Taylor,
Assistant Secretary.

Appendices

    A The New York Stock Exchange's application for an exemption 
pursuant to Section 36 of the Exchange Act
    B Proposed order granting the New York Stock Exchange's application 
for an exemption pursuant to Section 36 of the Exchange Act

Appendix A

    May 26, 2005.
    Jonathan G. Katz, Secretary, Securities and Exchange Commission, 
450 Fifth Street NW., Washington, DC 20549-0609.
    Dear Mr. Katz: The New York Stock Exchange, Inc. (the 
``Exchange'') requests that the Securities and Exchange Commission 
(the ``Commission'') provide relief pursuant to Section 36 \41\ of 
the Securities Exchange Act of 1934 (the ``Exchange Act'') \42\ to 
provide an exemption from the provisions of Section

[[Page 40752]]

12(a) \43\ of the Exchange Act to permit NYSE members and member 
organizations to trade certain debt securities that are not 
registered under Section 12(b) \44\ of the Exchange Act.
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    \41\ 15 U.S.C. 78mm.
    \42\ 15 U.S.C. 78a.
    \43\ 15 U.S.C. 78l(a).
    \44\ 15 U.S.C. 78l(b).
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Conditions Applicable to the Exemptive Relief Requested

    The Exchange requests that the Commission provide exemptive 
relief with respect to Section 12(a), which provides in relevant 
part that it shall be unlawful for any ``member, broker, or dealer 
to effect any transaction in any security (other than an exempted 
security) on a national securities exchange unless a registration is 
effective as to such security for such exchange.'' \45\ The Exchange 
further asks that this exemption be granted to allow NYSE members 
and member organizations to trade debt securities that satisfy the 
following conditions:
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    \45\ If the Commission grants exemptive relief from Section 
12(a), members, brokers and dealers would be able to trade on the 
NYSE eligible debt securities that had not been registered under 
Section 12(b), which prescribes the procedures for an issuer's 
registration of a security and the information required to be 
submitted. Similarly, the Exchange would no longer need to comply 
with the provisions of Section 12(d) regarding the certification of 
listing and registration of debt securities.
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    1. The issuer of the debt securities registered the offer and 
sale of that class of debt securities under the Securities Act of 
1933, as amended (the ``1933 Act''),\46\
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    \46\ 15 U.S.C. 77a.
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    2. The issuer of the debt securities or the issuer's parent, if 
the issuer is a wholly-owned subsidiary, has at least one class of 
common or preferred equity securities registered under Section 12(b) 
\47\ of the Exchange Act and listed on the New York Stock Exchange, 
and
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    \47\ 15 U.S.C. 78l(b).
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    3. The transfer agent for the debt securities is registered 
under Section 17A \48\ of the Exchange Act.
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    \48\ 15 U.S.C. 78q-1.
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    In connection with this exemptive request, the NYSE undertakes 
that it will take or has taken the following steps:
    (a) The NYSE will provide definitions of ``listed'' debt 
securities and ``traded'' debt securities on the Automated Bond 
System[reg] (the ``ABS[reg]'') log-on screen 
and on the NYSE's Web site,
    (b) The NYSE will distinguish between ``listed'' debt securities 
and ``traded'' debt securities on the ABS[reg] and on the 
NYSE Web site's bond issue directory,\49\
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    \49\ The NYSE will distinguish debt securities ``listed'' on the 
ABS[reg] from those ``traded'' on the ABS[reg] 
on the three different screens used to view the market and through 
which orders may be entered: (1) The book showing all the orders in 
a particular security; (2) the summary book showing aggregate 
interest at each price in a particular security; and (3) the display 
of the best bid/offer, price range, and calculated accrued interest 
in a particular security. As will be clearly noted on the 
ABS[reg] log-on screen, ``listed'' debt securities will 
be identified by a letter or symbol, ``traded'' debt securities will 
be identifiable due to the absence of such letter or symbol. The 
location of the indicator will be the same on all three screens.
---------------------------------------------------------------------------

    (c) The NYSE will directly provide each member organization and 
each listed company notification via letter and/or email prior to 
the date that trading of the debt securities commences on the 
ABS[reg] to clarify the distinction between ``listed'' 
debt securities and ``traded'' debt securities and to provide 
notification that eligible listed debt securities will be delisted 
and, instead, traded on the ABS[reg],
    (d) The NYSE will issue a press release upon launch of this 
initiative stating that ``listed'' debt securities trade along side 
``traded'' debt securities on the ABS[reg], and
    (e) The NYSE has contracted with Xcitek, LLC, (``Xcitek''), a 
third-party bond issue tracking service, for the provision of 
information prior to the date that this exemption is granted by the 
SEC.
    Xcitek's tracking service provides the NYSE a customized on-line 
reference for corporate actions relevant to bonds. The tracking 
system provides information and data electronically to the NYSE, and 
provides:
     Notification of calls (redemptions) of traded bonds,
     Notification of tender offers for traded bonds,
     Notice of defaults in payment of interest on traded 
bonds,
     Notice of consent solicitations for traded bonds, and
     Notice of corporate actions for traded bonds (includes 
tender offers, issuer name changes, cusip number changes).
    The tracking system does not provide notification of changes in 
trustees, obligors or transfer agents with respect to traded debt 
securities. The NYSE has entered into a one-year contract with 
Xcitek to provide this information electronically on a daily basis. 
Xcitek independently obtains, researches and organizes the 
information. The NYSE does not itself verify the information 
provided by Xcitek. To the extent that in the future, Xcitek is no 
longer willing or able to provide this information, the NYSE will 
contract with another third party for the provision of similar 
information.
    The NYSE has separately filed SR-NYSE-2004-69 (December 3, 2004) 
and Amendment No. 1 to 2004-69 (March 15, 2005) on Exchange Act Form 
19b-4 to propose NYSE Rules 1400 and 1401 that set forth the 
requirements for trading unlisted debt securities on the 
ABS[reg]. Proposed Rule 1400 provides that, for purposes 
of this exemption:
    ``The term Debt Securities includes only securities that, if 
they were to be listed on the New York Stock Exchange, would be 
listed under Sections 102.03 or 103.05 of the New York Stock 
Exchange's Listed Company Manual; provided, however, that such 
securities shall not include any security that is defined as an 
``equity security'' under Section 3(a)(11) of the Exchange Act.
    For the avoidance of doubt, note that the term ``Debt 
Securities'' does not include a security that, if listed on the New 
York Stock Exchange, would have been listed under Sections 703.19 or 
703.21 of the New York Stock Exchange's Listed Company Manual. The 
references to Sections 102.03, 103.05, 703.19, and 703.21 of the 
NYSE's Listed Company Manual are to those sections as in effect on 
January 31, 2005.''
    Proposed Rule 1401 specifies that only Debt Securities with an 
outstanding market value or principal amount of at least $10 million 
will be permitted to be traded by NYSE members and member 
organizations on the ABS[reg]. Proposed Rule 1401 also 
specifies that trading in Debt Securities will be suspended if:
     The outstanding aggregate market value or principal 
amount of the Debt Securities has fallen to less than $1,000,000, or
     The Debt Securities may no longer be traded by NYSE 
members or member organizations on an unregistered basis pursuant to 
this exemptive request.
    In order to ensure that debt securities have at least 
$10,000,000 in aggregate market value or principal amount at the 
time trading commences, the NYSE will review two existing corporate 
bond issue data bases that provide issue size information for the 
preponderance of corporate bonds.
    To monitor the $1,000,000 suspension threshold, the NYSE will 
generally utilize the third party tracking system to monitor partial 
redemptions and tender offers. The most prevalent reason for 
outstanding principal amounts to fall below $1 million is when the 
price of the bond declines because of a default or potential 
bankruptcy. Prices of bonds in these situations will be monitored. 
We will also monitor the media for warnings of possible 
difficulties, in addition to ratings downgrades.
    With respect to debt securities that are currently listed on the 
NYSE, the Exchange intends to apply to delist debt securities that 
satisfy the NYSE's requirements for traded debt and, instead, to 
trade those debt securities on the ABS[reg] on an 
unlisted basis. As described above, the NYSE will be contacting 
listed companies to provide notification that eligible listed debt 
securities will be delisted and, instead, traded on the 
ABS[reg].
    The NYSE will also inform listed companies of the NYSE's 
intention to identify currently outstanding or newly issued unlisted 
debt securities that are eligible to be traded by NYSE members and 
member organizations on the ABS[reg]. The NYSE's Fixed 
Income Markets Division will review a variety of sources, including 
SEC Securities Act filings and bond offerings posted daily in 
financial publications in order to identify additional unlisted debt 
securities that have been issued by a NYSE equity-listed company or 
wholly-owned subsidiary and that satisfy the requirements of 
proposed Rules 1400 and 1401. The NYSE intends to provide an 
opportunity for NYSE members and member organizations to trade all 
eligible debt securities. Once unlisted debt securities are 
identified and verified as satisfying the requirements of proposed 
Rule 1400 and 1401, the NYSE will notify NYSE members and member 
organizations that such unlisted debt securities are eligible to be 
traded on the ABS[reg] through ticker notices and 
postings on the ABS[reg] website.
    Debt securities that do not satisfy the proposed requirements of 
Exchange Rules 1400 and 1401 may continue to be listed on the NYSE. 
Debt securities that would not satisfy the proposed requirements for 
trading include convertible debt securities, debt securities that 
were listed under Sections 703.19 and 21 of the NYSE's Listed 
Company

[[Page 40753]]

Manual, debt issued by listed company subsidiaries that are not 
wholly owned, foreign government debt and debt issued by an issuer 
that does not have equity securities listed on the NYSE.

Background

    In 1992, the Exchange wrote to the Commission requesting that it 
grant a similar exemption pursuant to Section 3(a)(12) of the 
Exchange Act.\50\ The Exchange pointed out that, while debt 
securities traded on a national securities exchange must be 
registered under Section 12(b) of the Exchange Act,\51\ debt 
securities traded ``over-the-counter'' (``OTC'') were not subject to 
the same requirement. In fact, debt securities traded OTC need not 
even be issued by reporting companies. The Exchange argued that 
these statutory distinctions put it at a competitive disadvantage 
with respect to the OTC market. In an effort to be responsive, in 
November 1994, the Commission amended certain Exchange Act rules to 
``reduce regulatory distinctions between exchange-traded debt 
securities required to be registered under Section 12 of the 
Exchange Act and bonds traded over-the-counter for which such 
registration is not required.'' \52\ In doing so, the Commission 
acknowledged that ``regulatory distinctions may have unnecessarily 
and unintentionally affected the structure and development of the 
debt markets.'' \53\
---------------------------------------------------------------------------

    \50\ 15 U.S.C. 78c(a)(12). See Letter from Donald J. Solodar, 
Executive Vice President, New York Stock Exchange, to William H. 
Heyman, Director, Division of Market Regulation, Securities and 
Exchange Commission, and Linda C. Quinn, Director, Division of 
Corporation Finance, Securities and Exchange Commission, dated April 
7, 1992.
    \51\ See footnote 4 supra.
    \52\ See Securities Exchange Act Release No. 34-34922 (November 
1, 1994), 59 FR 55342 (Nov. 7, 1994). The Commission, among other 
things, exempted debt securities listed on a national securities 
exchange from Sections 14(a), 14(b) and 14(c) of the Exchange Act.
    \53\ See footnote 9 supra.
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The Exchange Act Bond Registration Requirement

    In the Exchange's view, the Exchange Act registration 
requirement for corporate bonds to be traded on exchanges continues 
to have an anti-competitive impact on exchange bond markets. Under 
Section 12(g) of the Exchange Act,\54\ only equity securities are 
required to be registered to be traded in the OTC market. In 
contrast, corporate bond issues may trade on a national securities 
exchange only if those bonds are registered under the Exchange Act.
---------------------------------------------------------------------------

    \54\ 15 U.S.C. 78l(g).
---------------------------------------------------------------------------

    The Exchange estimates that, in 1992, 90% of the par value of 
outstanding corporate debt (excluding private placements) was issued 
by reporting companies, but only 35% of that debt was registered 
under the Exchange Act. Currently, the Exchange estimates that 95% 
of the par value of outstanding corporate debt (excluding private 
placements) is issued by reporting companies, but only 8% of that 
debt is registered under the Exchange Act.\55\ As a result, the 
Exchange's bond market remains small and has declined over the last 
decade. In 1991, approximately 1,800 corporate bond issues having a 
par value of $287 billion were traded on the Exchange, representing 
675 issuers. At the end of 2004, the Exchange had some 500 corporate 
bond issues trading (having a par value of $230 billion), 
representing 220 issuers. In comparison, the Exchange estimates that 
there are over 22,000 publicly offered corporate bond issues, with a 
combined par value in excess of $2.8 trillion, trading in the OTC 
secondary markets in the United States without being registered 
under Section 12(b) of the Exchange Act. Thus, while there are over 
22,000 corporate bond issues that can be traded on the OTC market, 
only about 500 of these issues may be traded on exchanges. Clearly, 
despite the reforms undertaken by the Commission in 1994, the 
Exchange believes that fewer companies are deciding to register 
their debt securities under the Exchange Act, and the number of debt 
securities eligible for trading on national securities exchanges 
continues to diminish.
---------------------------------------------------------------------------

    \55\ While there are no definitive numbers as to the size of the 
corporate bond market, based upon issues rated by the Nationally 
Recognized Securities Rating Organizations (``NRSRO''), the Exchange 
estimates that there are over 22,000 publicly offered corporate bond 
issues, having a par value in excess of $3 trillion. These numbers 
do not include asset-backed securities, medium-term note offerings, 
or commercial paper. Telephone conversation between Fred Siesel, 
Consultant to the New York Stock Exchange and Dan Wyzocki, 
President, First Data Services (November 8, 2004).
---------------------------------------------------------------------------

    The consequences of the continued disparity in regulatory 
treatment of exchange and OTC debt securities are not limited to the 
competitive constraints on the Exchange. The Exchange believes that 
investors in corporate bonds are adversely impacted. In contrast to 
OTC bond trading, the Exchange's bond market has long disseminated 
both last sale prices as they occur on the Exchange exclusive of any 
mark-ups, mark-downs, or other charges, and bid and ask quotations. 
Continuous last sale price disclosure has existed since 1867, when 
the stock and bond ticker first went into operation. In 1919, the 
stock and bond tickers commenced separate operations, and in 1977, 
the bond high-speed quote line began the dissemination of last sale 
prices and quotations to market data providers, such as Bloomberg, 
Reuters, ILX and others. Today, this market data is available 
through some 400,000 market data displays providing subscribers--
primarily securities firms and financial institutions--with direct 
instantaneous access to this information, throughout each trading 
day. Instantaneous means within one to two seconds of the actual 
trade. The Exchange is not aware of any comparable level of 
transparency--trade prices, quotations, and speed of availability 
for corporate bond prices--that exists currently elsewhere or will 
exist in the foreseeable future. The Exchange believes that all of 
this transparency is lost when a bond delists from, or is not traded 
on, the Exchange.\56\
---------------------------------------------------------------------------

    \56\ One instance in which this transparency may be lost is when 
a company with both listed equity and debt is merged or reorganizes 
with another company. The successor may list its stock on the 
Exchange but leave its debt in a now wholly owned subsidiary, which 
may seek to delist its debt to avoid separate Section 13 reporting 
requirements. Once delisted from the Exchange, the debt is traded 
only OTC, and the Exchange believes that investors lose the benefit 
of the transparency provided by the real time reporting of 
quotations and trades on the Exchange.
    Examples of such delisting, include Southwestern Bell debt 
(Securities Exchange Act Release No. 34-42141 (Nov. 16, 1999), 64 FR 
63833 (Nov. 22, 1999)) and Pacific Bell debt (Securities Exchange 
Act Release No. 34-42142 (Nov. 16, 1999) 64 FR 63833 (Nov. 22, 
1999)). Other examples have involved the debt of Mobil Corporation, 
Outdoor Systems, ITT Corporation, Chrysler Auburn Hills, Texaco, 
Ralston-Purina, Time-Warner Entertainment, New England Telephone and 
New York Telephone.
---------------------------------------------------------------------------

    Exchange bond trading is conducted through the 
ABS[reg], which began operations in 1977. The 
ABS[reg] is a web-based trading system for fixed income 
securities to which Exchange member firms subscribe and through 
which they enter and match customer bond orders on a strict price 
and time priority basis. The system provides member subscribers with 
access to screens that display the order ``book'' in each bond in 
best price order and in the time sequence received. Completed, 
locked-in trades are submitted to the clearing corporation (i.e., 
Depository Trust Clearing Corporation) with calculated accrued 
interest. ABS[reg] centralizes bond trading and 
facilitates the high-speed dissemination of last sale prices and 
quotations to market data providers via the Exchange's dedicated 
bond quote line. ABS[reg] primarily serves the ``small-
lot'' corporate bond market. Small-lot bond buyers and sellers are 
primarily individuals, bank trust accounts, and small institutions. 
In addition, bond dealers will use ABS[reg] to offset so-
called ``tail-end'' bond positions acquired in the course of large-
lot trading. As noted above, ABS[reg] is the only system, 
known to us, providing the public with real-time disclosure of 
quotations and trade prices, exclusive of mark-ups/mark-downs, 
commissions, or other charges.

Bond Issue Information

    Because information that is disclosed in connection with the 
registration of bonds under the Exchange Act is generally also 
available through other Commission filings and other means, the 
Exchange believes that permitting a broker or dealer to effect a 
transaction in a debt security without requiring Exchange Act 
registration of eligible debt securities will not result in any 
significant loss of bond or issuer information to investors. First, 
the Exchange is only requesting exemptive relief with respect to the 
trading by NYSE members and member organizations of debt securities 
issued by eligible listed companies and their wholly owned 
subsidiaries. In order for debt securities to be traded by NYSE 
members and member organizations, the listed company must have 
equity securities listed on the NYSE and, thus, already be subject 
to the requirements of Section 13 of the Exchange Act. Information 
about the listed company will remain available to investors even in 
the absence of an Exchange Act registration requirement for bonds of 
these issuers or their wholly owned subsidiaries.
    Second, only debt securities that are registered under the 1933 
Act would be eligible to be traded by NYSE members and

[[Page 40754]]

member organizations on the ABS[reg]. Additionally, under 
Section 15(d) of the Exchange Act, issuers not required to register 
their debt securities under Section 12 of the Exchange Act are 
subject to Section 13 reporting requirements for the fiscal year 
following the effective date of a registration statement filed under 
the 1933 Act.\57\ Issuers must continue to file such reports so long 
as they have a class of securities with at least 300 ``holders of 
record'' as defined under Exchange Act Rule 12g5-1.\58\ Therefore, 
with respect to eligible debt securities that have been issued by 
the wholly owned subsidiary of a listed company, that wholly owned 
subsidiary may or may not itself be currently subject to the 
requirements of Section 15(d) or Section 13 of the Exchange Act.
---------------------------------------------------------------------------

    \57\ 15 U.S.C. 78o(d).
    \58\ 17 CFR 240.12g5-1.
---------------------------------------------------------------------------

    The 1933 Act registration statements themselves supply much of 
the relevant information needed by the bond markets and investors. 
Indeed, for the most part, the Exchange Act registration Form 8-A 
simply incorporates by reference the information found in the 1933 
Act registration statement. The 1933 Act registration statement also 
contains a much more detailed and relevant description of the debt 
issue than is required by Rule 12b-3 of the Exchange Act.\59\ The 
description contained in the term sheet of the registration 
statement provides the information necessary to trade that issue--
whether on an exchange or OTC. The issue description contained in 
the Form 8-A registration statement does not provide the information 
needed to trade bonds.
---------------------------------------------------------------------------

    \59\ 17 CFR 240.12b-3. Rule 12b-3 requires that wherever the 
title of securities is required to be stated one shall also indicate 
``the type and general character of the securities * * *.'' For 
funded debt, issuers are required to state the following: the rate 
of interest, the maturity date (or dates for serial issues), an 
indication if the payment of principal or interest is contingent, a 
brief indication of the priority of the issue, and, if the issue is 
convertible, a statement to that effect.
---------------------------------------------------------------------------

    Most of the other disclosure items required in connection with 
debt securities arise with respect to Forms 8-K, 10-Q and 10-K. 
These forms would continue to be filed by eligible listed companies 
and, where required by Sections 15(d) or 13 under the Exchange Act, 
by eligible wholly owned subsidiaries, regardless of whether the 
debt securities are registered under the Exchange Act. Item 2.04 of 
Form 8-K requires disclosure of any triggering event, such as a 
default, that accelerates or increases a direct financial 
obligation. Item 3.03 of Form 8-K requires disclosure of any 
material modification to the rights of security holders. Item 
601(b)(4) of Regulation S-K (required to be included in 10-Ks and 
10-Qs) discusses the definition of the rights of debt holders. Part 
II--Item 3(a) of Form 10-Q requires that, to the extent that the 
registrant has not previously disclosed such information on Form 8-
K, the registrant must provide information regarding defaults in the 
payment of principal, interest, sinking fund, etc., ``with respect 
to any indebtedness of the registrant or any of its significant 
subsidiaries exceeding 5 percent of the total assets of the 
registrant and its consolidated subsidiaries * * *'' (emphasis 
added). Thus, the Form 10-Q requires disclosure of defaults in the 
payment of principal, interest, sinking fund, etc. for any bonds of 
the registrant, irrespective of whether such bonds are exchange-
listed or not.
    If, as described above, a wholly owned subsidiary ceases to 
provide Exchange Act reports itself, much of the information that 
had been provided by the wholly owned subsidiary will be provided 
instead by the wholly owned subsidiary's listed parent company in 
its own Exchange Act reports. The listed parent company, however, 
will not be required to list and describe the debt securities issued 
by the wholly owned subsidiary on the cover page of its own annual 
report on Form 10-K or to include as an exhibit to its own Forms 10-
K or 10-Q the exhibits that would have been required to be filed by 
the wholly owned subsidiary pursuant to Item 601(b)(4) of Regulation 
S-K (relating to creation of a new class of securities or 
indebtedness or the modification of existing rights of security 
holders).
    There are also a variety of databases providing bond 
information, including information regarding the listing and/or 
trading location of a bond. A few examples of these database 
services include: Standard & Poor's Bond Guide, the Mergent Bond 
Record, First Data Services' BORAS, Bloomberg and the Commission's 
EDGAR internet service, among other services. In addition, the 
Exchange's own bond issue directory is available on the Exchange's 
web site and carries the description of each listed bond issue, 
including bonds currently exempt from Exchange Act registration 
requirements, such as Tennessee Valley Authority and the 
International Bank for Reconstruction and Development (World Bank) 
bonds.
    Most notably, of course, OTC bond trading functions without the 
information obtained as a result of Exchange Act registration. OTC 
bond trading relies on the information disclosed in the 1933 Act 
registration statement and the indentures filed under the Trust 
Indenture Act, including amendments to the indenture affecting the 
rights of bondholders.
    Debt securities traded by NYSE members and member organizations 
on the ABS( will not be subject to the provisions of the NYSE's 
Listed Company Manual that relate to debt securities that are listed 
on the NYSE. While both traded and listed debt securities are 
subject to the same quantitative thresholds for initial trading/
listing and continued trading/listing, listed debt securities are 
also subject to other requirements, including:
     Issuers of listed debt securities are required to 
provide immediate notice to the NYSE and the public of defaults or 
other unusual circumstances relating to the payment of interest;
     Issuers of listed debt securities are required to 
provide immediate notice to the NYSE and the public of any corporate 
action it (or third parties) may take towards the redemption, 
retirement or cancellation of the security;
     Issuers of listed debt securities are subject to 
requirements for transfer agents; and
     Issuers of listed debt securities are required to 
submit a listing application in order to list the securities.
    As noted above, in the case of traded debt securities, the NYSE 
will obtain notice regarding defaults and redemptions through the 
third-party tracking system.

No Justification for Disparate Treatment

    In summary, the disparate regulation between exchanges and the 
OTC markets has occurred without deliberate design. In 1934, 
Congress determined to regulate all listed issuers, and did not 
distinguish between listed equity and listed debt. Of course, at the 
time, the only place a company could be ``listed'' was on an 
exchange. In 1964, Congress properly determined to extend Exchange 
Act registration requirements to issuers having a substantial number 
of public shareholders and to require them to file periodic reports 
with the Commission, even if they were not listed on an exchange. 
The focus, however, was on those companies with public stockholders, 
so Section 12(g) of the Exchange Act was made applicable only to 
issuers of equity held by the requisite number of holders. As a 
result, publicly held debt that is not listed does not trigger the 
registration requirement.\60\
---------------------------------------------------------------------------

    \60\ Also at that time, Section 15(d) was amended to replace the 
asset-size standard with a holder-of-record standard. See Securities 
Exchange Act Release No. 34-7492 (January 5, 1965), 30 FR 483 
(1965). Because of the widespread use of street name holding, 
however, the vast majority of bonds issued by bond-only companies 
fall outside the reporting requirement of Section 15(d). Thus 
Section 15(d), though it applies to both equity and debt, does not 
fill the gap left by Section 12(g), and does not achieve Exchange 
Act ongoing reporting for the bonds of most bond-only companies.
---------------------------------------------------------------------------

    We believe that this exemptive relief is consistent with the 
Commission's interest in greater bond market transparency. We also 
believe that removing unnecessary anti-competitive barriers to 
exchange trading of debt of reporting companies and their 
consolidated subsidiaries will go a long way towards providing bond 
investors with the transparency that we all agree is so important. 
We urge the Commission to use its exemptive power to remove the 
requirement that bonds of NYSE-listed equity issuers and their 
consolidated subsidiaries must be registered under the Exchange Act 
in order to be traded on an exchange. This dichotomy between 
exchange and OTC bond markets has existed too long and should be 
ended.

 Sincerely yours,

/s/ Mary Yeager

    cc: Alan L. Beller, Annette L. Nazareth, David Shillman, Paula 
Dubberly, Robert Plesnarski, Sean Harrison, Michael Gaw, Timothy C. 
Fox.

Appendix B--Proposed Order Granting the New York Stock Exchange's 
Application for an Exemption Pursuant to Section 36 of the Securities 
Exchange Act of 1934

    This is a proposed order regarding the exemptive application of 
the New York Stock Exchange, Inc. (``NYSE''). Before issuing any 
final order, the Commission will consider

[[Page 40755]]

public comments received on the NYSE's exemptive application and 
proposed order.

I. Introduction

    On May 26, 2005, the Commission received an application from the 
NYSE for an exemption pursuant to Section 36 \61\ of the Securities 
Exchange Act of 1934 (the ``Exchange Act''),\62\ in accordance with 
the procedures set forth in Exchange Act Rule 0-12.\63\ The NYSE has 
requested exemptive relief from Section 12(a) \64\ of the Exchange 
Act to permit its members and brokers or dealers to trade certain 
unregistered debt securities on the NYSE's Automated Bond System. 
This order grants the NYSE's application for an exemption.
---------------------------------------------------------------------------

    \61\ 15 U.S.C. 78mm. Section 36 of the Exchange Act gives the 
Commission the authority to exempt any person, security or 
transaction from any Exchange Act provision by rule, regulation or 
order, to the extent that the exemption is necessary or appropriate 
in the public interest and consistent with the protection of 
investors.
    \62\ 15 U.S.C. 78a et seq.
    \63\ CFR 240.0-12. Exchange Act Rule 0-12 sets forth procedures 
for filing applications for orders for exemptive relief pursuant to 
Section 36.
    \64\ 15 U.S.C. 78l(a).
---------------------------------------------------------------------------

II. Proposed Order Granting the New York Stock Exchange's Application 
for an Exemption Pursuant to Section 36 of the Securities Exchange Act 
of 1934

    Section 12(a) of the Exchange Act provides in relevant part that 
it shall be unlawful for any ``member, broker or dealer to effect 
any transaction in any security (other than an exempted security) on 
a national securities exchange unless a registration is effective as 
to such security for such exchange.'' Section 12(b) \65\ of the 
Exchange Act dictates how the registration referred to in Section 
12(a) must be accomplished. Accordingly, all equity and debt 
securities that are not ``exempted securities'' or are not otherwise 
exempt from Exchange Act registration must be registered by the 
issuer under the Exchange Act before a member, broker or dealer may 
trade that class of securities on a national securities exchange.
---------------------------------------------------------------------------

    \65\ 15 U.S.C. 78l(b).
---------------------------------------------------------------------------

    Contrarily, brokers or dealers who trade debt securities 
otherwise than on a national securities exchange may trade debt 
securities regardless of whether the issuer registered that class of 
debt under the Exchange Act. This is so because Exchange Act 
registration for securities traded other than on a national 
securities exchange is required only for certain equity securities. 
In particular, Section 12(g) \66\ of the Exchange Act, the only 
Exchange Act provision other than Section 12(a) to impose an 
affirmative Exchange Act registration requirement, requires the 
registration of equity securities only.\67\
---------------------------------------------------------------------------

    \66\ 15 U.S.C. 78l(g).
    \67\ Section 12(g)(1) of the Exchange Act and Rule 12g-1 [17 CFR 
240.12g-1] promulgated thereunder require an issuer to register a 
class of equity securities if the issuer of the securities, at the 
end of its fiscal year, has more than $10,000,000 in total assets 
and a class of equity securities held by 500 or more recordholders.
---------------------------------------------------------------------------

    As the Commission has stated in the past, we believe that this 
disparate regulatory treatment may have negatively and unnecessarily 
affected the structure and development of the debt markets.\68\ In 
1994, to reduce existing regulatory distinctions between exchange-
traded debt securities and debt securities that trade in the ``over-
the-counter'' (``OTC'') market, we adopted Exchange Act Rule 3a12-
11.\69\ Rule 3a12-11 provides for the automatic effectiveness of 
Form 8-A registration statements for exchange-traded debt 
securities, exempts exchange-traded debt from the borrowing 
restrictions under Section 8(a) \70\ of the Exchange Act, and 
exempts exchange-traded debt from certain proxy and information 
statement requirements under Sections 14(a), (b) and (c) of the 
Exchange Act.\71\ Despite these efforts, the vast majority of 
secondary trading of debt securities continues to occur in the OTC 
market, which suggests that there still may be regulatory 
impediments that need to be addressed.\72\
---------------------------------------------------------------------------

    \68\ See Release Nos. 34-34922 (November 1, 1994) [59 FR 55342], 
and 34-34139 (June 1, 1994) [59 FR 29398].
    \69\ 17 CFR 240.3a12-11.
    \70\ 15 U.S.C. 78h(a).70
    \71\ 15 U.S.C. 78n(a), (b) and (c).
    \72\ The NYSE estimates that there are over 22,000 publicly 
offered corporate bond issues having a par value in excess of $3 
trillion but only 8% of the $3 trillion par value is registered 
under the Exchange Act and so may be traded on the NYSE's Automated 
Bond System. See the NYSE's application for exemptive relief.
---------------------------------------------------------------------------

    In addition, we have sought to increase the level of 
transparency in the public debt markets. We have long believed that 
price transparency in the U.S. capital markets is fundamental to 
promoting the fairness and efficiency of our markets.\73\ In 1998, 
the Commission's staff conducted a review of the public debt markets 
and found that in the area of corporate debt securities, price 
transparency was deficient.\74\ Following the staff's 1998 review, 
the Commission requested the National Association of Securities 
Dealers, Inc. (``NASD'') to adopt rules requiring dealers to report 
transactions in corporate debt securities and preferred stock to the 
NASD and to develop a real-time price quotation system.\75\
---------------------------------------------------------------------------

    \73\ See Testimony of Chairman Arthur Levitt Before the House 
Subcommittee on Finance and Hazardous Materials, Committee on 
Commerce, Concerning Transparency in the United States Debt Market 
and Mutual Fund Fees and Expenses (September 29, 1998).
    \74\ Id.
    \75\ Id. The NASD was asked to undertake this initiative for two 
reasons. First, the NASD is the self-regulatory agency for the OTC 
market, the market on which the vast majority of debt securities are 
traded. Second, the Commission believed that the NASD possessed the 
required infrastructure to undertake the initiative and this would 
obviate the need to ``reinvent the wheel.'' See Testimony of 
Chairman Arthur Levitt Before the House Subcommittee on Finance and 
Hazardous Materials, Committee on Commerce, Concerning Hedge Fund 
Activities in the U.S. Financial Markets (March 18, 1999).
---------------------------------------------------------------------------

    We view the exemptive relief requested by the NYSE as another 
step to improve the public debt markets. The Commission believes 
that granting the NYSE's application will serve the public interest 
by minimizing unnecessary regulatory disparity and promoting 
competition. Currently, unlike on a national securities exchange, 
broker dealers may trade debt securities in the OTC market 
regardless of whether the issuer registered that class of debt under 
the Exchange Act. The exemption is designed to minimize that 
disparate regulatory treatment and promote competition between the 
debt security markets. Moreover, the exemption may provide greater 
transparency than exists on the current OTC market.
    At the same time, the conditions of the exemption serve to 
protect investors by alleviating any reduction in information 
available as a result of the exemption. Further, the conditions are 
designed to ensure that investors continue to have access to 
comprehensive public information about an issuer, including the 
issuer's detailed disclosure in a registration statement filed under 
the Securities Act of 1933 registration statement and accompanying 
trust indenture qualified under the Trust Indenture Act of 1939, and 
substantially all of the public information that would be available 
if the securities were registered under Section 12 of the Exchange 
Act.
    In granting this relief, we expect that the NYSE will design and 
implement all rules related to the relief in a manner that protects 
investors and the public interest and does not unfairly discriminate 
between customers, issuers, brokers or dealers.
    Accordingly, it is ordered pursuant to Section 36 of the 
Exchange Act that, under the terms and conditions set forth below, a 
NYSE member, broker or dealer may effect a transaction on the NYSE's 
Automated Bond System in a debt security that has not been 
registered under Section 12(b) of the Exchange Act without violating 
Section 12(a) of the Exchange Act.
    For purposes of this order, a ``debt security'' is:
    Any security that, if the class of securities were listed on the 
NYSE, would be listed under Sections 102.03 or 103.05 of the NYSE's 
Listed Company Manual. A debt security does not include any security 
that, if the class of securities were listed on the NYSE, would be 
listed under Sections 703.19 or 703.21 of the NYSE's Listed Company 
Manual. Provided, however, under no circumstances does a debt 
security include any security that is defined as an ``equity 
security'' under Section 3(a)(11) of the Exchange Act.

References to Sections 102.03, 103.05, 703.19, and 703.21 of the 
NYSE's Listed Company Manual are to those sections as in effect on 
January 31, 2005.
    For purposes of this order, the following conditions must be 
satisfied:
    (1) The issuer of the debt security has registered the offer and 
sale of such securities under the Securities Act of 1933;\76\
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    \76\ 15 U.S.C. 77a et seq.
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    (2) The issuer of the debt security, or the issuer's parent 
company if the issuer is a wholly-owned subsidiary,\77\ has at least 
one class of common or preferred equity

[[Page 40756]]

securities registered under Section 12(b) of the Exchange Act and 
listed on the NYSE;
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    \77\ The terms ``parent'' and ``wholly-owned'' have the same 
meanings as defined in Rule 1-02 of Regulation S-X [17 CFR 210.1-
02].
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    (3) The transfer agent of the debt security is registered under 
Section 17A \78\ of the Exchange Act;
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    \78\ 15 U.S.C. 78q-1.
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    (4) The trust indenture for the debt security is qualified under 
the Trust Indenture Act of 1939; \79\ and
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    \79\ 15 U.S.C. 77aaa-77bbbb.
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    (5) The NYSE has complied with the undertakings to distinguish 
between debt securities registered under Section 12(b) of the 
Exchange Act and listed on the NYSE and debt securities trading 
under this order, as set forth in the NYSE's exemptive application.

    By the Commission.

[NAME]
[TITLE]

[FR Doc. E5-3742 Filed 7-13-05; 8:45 am]
BILLING CODE 8010-01-P