[Federal Register Volume 60, Number 211 (Wednesday, November 1, 1995)]
[Notices]
[Pages 55615-55617]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-27130]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36417; File No. SR-BSE-95-12]
Self-Regulatory Organizations; Boston Stock Exchange, Inc.; Order
Granting Approval to Proposed Rule Change and Notice of Filing and
Order Granting Accelerated Approval of Amendment No. 1 to Proposed Rule
Change Relating to Specialist Concentration
October 25, 1995.
On June 19, 1995, the Boston Stock Exchange, Inc. (``BSE'' or
``Exchange'') submitted to the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change seeking permanent approval of the Exchange's
Specialist Concentration Policy.
\1\15 U.S.C. 78s(b)(1).
\2\17 CFR 240.19b-4.
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The proposed rule change was published for comment in the Federal
Register on July 25, 1995.\3\ No comments were received on the
proposal. On October 18, 1995, the BSE submitted Amendment No. 1 to the
proposed rule change.\4\ This order approves the proposed rule change.
In addition, Amendment No. 1 is approved on an accelerated basis.
\3\Securities Exchange Act Release No. 35987 (July 18, 1995), 60
FR 38065.
\4\See Letter from Karen Aluise, Assistant Vice President, BSE,
to Glen Barrentine, Team Leader, SEC (Oct. 13, 1995). Amendment No.
1 is described infra at note 8 and accompanying text.
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The Exchange's current policy regarding the concentration of
specialist units was first approved by the Commission on a six-month
pilot basis ending August 7, 1990.\5\ The Commission later approved the
renewal of the pilot program for additional one-year periods through
September 26, 1995.\6\
\5\Securities Exchange Act Release No. 27684 (Feb. 7, 1990), 55
FR 5527 (approving File No. SR-BSE-89-05).
\6\See Securities Exchange Act Release Nos. 28327 (Aug. 10,
1990), 55 FR 33794 (approving File No. SR-BSE-90-11); 29551 (Aug.
13, 1991), 56 FR 41380 (approving File No. SR-BSE-91-06); 31037
(Aug. 13, 1992), 57 FR 37854 (approving File No. SR-BSE-92-08);
32753 (Aug. 16, 1993), 58 FR 44707 (approving File No. SR-BSE-93-
15); and 34716 (Sept. 26, 1994), 59 FR 50026 (approving File No. SR-
BSE-94-12).
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The BSE's Specialist Concentration Policy pilot program establishes
certain standards based on Consolidated Tape Association (``CTA'')
ranking\7\ of specialist stocks for reviewing certain proposed mergers,
acquisitions, and other combinations between or among specialist units.
The proposed policy
[[Page 55616]]
would authorize those members of the Executive Committee of the
Exchange's Board of Governors that are not affiliated with a specialist
organization to review proposed combinations that, in the Exchange's
view, may lead to undue concentration with the specialist community.\8\
\7\The CTA disseminates last sale transaction information for
trades executed on any of the participant exchanges or the Nasdaq
Stock Market. The current CTA participants include the New York
Stock Exchange (``NYSE''), American Stock Exchange (``Amex''),
Chicago Stock Exchange (``CHX''), Philadelphia Stock Exchange
(``Phlx''), Pacific Stock Exchange (``PSE''), BSE, Chicago Board
Options Exchange (``CBOE''), Cincinnati Stock Exchange (``CSE''),
and the National Association of Securities Dealers (``NASD''). Each
specialist stock is ranked according to the number of CTA trades in
such stock. The ranking is based upon the average volume of trades
and shares reported to CTA over the past four quarters. Securities
Exchange Act Release No. 35987 (July 18, 1995), 60 FR 38065.
\8\The Executive Committee must be composed of at least five
members of the Board, two of whom must be the Chairman and the Vice
Chairman. Boston Stock Ex. Const. art. VII, Sec. 2, Boston Stock Ex.
Guide (CCH), para.1202 (July 1993). Amendment No. 1 modifies the
BSE's Specialist Concentration Policy such that any member of the
Executive Committee that is affiliated with a specialist
organization will be prohibited from participating in any
discussions or decisions of the Committee in applying this policy.
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The Executive Committee would review any arrangements where
previously separate specialist organizations would be operating under
common control and would comprise: 15% or more of the 100 most actively
traded CTA stocks; or 15% or more of the second 100 most actively
traded CTA stocks; or 20% or more of the third 100 most actively traded
CTA stocks; or 15% or more of all the CTA stocks eligible for trading
on the BSE where the Free List contains fewer than 100 issues.\9\
\9\The Free List is made up of securities that are not
registered to certain specialists and can be traded by any
specialist.
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The Executive Committee would approve or disapprove the proposed
combination based on its assessment of the following considerations:
(1) Specialist performance and market quality in the stocks subject to
the proposed combination; (2) the likelihood that the proposed
combination would strengthen the capital base of the resulting
organization, minimize the potential for financial failure and negative
consequences of any such failure on the specialist system as a whole,
and maintain or increase operational efficiencies; (3) commitment to
the Exchange market, focusing on whether the constituent specialist
organizations engage in business activities that might detract from the
resulting specialist organization's willingness or ability to act to
strengthen the Exchange agency/auction market and its competitiveness
in relation to other markets;\10\ and (4) the effect of the proposed
combination on the overall concentration of specialist organizations.
\10\With respect to the ``commitment to the Exchange market''
criteria, the Executive Committee would look to a variety of factors
that extend beyond compliance with the Exchange's requirements for
providing sufficient capital, talent, and order handling services.
For example, the Committee would review and assess each constituent
unit's past performance on the Exchange relating to such matters as:
the acceptance and cooperation in the development, implementation,
and enhancement of the Boston Exchange Automated Communications and
Order Routing Network (``BEACON''); efforts at resolving problems
concerning customer orders; willingness to facilitate early openings
in order to compete effectively with other exchanges; and
willingness to voluntarily provide execution guarantees beyond the
minimum required under the Exchange's rules.
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The Exchange has stated previously that the Policy is designed to
provide the BSE with a mechanism for reviewing proposed mergers,
acquisitions, and other combinations between or among specialist units
that may lead to a level of concentration within the specialist
community that is detrimental to the Exchange and the quality of its
markets.\11\ The Exchange expressed its belief that if specialist units
were permitted to aggregate control or dominate activity on the Floor
of the Exchange: the potential for increasing order flow would be
diminished seriously; a disproportionately large number of top quality
stocks could be handled by one or a small number of specialist firms;
the barriers that new entrants to the specialist business face may
increase; the Exchange could become dependant upon one firm for a
disproportionately large portion of its revenues; the influence of the
larger firms over the policies or direction of the Exchange would
increase significantly; competition among specialists for new stock
allocations would be reduced; the integrity of the entire stock
allocation process would be undermined; and, in general, the incentives
for quality markets and higher standards of performance would be
reduced.
\11\See Securities Exchange Act Release No. 27684 (Feb. 7,
1990), 55 FR 5527 (approving File No. SR-BSE-89-05).
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The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange, and, in
particular, with the requirements of Section 6(b).\12\ In this regard,
the Commission deems the proposal consistent with the Section
6(b)(5)\13\ requirements that the rules of an exchange be designed to
promote just and equitable principles of trade, to prevent fraudulent
and manipulative acts, and, in general, to protect investors and the
public. The proposal identifies specific levels of review for
combinations that could impair market quality and hinder competition to
the detriment of investors and the public interest, but still ensures
that combinations that are beneficial to the marketplace will not be
prohibited.
\12\15 U.S.C. 78f(b).
\13\15 U.S.C. 78f(b)(5).
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The Commission believes that in many situations combinations among
specialist units can be beneficial for the quality of the market and
for the units themselves, particularly those units with limited capital
and resources. The Commission, however, recognizes the BSE's concern
that undue concentration could result in various negative effects on
market quality by, among other things, hampering competition among
specialists and reducing incentives for specialists to provide better
markets. In addition, the Commission recognizes that, as specialist
concentration increases, the continued financial and operational
vitality of any one unit will have increased importance on the overall
quality of the Exchange's markets and its specialist system as a whole.
Accordingly, in light of the legitimate concentration concerns
identified by the BSE, the Commission considers it appropriate for the
BSE to have a permanent review policy that authorizes it to monitor
specialist combinations to determine their impact upon the competitive
environment necessary to maintain an orderly market. Furthermore, the
Commission continues to believe the concentration factors contained in
the proposal should enable the BSE to identify those combinations that
could be harmful to market quality while at the same time not hamper
the approval of those combinations that would not result in undue
concentration or impair market quality. Finally, the Commission
believes that exclusion of affiliated Executive Committee members from
participating in the discussions and decision making process concerning
specialist combinations should allow the Exchange to avoid a potential
conflict of interest situation and result in a fairer decision.
The Commission finds good cause for approving proposed Amendment
No. 1 prior to the thirtieth day after the date of publication of
notice of filing thereof in the Federal Register. Amendment No. 1 would
exclude all members of the Executive Committee who are also
[[Page 55617]]
affiliated with specialist organizations from participating in the
discussions and decisions concerning proposed specialist combinations.
As a result, approval of Amendment No. 1 should result in a fairer and
more impartial decision making process. In addition, Amendment No. 1 is
similar to rules of other self-regulatory organizations.\14\ For these
reasons, the Commission finds good cause for accelerating approval of
the proposed rule change, as amended.
\14\See, e.g., PSE Rule 11.3 (prohibiting committee members from
adjudicating any matter in which they have an interest).
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Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 1. Persons making written
submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549. 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. Sec. 552, will be available for inspection and
copying at the Commission's Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies of such filing also will be
available for inspection and copying at the principal office of the
Boston Stock Exchange. All submissions should refer to File No. SR-BSE-
95-12 and should be submitted by November 22, 1995.
It therefore is ordered, pursuant to Section 19b)(2) of the
Act,\15\ that the proposed rule change (SR-BSE-95-12), including
Amendment No. 1, is approved.
\15\15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\16\
\16\15 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-27130 Filed 10-31-95; 8:45 am]
BILLING CODE 8010-01-M
