[Federal Register Volume 59, Number 212 (Thursday, November 3, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-27229]
[[Page Unknown]]
[Federal Register: November 3, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34906; File No. SR-NYSE-94-30]
Self-Regulatory Organizations; New York Stock Exchange, Inc.;
Order Granting Approval to Proposed Rule Change Relating to Its
Allocation Policy and Procedures
October 27, 1994.
I. Introduction
On August 12, 1994, the New York Stock Exchange, Inc. (``NYSE'' or
``Exchange'') submitted to the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change requesting permanent approval of
revisions to its Allocation Policy and Procedures that were implemented
on a one year pilot basis.\3\
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1994).
\3\See Securities Exchange Act Release No. 33121 (October 29,
1993) (approving such changes on a one-year pilot basis to expire
October 28, 1994) (``Pilot Release'').
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The proposed rule change was published for comment in Securities
Exchange Act Release No. 34644 (September 7, 1994), 59 FR 47192
(September 14, 1994). No comments were received on the proposal.
II. Description of the Proposal
The NYSE Allocation Policy and Procedures (``Policy'') governs the
allocation of equity securities to NYSE specialist units.\4\ The intent
of the Policy is to ensure that each equity security listed on the
Exchange is allocated in the fairest manner possible to the best
specialist unit for that security. In its continuing efforts to enhance
allocation decisions, the Exchange conducts periodic reviews of the
allocation process.\5\ In October of 1993 the NYSE amended its Policy
on a one-year pilot basis to revise, among other things, the allocation
criteria, the composition of the Allocation Committee
(``Committee'')\6\ and Allocation Panel (``Panel''),\7\ and the
Committee's disclosure policy.
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\4\The NYSE Allocation Policy applies to the allocation of
equity securities under the following circumstances: (1) when an
equity security is to be initially listed on the NYSE; (2) when an
equity security is to be reallocated as a result of disciplinary or
other proceedings under NYSE Rules 103A, 475 and 476; or (3) when a
specialist unit voluntarily surrenders its registration in a
security as a result of possible disciplinary or performance
improvement action. See NYSE Allocation Policy and Procedures.
\5\Subsequent to the implementation of the pilot program
pursuant to the Pilot Release, the Exchange conducted another
comprehensive review of the allocation process and further revised
the Policy (see SR-NYSE-94-18). These revisions include, among other
things, the composition of the Allocation Committee and the
Allocation Panel, the quorum requirement for the Committee, and
allocation of merging companies.
\6\Under the Policy, the NYSE Allocation Committee has sole
responsibility for the allocation of securities to specialist units
pursuant to Board-delegated authority, and is overseen by the
Quality of Markets Committee of the Board of Directors (``Board'').
The Allocation Committee renders decisions based on the allocation
criteria specified in the Allocation Policy.
\7\The composition of the Panel reflects the Committee structure
and includes floor brokers, allied members, and floor broker
Governors. The Panel comprises the pool of individuals from which
the Committee is formed. The Panel members are selected through an
annual appointment process that utilizes input from the membership.
Panel members are appointed to serve a one-year term; Governors,
however, remain on the Panel for as long as they are Governors.
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The Exchange fully implemented the changes to the Policy, detailed
in the Pilot Release, in February of 1994. The Exchange states that it
has reviewed the changes to the Policy as they have impacted on the
allocation process and it believes that there has been a beneficial
effect in terms of the way in which stocks are allocated. The Exchange
further maintains that it continues to subject this vital function to
rigorous scrutiny, looking to refine the process, as is evidenced by
the filing of further changes to the Policy cited earlier.
III. Discussion
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)(5) of the Act.\8\
Section 6(b)(5) requires that the rules of an exchange be designed to
promote just and equitable principles of trade, to prevent fraudulent
and manipulative acts and practices, to remove impediments to and
perfect the mechanism of a free and open market, and, in general, to
protect investors and the public interest. Further, the Commission
finds that the proposal is consistent with Section 11(b) of the Act\9\
and Rule 11b-1 thereunder,\10\ which allow exchanges to promulgate
rules relating to specialists in order to maintain fair and orderly
markets. For the reasons set forth below, the Commission believes that
the amended Policy should enhance the Exchange's allocation process,
encourage improved specialist performance and, thereby, protect
investors and the public interest.
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\8\15 U.S.C. 78f(b)(5) (1988).
\9\15 U.S.C. 78k(b) (1988).
\10\17 CFR 240.11b-1 (1994).
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Specialists play a crucial role in providing stability, liquidity
and continuity to the trading of securities. Among the obligations
imposed upon specialists by the Exchange, and by the Act and the rules
thereunder, is the maintenance of fair and orderly markets in their
designated securities.\11\ To ensure that specialists fulfill these
obligations, it is important that the Exchange develop and maintain
stock allocation procedures and policies that provide specialists with
an incentive to strive for optimal performance. The Commission fully
supports and encourages the NYSE's continuing effort to develop
meaningful and effective allocation policies that encourage improved
specialist performance and market quality.
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\11\See e.g., Rule 11b-1, 17 CFR 240.11b-1 (1994); NYSE Rule
104.
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The Commission believes that the proposed revisions to the NYSE's
Policy should refine the Exchange's allocation process and, thereby,
encourage improved specialist performance. As discussed in more detail
in the Pilot Release, the NYSE's Policy emphasizes that the most
significant allocation criterion is specialist performance. In the
Commission's view, performance-based stock allocations not only help to
ensure that stocks are allocated to specialists who will make the best
markets, but will provide an incentive for specialists to improve their
performance or maintain superior performance.
The Commission believes that the use of Specialist Performance
Evaluation Questionnaire (``SPEQ'')\12\ ratings, objective performance
measures, and the Committee's professional judgment under the revised
Policy should enable the Committee to review specialist performance in
a more precise and comprehensive fashion. Specifically, the Commission
believes that it is appropriate to limit the weight that the SPEQ may
be given in allocation decisions to one-third and to increase the
emphasis given to objective measures of performance. Although the SPEQ
remains a useful tool to measure performance, the Commission has long
believed that objective indications of performance should play an
important role in allocation decisions. In particular, the Commission
believes that objective performance measures can identify poor market
making performance that otherwise may not be reflected in a unit's SPEQ
survey results.\13\
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\12\The SPEQ is a quarterly survey on specialist performance
completed by eligible floor brokers (i.e., any floor broker with at
least one year of experience). The SPEQ consists of 21 questions and
requires floor brokers to rate, and provide written comments on, the
performance of specialist units with whom they deal frequently.
\13\The Commission believes that it is appropriate to delete the
objective performance measure pertaining to the Opening Automated
Report Service (``OARS'') contained in the Policy. Because this
performance measure was deleted from NYSE Rule 103A in 1990,
deleting the reference to the OARS would update and remove an
obsolete performance measure from the Policy.
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The Commission believes that the NYSE's proposal to require that
SPEQ performance data be presented to the Committee in four tiers, with
units listed alphabetically in each comparable group, is a reasonable
means of ranking units for comparison. In this regard, the Commission
recognizes that a unit might not have SPEQ scores which, from a
statistical perspective, are significantly different from the next
higher or lower unit. The presentation of the SPEQ results in four
tiers that differ significantly should provide the Committee with
appropriate groupings of specialist units for its use in allocation
decisions. This should help the Committee in its evaluation of
applicants for a new listing.
The Commission believes that the Exchange's proposal to amend its
Policy to state that in the case of spin-offs, listings of related
companies and relistings of securities, the NYSE will honor a listing
company's request that it not be allocated automatically to its former
specialist unit or the specialist in the parent or related company,
should provide an opportunity for the listed company to provide input
into the allocation of an affiliated listing. However, a listing
company's preference should not be allowed to take significance over or
negate specialist performance. A listing company's preference is a
minor, supplemental factor and only should be used to distinguish
between the best qualified units based on performance related
criteria.\14\ In this regard, the listing company's request would serve
only to open the allocation to all units.
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\14\See Securities Exchange Act Release No. 27803 (March 14,
1990), 55 FR 10740 (March 22, 1990) (order approving File No. SR-
NYSE-88-32).
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The Commission believes that the Exchange's proposal to delete the
reference to specific aspects of trading foreign issues on the Exchange
floor should provide the NYSE with additional flexibility in allocating
foreign issues. Again, the foreign listing considerations in the Policy
are supplemental in that specialist performance remains the key factor
in allocation decisions.
The Commission believes that the NYSE's proposal to eliminate
specialist representation on the Committee will solve the appearance of
a conflict of interest on the Committee and, thereby, enhance
confidence in the allocation process. The Commission concurs with the
NYSE's conclusion that floor brokers and allied members are in a better
position to judge the relative strengths and weaknesses of specialist
units. The Commission also agrees that an effort should be made to
appoint individuals that have not yet served on the Committee before
reappointing past Committee members. This should ensure that a broader
segment of the trading floor community will have an opportunity to
serve on the Committee. In this regard, the Commission also agrees with
the NYSE in that the Panel should consist of a core group of
experienced, senior professionals and supports its proposal to select a
significant number of floor members on the Panel from among the
Exchange's senior floor officials, floor governors and former
allocation committee chairmen. Accordingly, the Commission believes
that the revised mix of both Committee and Panel members is appropriate
and consistent with the Act.
The Commission believes that the NYSE's proposal to require that
the list of Committee members be kept confidential and prohibit members
and investment bankers from initiating contact with Committee members
regarding pending allocations should minimize potential conflicts in
allocation decisions. Under the revised Policy, Committee members still
would be permitted to initiate contact with any specialist if they
believe it would be beneficial when making an allocation decision. The
Commission believes that this revision to the Policy should help to
ensure that specialist performance, rather than subjective
recommendation, is the most significant criterion in allocation
decisions.
The Commission believes that the NYSE's proposal to amend the
Policy to discontinue the practice of distributing a summary of reasons
for each allocation decision to Exchange floor members provides for
more efficient resource allocation and reduces unnecessary paperwork.
At the same time, the Commission emphasizes, however, that the Exchange
will make such information available to those who are interested by
continuing to publish\15\ allocation decisions for its membership and
listing companies.
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\15\The term ``publish'' in this context refers to: (1) a
posting on a bulletin board on the floor of the Exchange giving
notice to all floor members of each allocation; and (2) a
notification to the issuer whose security was allocated.
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The Commission believes that the Exchange's proposal to permit all
current Committee members, including outgoing members, to vote for an
incoming Committee Chairman is reasonable in that outgoing Committee
members have gained valuable experience with candidates with whom they
have been serving. Therefore, the Commission believes that outgoing
members' input should broaden the scope of the election of the NYSE's
Committee Chairman, and help to ensure the selection of the best
qualified Chairman of the Committee.\16\
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\16\The Commission believes that the NYSE's proposal to
standardize the agenda used to educate Committee Chairmen and
members should encourage Committee Chairmen and members to maintain
quality performance in their allocation responsibilities.
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The Commission believes that the proposed amendments to the
allocation application procedure to require information about a
specialist unit's contacts with listed companies and NYSE member
organizations should help to facilitate compliance with NYSE Rule 106.
NYSE Rule 106(c) requires each specialist to report to the Exchange
semi-annually, a record of their contacts with senior officials of
their listed companies, their off-floor contacts with representatives
of each of the 15 largest Exchange member organizations, their off-
floor contacts with each other member organization that is a
significant customer of the specialist unit, and their off-floor
contacts with any other member organization that requests such contact.
Because the revised application would specify the Exchange's current
specialist contact requirement, the proposal should assist specialists
in their responsibilities under the rules of the Exchange.
Finally, the Commission believes that it is appropriate for the
NYSE to implement the revised Policy on a permanent basis. The
Commission believes that the pilot period has provided the Exchange and
the Commission with an opportunity to study the effects of the revised
Policy on the NYSE's allocation process. During the pilot period, the
Exchange has monitored carefully the effects of the revised Policy and
has reported its findings to the Commission. The Commission has
reviewed and analyzed the reports submitted by the Exchange and on that
basis, and for the reasons discussed above, believes that the revised
Policy is consistent with the Act and furthers the objectives of the
Exchange to develop an efficient and reliable allocation procedure.
It Is Therefore Ordered, pursuant to Section 19(b)(2) of the
Act,\17\ that the proposed rule change (SR-NYSE-94-30) is approved.
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\17\U.S.C. 78s(b)(2) (1988).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\18\
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\18\17 CFR 200.30-3(a)(12) (1991).
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Jonathan G. Katz,
Secretary.
[FR Doc. 94-27229 Filed 11-2-94; 8:45 am]
BILLING CODE 8010-01-M
