[Federal Register Volume 70, Number 135 (Friday, July 15, 2005)]
[Notices]
[Pages 41067-41069]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3775]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51999; File No. SR-NYSE-2004-69]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Notice of Filing of a Proposed Rule Change and Amendment No. 1 Thereto 
To Establish Rules for the Trading of Unlisted Debt Securities on the 
Exchange's Automated Bond System

July 8, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 3, 2004, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the NYSE. On March 15, 
2005, the NYSE filed Amendment No.1 to the proposed rule change.\3\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1, which replaced and superceded the original 
filing in its entirety, restated the scope of the NYSE's requested 
exemption, described in Section II(A)(1), below; provided the name 
of the tracking service, Xcitek, that would provide the NYSE a 
customized on-line reference for corporate actions relevant to 
bonds; provided additional discussion of the definition of ``Debt 
Securities'' under proposed NYSE Rule 1400; described additional 
scenarios in proposed NYSE Rule 1401 under which the Exchange would 
suspend trading on ABS of unlisted Debt Securities; and discussed 
the effect that the proposed rule change would have on existing NYSE 
Rule 396.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NYSE proposes Exchange Rules 1400 and 1401 relating to the 
trading of unlisted debt securities on its Automated Bond System[reg] 
(``ABS''). The text of the proposed rule change, as amended, is 
available on NYSE's Web site (http://www.nyse.com), at the NYSE's 
principal office, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the NYSE included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it had received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    On May 26, 2005, separately from this rule proposal, the Exchange 
submitted a letter (the ``2005 Exemptive Request Letter'') to the 
Commission requesting that the Commission, pursuant to Section 36 of 
the Act,\4\ issue an exemption from Section 12(a) of the Act \5\ that 
would permit NYSE members and member organizations to trade certain 
debt securities on ABS that are not registered under Section 12(b) of 
the Act.\6\ Section 12(a) 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.'' The Exchange requested that this 
exemption be granted in connection with debt securities that satisfy 
the following conditions:
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    \4\ 15 U.S.C. 78mm.
    \5\ 15 U.S.C. 78l(a).
    \6\ 15 U.S.C. 78l(b).
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    (a) The issuer of the debt securities registered the offer and sale 
of that class of debt securities under the Securities Act of 1933 
(``1933 Act''); \7\
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    \7\ 15 U.S.C. 77a et seq.
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    (b) 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) of 
the Act and listed on the NYSE; and
    (c) The transfer agent for the debt securities is registered under 
Section 17A of the Act.\8\
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    \8\ 15 U.S.C. 78q-1.
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    In the 2005 Exemptive Request Letter, the NYSE stated that it would 
take or has taken the following steps in connection with the exemptive 
request:
    (a) The NYSE would provide definitions of ``listed'' debt 
securities and ``traded'' debt securities on the ABS log-on screen and 
on the NYSE's Web site;
    (b) The NYSE would distinguish between ``listed'' debt securities 
and ``traded'' debt securities on ABS and on the NYSE Web site's bond 
issue directory; \9\
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    \9\ The NYSE would distinguish debt securities ``listed'' on ABS 
from those ``traded'' on ABS 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 would be clearly noted on the ABS log-on screen, 
``listed'' debt securities would be identified by a letter or 
symbol, and ``traded'' debt securities would be identifiable due to 
the absence of such letter or symbol. The location of the indicator 
would be the same on all three screens.
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    (c) The NYSE would directly provide each member organization and 
each listed company notification via letter and/or e-mail prior to the 
date that trading of the debt securities commences on ABS to clarify 
the distinction between ``listed'' debt securities and ``traded'' debt 
securities and to provide notification that eligible listed debt 
securities would be delisted and, instead, traded on ABS;
    (d) The NYSE would issue a press release upon launch of this 
initiative stating that ``listed'' debt securities trade along side 
``traded'' debt securities on ABS; 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 action on the NYSE's exemption request is taken 
by the Commission.
    Xcitek's tracking service provides the NYSE a customized on-line 
reference for corporate actions relevant to bonds, including:
     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,

[[Page 41068]]

issuer name changes, and 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 information provided by Xcitek. To the 
extent that, in the future, Xcitek is no longer willing or able to 
provide this information, the NYSE would contract with another third 
party for the provision of similar information.
    Exchange bond trading is conducted through ABS, which began 
operations in 1977. If the Commission grants the NYSE's request for 
exemptive relief, the Exchange would allow NYSE members and member 
organizations to commence trading certain debt securities on ABS that 
are not registered under Section 12 of the Act.\10\ ABS is a Web-based 
trading system for fixed income securities to which Exchange member 
firms may 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-priced order and in the time 
sequence received. Completed, locked-in trades are submitted to the 
Depository Trust Clearing Corporation with calculated accrued interest. 
ABS 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 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 use ABS to offset so-called 
``tail-end'' bond positions acquired in the course of large-lot 
trading. ABS is the only system, known to the NYSE, to provide the 
public with real-time disclosure of debt quotations and trade prices, 
exclusive of mark-ups/mark-downs, commissions, or other charges.
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    \10\ 15 U.S.C. 78l.
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    In connection with its request for exemptive relief, the Exchange 
proposes to adopt NYSE Rules 1400 and 1401 that would specify that 
certain unregistered, unlisted debt securities may be traded by NYSE 
members and member organizations on ABS and to specify the quantitative 
standards that must be met and the qualitative standards that would be 
considered by the NYSE for unlisted debt securities to be initially and 
continually traded on ABS.
    Proposed NYSE Rule 1400 would state that the term ``Debt 
Securities'' for purposes of determining which securities are eligible 
to be traded on ABS would include any unlisted note, bond, debenture, 
or evidence of indebtedness that is:
    (1) Statutorily exempt from the registration requirements of 
Section 12(b) of the Act, or
    (2) Eligible to be traded absent registration under Section 12(b) 
of the Act pursuant to any exemption granted by the Commission in 
response to the 2005 Exemptive Request Letter.
    Debt Securities that fall into the first category include those 
issued by entities that are themselves exempt from the registration 
under the Act on a statutory basis, such as those issued by the 
Tennessee Valley Authority and the International Bank for 
Reconstruction and Development (World Bank).
    For purposes of the second category, proposed NYSE Rule 1400 would 
provide that--to be eligible to be traded by NYSE members, brokers, and 
dealers on ABS on an unregistered, unlisted basis--the term ``Debt 
Securities'' would mean securities that,

    ``if they were to be listed on the NYSE, would be listed under 
Sections 102.03 or 103.05 of the NYSE'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 NYSE, would have been listed under Sections 703.19 or 703.21 
of the NYSE's Listed Company Manual. The references in this Rule 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.''

    The effect of this proposed definition would be to limit the class 
of unregistered, unlisted debt securities that may be traded on ABS by 
NYSE members and member organizations to straight-debt securities. Debt 
Securities that would not satisfy the proposed requirements for trading 
would include convertible debt securities (deemed equity securities 
under Section 3(a)(11) of the Act \11\); structured products (required 
to be listed under Sections 703.19 or 703.21 of the NYSE Listed Company 
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.
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    \11\ 15 U.S.C. 78c(a)(11).
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    Proposed NYSE Rule 1401 would specify that the Exchange would 
permit only unlisted Debt Securities with an outstanding market value 
or principal amount of at least $10 million to be traded by NYSE 
members and member organizations on ABS. Proposed NYSE Rule 1401 also 
would specify that trading would be suspended if:
    (a) The outstanding aggregate market value or principal amount of 
the Debt Securities has fallen to less than $1,000,000; or
    (b) The Debt Securities either:
    (1) No longer qualify for a statutory exemption from the 
registration requirements of Section 12(b) of the Act, or
    (2) May no longer be traded by NYSE members or member organizations 
on an unregistered basis pursuant to any exemption granted by the 
Commission in response to the 2005 Exemptive Request Letter.
    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 would 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 generally 
would utilize Xcitek to monitor partial redemptions and tender offers. 
The most prevalent reason for outstanding principal amounts to fall 
below $1,000,000 is when the price of the bond declines because of a 
default or potential bankruptcy. The NYSE would monitor the prices of 
bonds in these situations. The NYSE also would 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 the Commission to delist debt 
securities that would satisfy the NYSE's requirements for traded debt 
and, instead, to trade those debt securities on ABS on an unlisted 
basis. As described above, the NYSE would contact listed companies to 
notify them that eligible listed debt securities would be delisted and, 
instead, traded on ABS.
    The NYSE also would inform listed companies of its intention to 
identify currently outstanding or newly issued unlisted debt securities 
that would be eligible to be traded by NYSE members and member 
organizations on ABS. The NYSE's Fixed Income Markets Division would 
review a variety of sources, including 1933 Act filings and bond 
offerings posted daily in financial publications, to identify 
additional

[[Page 41069]]

unlisted debt securities that have been issued by an NYSE equity-listed 
company or wholly owned subsidiary thereof and that satisfy the 
requirements of proposed NYSE 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 NYSE 
Rules 1400 and 1401, the NYSE would notify its members and member 
organizations that such unlisted debt securities are eligible to be 
traded on ABS through ticker notices and postings on the ABS Web site.
    Debt securities that do not satisfy the requirements of proposed 
NYSE Rules 1400 and 1401 could 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 703.21 of the NYSE's Listed Company 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 an equity security listed on the NYSE.
    Debt securities traded on ABS would 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 would be subject to the same quantitative thresholds 
for initial trading/listing and continued trading/listing, listed debt 
securities are also subject to other requirements, including:
     Providing immediate notice to the NYSE and the public of 
defaults or other unusual circumstances relating to the payment of 
interest;
     Providing 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;
     Certain requirements for transfer agents; and
     Submission of a listing application to list the 
securities.
    As noted above, in the case of traded debt securities, the NYSE 
would obtain notice regarding defaults and redemptions through the 
third-party tracking system.
2. Statutory Basis
    The basis under the Exchange Act for this proposed rule change is 
the requirement under Section 6(b)(5) of the Act \12\ that an exchange 
have rules that are designed to prevent fraudulent and manipulative 
acts and practices; to promote just and equitable principles of trade; 
to remove impediments to, and perfect the mechanism of a free and open 
market; and, in general, to protect investors and the public interest.
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    \12\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The NYSE does not believe that the proposed rule change, as 
amended, could result in any burden on competition that is not 
necessary or appropriate in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding, or (ii) as to 
which the NYSE consents, the Commission will:
    A. By order approve such proposed rule change, as amended; or
    B. Institute proceedings to determine whether the proposed rule 
change, as amended, should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-NYSE-2004-69 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.
    All submissions should refer to File Number SR-NYSE-2004-69. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission 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/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Section Room, 100 F 
Street, NE., Washington, DC 20549-9303. Copies of such filing also will 
be available for inspection and copying at the principal office of the 
Exchange. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
publicly available. All submissions should refer to File Number SR-
NYSE-2004-69 and should be submitted on or before August 15, 2005.

    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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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-3775 Filed 7-14-05; 8:45 am]
BILLING CODE 8010-01-P