[Federal Register Volume 64, Number 240 (Wednesday, December 15, 1999)]
[Proposed Rules]
[Pages 69975-69981]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-32472]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-42209; File No. S7-29-99]
RIN 3235-AH85
Unlisted Trading Privileges
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: The Securities and Exchange Commission is proposing a change
to Rule 12f-2 under the Securities Exchange Act of 1934, which governs
unlisted trading privileges (``UTP'') in listed initial public
offerings (``IPOs''). Under the proposed rule change, a national
securities exchange extending UTP privileges to an IPO security listed
on another exchange would no longer be required to wait until the day
after trading has commenced on the listing exchange to allow trading in
that security. Instead, a national securities exchange would be
permitted to begin trading in an IPO issue pursuant to UTP immediately
after the first trade in the security is reported by the listing
exchange to the Consolidated Tape.
DATES: Comments should be submitted on or before January 31, 2000.
ADDRESSES: Interested persons should submit three copies of their
written data, views and opinions to Jonathan G. Katz, Secretary,
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington,
DC 20549-0609. Comments may also be submitted electronically to the
following e-mail address: rule-comments@sec.gov. All comment letters
should refer to File No. S7-29-99. All submissions will be made
available for public inspection and copying at the Commission's Public
Reference Room, 450 Fifth Street, N.W., Washington, DC 20549.
Electronically-submitted comments will be posted on the Commission's
Internet website (http://www.sec.gov).
FOR FURTHER INFORMATION CONTACT: Kevin Ehrlich, Attorney, at (202) 942-
0778 or Ira Brandriss, Attorney, at (202) 942-0148, Division of Market
Regulation, Securities and Exchange Commission, 450 Fifth Street, N.W.,
Washington, DC 20549-1001.
SUPPLEMENTARY INFORMATION:
I. Background
Section 12(f) of the Act \1\ governs when a national securities
exchange (``exchange'') may extend UTP to a security, i.e., allow
trading in a security
[[Page 69976]]
that is not listed and registered on that exchange.\2\ Section 12(f)
was substantially amended by the UTP Act of 1994 (``UTP Act'').\3\
Prior to that time, exchanges had to apply to the Commission for
approval before extending UTP to a particular security. This process
entailed notice of the application in the Federal Register, a period
for interested parties to comment on the application, and formal
Commission approval based on a finding that extension of UTP to the
security would be consistent with the maintenance of fair and orderly
markets and the protection of investors. The UTP Act, among other
matters, removed the application, notice, and Commission approval
process from Section 12(f) (except in cases of Commission suspension of
UTP in a particular security on an exchange). Accordingly, the UTP Act
eliminated the extensive UTP approval process for all securities listed
and registered on an exchange. Nevertheless, as discussed in detail
below, the exchanges must wait one full day before they can extend UTP
to a listed IPO security as defined in Section 12(f)(1)(G)(i) and
(ii).\4\
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\1\ 15 U.S.C. 78l(f).
\2\ Section 12(a) generally prohibits trading on an exchange of
any security that is not registered (listed) on that exchange.
Section 12(f) excludes from this restriction securities traded
pursuant to UTP that are registered on another national securities
exchange. When an exchange ``extends UTP'' to a security, the
exchange allows its members to trade the security as if it were
listed on the exchange. Over-the-counter (``OTC'') dealers are not
subject to the Section 12(a) registration requirement because they
do not transact business on an exchange.
\3\ Pub. L. No. 103-389, 108 Stat. 4081 (1994).
\4\ Section 12(f)(1)(B), read jointly with
Section12(f)(1)(A)(ii), as amended, provides this exception for
listed IPO securities. In defining securities that fall within the
exception, subparagraphs 12(f)(1)(G)(i) and (ii) provide:
(i) a security is the subject of an initial public offering if--
(I) the offering of the subject security is registered under the
Securities Act of 1933; and
(II) the issuer of the security, immediately prior to filing the
registration statement with respect to the offering, was not subject
to the reporting requirements of Section 13 or 15(d) of this title;
and
(ii) an initial public offering of such security commences at
the opening of trading on the day on which such security commences
trading on the national securities exchange with which such security
is registered.
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A. The Waiting Period
In passing the UTP Act, Congress considered the question of whether
a waiting period should be imposed on exchanges trading an IPO security
pursuant to UTP. During the legislative process, conflicting views
arose among interested parties concerning the appropriate waiting
period, if any, for extending UTP to an IPO security.\5\
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\5\ At Congressional hearings, testimony and evidence were
presented, on one hand, to show the negative impact that a mandatory
waiting period for UTP would have on competition. An interested
party in favor of a mandatory waiting period asserted, on the other
hand, that listed IPO securities should trade in a central location
for a ``short'' period of time to help ensure market efficiency
immediately following an IPO, and that immediate UTP in listed IPO
securities could increase the cost of raising capital for issuers.
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As a result, Congress temporarily permitted UTP exchanges to trade
an IPO security only after two days of trading had occurred on the
exchange on which the security was registered and listed. It also
required the Commission to prescribe, by rule or regulation within 180
days of the legislation's enactment, the duration of the interval, if
any, that UTP exchanges would be required to wait before trading in
listed IPOs.\6\ In a report to Congress on the UTP Act, the House
Committee on Energy and Commerce described the interim waiting period
as ``a temporary exception'' to the general authority it granted to
exchanges to extend UTP immediately. In leaving the ultimate decision
on the issue in the hands of the Commission, the Committee expressed
the view that the rulemaking process would afford an opportunity for
the conflicting concerns and suggestions to be examined and
resolved.\7\
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\6\ Amended Section 12(f)(1)(C) required exchanges (until the
earlier of the effective date of a Commission rule, or 240 days
after the enactment of the UTP Act) to wait until the third trading
day in a listed IPO security before trading the security pursuant to
UTP.
\7\ The Committee stated that:
The Committee expects that, in undertaking the IPO rulemaking
authorized under the bill, the Commission will seek comments on the
benefits associated with streamlining the regulatory process and
enhancing competitive opportunities among market centers with
respect to UTP in IPOs, and the identification of the negative
effects if any that granting immediate UTP might have on the
distribution of these securities. The Committee further expects the
Commission to consider the experience of the third market trading in
listed IPOs in the course of its examination of these questions.
Finally, the Committee expects the markets to cooperate in providing
the Commission with data regarding the nature and effect of trading
activity (including, for example, any volatility effects on the
security) in connection with IPO listings in order to enable the
Commission to determine whether the benefits of confining early
trading in IPOs to one marketplace are outweighed by the benefits of
removing regulatory delays that inhibit competition among markets.
H.R. Rep. No. 626, 103d Cong., 2d Sess. (1994).
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B. The Commission's Original Proposal: Elimination of the Waiting
Period
Accordingly, on February 9, 1995, the Commission proposed for
comment Rule 12f-2,\8\ which would have virtually eliminated the
waiting period.\9\ Under the proposal, rather than continuing the
temporary requirement to wait two days, UTP exchanges would have been
permitted to begin trading in a listed IPO immediately after the first
trade executed on the listing exchange was reported by that exchange to
the Consolidated Tape. In proposing a one-trade interval for UTP in IPO
securities, the Commission stated that:
\8\ 17 CFR 240.12f-2.
\9\ Exchange Act Release No. 35323 (Feb. 2, 1995), 60 FR 7718
(Feb. 9, 1995).
Shortening the interval for UTP in listed IPO securities should
enhance the ability of exchanges to compete for order flow in the
subject securities, especially in light of the fact that OTC dealers
may trade IPO securities immediately upon effective registration
with the Commission. Accordingly, in the absence of a compelling
reason to impose a restriction that would inhibit competition among
exchanges, the Commission initially believes that competing
exchanges should be able to extend UTP to a listed IPO security
after the first trade in the security on the listing exchange has
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been effected and reported.\10\
\10\ Exchange Act Release No. 35323 (Feb. 2, 1995), 60 FR 7718,
7720 (Feb. 9, 1995).
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The Commission noted that testimony and evidence were presented
during the legislative process preceding the UTP Act to show the
negative impact that a mandatory waiting period has on competition. The
Commission also pointed out that the third market traded listed IPO
securities with no delay. The Commission solicited comment on the
potential impact on markets and the distribution of securities, as well
as the experience of the third market.
The Commission received eight letters in response to the original
proposal, five of which supported the proposed rule, and three of which
opposed it.\11\ In addition, shortly before the proposed rules were
published, the Commission received a study from the Philadelphia Stock
Exchange (``Phlx''), submitted on behalf of itself, the Boston Stock
Exchange, the Chicago Stock Exchange, and the Pacific Stock Exchange
(now known as the Pacific Exchange).
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\11\ Favoring the proposal were the Boston Stock Exchange, Inc.,
the Chicago Stock Exchange, Inc., the Pacific Stock Exchange, Inc.
(one letter commenting directly on the proposal, and one letter
responding to negative comments), and the Philadelphia Stock
Exchange, Inc. (letter responding to negative comments). Opposing
the proposal were the New York Stock Exchange, Inc., CS First
Boston, and Lehman Brothers. For a summary of the comments, see
Exchange Act Release No. 35637 (April 21, 1995), 60 FR 20891 (April
28, 1995).
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The Phlx study showed high trading volume in IPOs during the early
days of trading, particularly the first and second days of trading.
Citing this data, the regional exchanges argued that a restriction on
extending UTP to IPO securities created a substantial negative effect
on competition, both in relation to the listing exchange and OTC
dealers
[[Page 69977]]
trading listed securities (the ``third market'').\12\
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\12\ The Chicago Stock Exchange also stated that it had listed
IPOs simultaneously with the NYSE and had seen no adverse effect.
Similarly, the Phlx study found, in the case of five IPOs that were
dually or multiply listed on at least one regional exchange and the
NYSE, that the regional trades on the first two days virtually
always were within the NYSE daily trading range.
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On the other hand, the commenters opposing a reduced waiting
period--the New York Stock Exchange (``NYSE'') and two underwriting
firms--maintained that immediate regional exchange trading of IPOs
would increase price volatility in the trading of IPO securities. With
IPOs trading immediately on UTP exchanges, they argued, underwriters
would not have sufficient time to ensure an orderly distribution of the
securities.\13\ A study produced by Lehman Brothers at the time showed
higher volatility in some Nasdaq IPOs than in selected NYSE IPOs.
Opponents of the proposal cited this data in asserting that dispersed
initial trading of IPOs is more volatile than initial centralized
trading.\14\
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\13\ Two commenters advocated at the time that Congress's
temporary two-day delay should continue in place, while the third
recommended the retention of, at the very least, a one-day trading
delay.
\14\ Supporters countered that any increase in price volatility
in early trading of IPOs is limited to upward price movement.
Supporters also argued that price volatility is generated by supply
and demand, and, as a natural by-product of a free and open market,
should never be used as a reason to exclude some equally-regulated
competitors from the marketplace.
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C. Adoption of a Revised Version
On April 21, 1995, the Commission adopted a revised version of its
original proposal. Instead of allowing UTP exchanges to trade a listed
IPO as soon as the first trade on the listing exchange was reported to
the Consolidated Tape, the revised rule required them to wait until the
opening of business on the day following the IPO. In other words, a
one-day trading delay was established for UTP in listed IPOs.\15\
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\15\ See Exchange Act Release No. 35637 (April 21, 1995), 60 FR
20891 (April 28, 1995).
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In arriving at this position in 1995, the Commission acknowledged
the substantial volume of trading that occurs on the initial trading
days of IPOs. As a general matter, the Commission agreed with the
regional exchanges that early UTP in IPO securities would enhance the
ability of multiple markets to compete for this volume. However, it
also recognized a possibility that virtually immediate UTP in IPO
securities could complicate the pricing and orderly distribution of IPO
securities by increasing the risk of price volatility as the securities
are distributed to the public. The Commission noted particularly the
concern raised by the underwriters that believed that IPO pricing could
be at risk if there was no opportunity for early centralized trading.
Finally, a significant factor in the Commission's decision to adopt a
one-day trading delay in 1995 was the fact that insufficient data was
available with which to assess the potential impact of immediate IPO
trading in multiple markets.
The Commission stated at the time, however, that it would continue
to monitor the trading of IPOs, and that it would be willing to
consider revisiting the question of the appropriate waiting period for
extending UTP to listed IPO securities after experience had been gained
with the amended rules.\16\ The Commission believes that it is now
appropriate to revisit the one-day waiting period based on its
experience over the last four years, as well as results of a new study
submitted to the Commission by several regional exchanges.
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\16\ Id. at 20894.
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D. The 1998 Study
In August 1998, the Chicago Stock Exchange, the Cincinnati Stock
Exchange, and the Pacific Exchange presented to the SEC for review a
new study (``1998 Study''), examining the effects of immediate multiple
trading of IPO securities.\17\ The study was conducted at the request
of the Chicago Stock Exchange in response to the Commission's 1995
indication that it would be open to reconsidering the issue when new
data became available.
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\17\ Jay Ritter, Joe B. Cordell Eminent Scholar, University of
Florida, ``Unlisted Trading Privileges in Listed IPOs: Analysis of
the One-Day Delay,'' June 1998, available in public File No. S7-29-
99.
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The study comprised two sets of inquiries. Each compared a group of
newly issued securities that were permitted to trade immediately on
more than one exchange, with a group of IPO securities that were
similar in type but that were subject to the one-day trading delay. The
study examined whether bid-ask spreads and intraday price volatility
were greater for the IPOs that were dually or multiply traded than for
the IPOs that were not, compiling data from the first five days of
trading for each of the securities.
Specifically, the first analysis compared a group of nine dually
listed IPOs and six spin-offs \18\ that traded on more than one
exchange \19\ with a similar group of IPO securities that were not
dually or multiply listed. The two groups of offerings were issued
during the same general time period,\20\ and were similar in terms of
the industry of the issuer and the amount of proceeds from the
offering. Because an IPO as defined under the Act includes both
traditional IPOs and spin-offs, the study attempted to include both in
its analysis. Moreover, like IPOs, the spin-offs involve an issuance of
shares where there is no previous basis to establish an opening price.
The sampling for comparison was small because IPOs are rarely listed on
more than one exchange.
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\18\ In the spin-offs, the shareholders of a parent company were
issued IPO shares in a subsidiary company. Spin-offs are considered
to be ``technical IPOs''--i.e., transactions that are not
traditional initial issuances of shares to the general public in
exchange for cash, but that are currently included within the
definition of IPO in Section 12 of the Act.
\19\ Spin-offs and IPOs that were not considered IPOs under
Section 12 of the Act could be traded immediately on other
exchanges.
\20\ The dually or multiply listed IPOs and spin-offs examined
in this section of the study began trading between 1993 and 1997.
The comparison group of IPOs and spin-offs listed on only one
exchange were selected from among IPOs and spin-offs that began
trading between 1995 and 1997 because the one-day delay for UTP
trading of such securities first went into effect in 1995. The
comparison group was selected on the basis of similar industries and
proceeds. The sample group of dually-listed IPOs included the
following companies: Dr. Pepper/Seven-Up, Dean Witter/Discover,
Allstate, Urban Shopping Centers, Pac-Tel, Guidant Corp., PMI Group,
Hambrecht & Quist, Dominick's Supermarkets, Western Atlas Inc.,
Lehman Bros. Holdings, Promus Hotel Corp., Host Marriott Services,
360 deg. Communications, and Imation Corp. The control group of non-
dually listed IPOs included: Fresh Del Monte Produce, Donaldson
Lufkin Jenrette, American States Financial, Prentiss Properties
Trust, Excel Communications, Global DirectMail, capMAC Holdings,
Friedman Billings Ramsey, Circle K, Diamond Offshore Drilling,
Contifinancial, Renaissance Hotel Group, Red Roof Inns, Berg
Electronics, and Bell & Howell.
In terms of intraday price volatility (the daily standard
deviation of returns), the sample group produced volatility of 5.3%
while the control group had volatility of 6.89%. This difference
suggests that non-dually listed IPOs tend to be 30% more volatile
than dually listed IPOs. The study also showed that the bid-ask
spreads for each group were similar. The bid-ask spreads for the
dually listed group were a statistically insignificant 10% higher
than the control group for the first day of trading and only 5%
higher by the second day of trading.
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This first inquiry found that price volatility was higher on the
first day of trading for both groups of IPOs and spin-offs than on any
of the subsequent four days. However, the price volatility of IPOs and
spin-offs traded on only one exchange was approximately 30% higher than
that of the IPOs and spin-offs that were traded on at least two
exchanges. In addition, in its comparison of bid-ask spreads, the study
showed that there was no statistically significant difference between
the two groups. Thus, the study concluded, neither an analysis of price
volatility nor a survey of bid-ask spreads
[[Page 69978]]
revealed any evidence of damage to market quality caused by immediate
trading of IPOs on non-listing exchanges.
The second analysis compared a group of securities issued by
companies that underwent some type of restructuring and could be dually
or multiply traded because they were not subject to the UTP
prohibition, with a group of stocks that similarly were issued as a
result of reorganizations but that were subject to the UTP prohibition.
Although this sampling did not include securities of a private company
going public for the first time, the reorganizations are considered
``technical IPOs'' because they meet the Section 12(f) definition of an
IPO for the purposes of the statutory one-day trading delay.\21\ The
analysis compared data between 1994 and 1997 for eleven companies that
were not subject to the UTP prohibition with six companies that were.
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\21\ See note 4, supra.
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This second inquiry found that the price volatility on the first
day of trading in either group of securities was not exceptionally
high. Moreover, the price volatility of new issuances that traded on
more than one exchange the first day did not differ significantly from
that of the technical IPOs trading on only one exchange. The study also
found no significant differences in the bid-ask spreads between the
technical IPOs and the comparison group that traded on more than one
exchange the first day.\22\
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\22\ The second analysis compared eleven stocks of issuers that
underwent some form of restructuring between May 1994 and October
1997 that were not deemed to be an IPO, with six stocks that
underwent a restructuring between April 1997 and October 1997 but
that were deemed to be an IPO. The control group of stocks that were
not considered to be an IPO included: Illinova Corp., Rexel Corp.,
Burlington Northern Santa Fe, Walt Disney, Rockwell International,
Tenneco, Enron Corp., Rough Industries, Texas Utilities Co., First
Republic Bancorp, and Excel Communications. The sample group of
stocks that were considered to be an IPO included: CTG Resources,
New Century Energies, Pioneer Natural Resources, Fred Meyer Inc.,
Keyspan Energy, and U.S. Restaurant Properties.
The sample group of technical IPOs was less volatile than the
control group for four of the first five days of trading after the
restructuring. The ratio of volatility of the sample group compared
to the control group for the first five days of trading was: 0.96,
1.55, 0.59, 0.80 and 0.81. A ratio of 1 shows identical volatility.
Likewise, the bid-ask spreads were closer for the sample group than
the control group for the first five days of trading after a
restructuring. The ratio of bid-ask spreads of the sample group
compared to the control group for the first five days of trading
was: 0.80, 0.88, 0.69, 0.81, and 0.93. Again, a ratio of 1 shows
identical bid-ask spreads.
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The study concluded from these analyses that there is no empirical
basis for the contention that multiple exchange trading on the first
day of an IPO adversely affects market quality, either by increasing
price volatility or widening bid-ask spreads. In fact, the evidence
indicated that listed IPOs that are not traded on more than one
exchange can be more volatile than dually or multiply listed IPOs. The
study further noted that the third market, which is not subject to the
one-day delay, currently competes with the listing exchange in trading
IPOs on the first day with no visible adverse effect.
In addition, the study contained data demonstrating that regional
exchanges have been unable to attract a substantial share of first day
trading volume in IPOs even when not barred by the statute from
participating. For example, in the case of the dually or multiply
listed IPOs studied, the regional exchanges garnered an average of only
1.8% of the total trading volume on the first day. Although the
proportion increased over the next four trading days, it still remained
comparatively small. In the case of IPOs subject to the one-day trading
delay, the regional exchanges accounted for no more than an average 5%
of the total trading volume for days two through five. In view of the
small amount of volume at issue, the study concluded that eliminating
the one-day delay should not have a major impact on the market as a
whole. The study also observed that the current ban on first day
trading puts regional exchanges at a competitive disadvantage vis-a-vis
the third market, which is not subject to the one-day delay.
II. Discussion
A. Introduction
The Commission preliminarily believes that there is an absence of
significant evidence that the delay protects the markets and that,
accordingly, there is no justification for the continuance of the one-
day trading delay. Recent experience appears to support changing the
rule. The one-day trading delay appears to provide no real benefits to
the market for IPOs and actually inhibits competition among markets.
The lack of any problems over the last four years with reducing the
waiting period from two days to one day supports this conclusion.\23\
In addition, the 1998 study discussed above provides further evidence
that the one-day trading delay should be eliminated or reduced.
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\23\ While there have been frequent questions regarding which
transactions qualify as IPOs under the rule, there have not been
significant problems in terms of IPO pricing.
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As noted above, when the Commission first considered this issue in
1995, two commenters supported a two-day waiting period for IPOs,
arguing that IPOs would not have an orderly distribution and that there
would be increased price volatility on these two days. This, however,
has not turned out to be a concern on the second trading day as
evidenced by the successful trading since 1995 of IPO securities on the
second trading day by multiple markets. Therefore, based on this
experience and the 1998 Study, the Commission proposes to allow
exchanges to extend UTP to IPO securities after the first trade on the
listing market is reported to the Consolidated Tape.
B. Proposed Amendment
The Commission is proposing an amendment to Rule 12f-2(a) \24\ to
provide that an exchange may extend UTP to a listed IPO security when
at least one transaction in the subject security has been effected on
the listing exchange and the transaction has been reported pursuant to
an effective transaction reporting plan as defined in Rule 11Aa3-1
under the Act.\25\ The proposed rule would reduce the mandatory waiting
period (or ``interval,'' as it is described in the Act) for extending
UTP in listed securities from one trading day, as specified in the
current Rule 12f-2(a), to the time that it takes to effect and report
the initial trade in the security on the listing exchange.
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\24\ 17 CFR 240.12f-2(a).
\25\ 17 CFR 240.11Aa3-1. The remaining paragraphs of Rule 12f-2,
paragraphs (b) and (c), which currently define subject securities
and require that the extension of UTP to an IPO security comply with
all the other provisions in Section 12(f), and the rules thereunder,
would remain unchanged.
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The Commission believes that it is appropriate to minimize
regulatory restraints on competition for trading listed IPO securities.
The proposed rule change should enhance the ability of exchanges to
compete for order flow in these securities, especially in light of the
fact that OTC dealers and alternative trading systems may already trade
IPO securities immediately upon effective registration with the
Commission. The Commission sees no compelling reason to maintain a
restriction that inhibits competition among the exchanges.
Moreover, the 1995 and 1998 studies show no evidence that the one-
day trading delay provides any tangible benefits to market quality. In
fact, the 1998 Study suggests that greater price volatility actually
exists on the first day of an IPO with the trading delay in place. The
1998 Study examined both bid-ask spreads and price volatility and
[[Page 69979]]
was unable to determine that there was an adverse impact on market
quality resulting from the trading of IPO securities in multiple
markets.\26\ Especially in view of the rapidly expanding choices that
investors have for trade execution, placing unnecessary restrictions on
some markets in favor of others tends to hamper competition. While the
listing exchange should have the benefit of listing the IPO, other
markets should be permitted to provide a place for investors to trade
those securities.
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\26\ The Commission recognizes that the number of IPOs studied
was limited due to the low number of multiple IPO listings and the
current restrictions. The Commission still preliminarily believes
that the study's methodology is reasonable. For the definition of
``IPO,'' see note 4, supra.
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In 1995, the Commission expressed concern about maintaining the
delay but decided that prudence dictated a cautious approach. After
several years of experience with the one-day trading delay and analysis
of the impact, the Commission preliminarily believes that it is now
appropriate to lift the one-day trading delay for IPOs.
At the same time, the Commission preliminarily believes it
necessary to retain a minimal, one trade waiting requirement before
non-listing exchanges may begin trading. The first transaction in an
IPO, as disseminated on the Consolidated Tape, conveys essential
information to the public concerning the price of the security set by
the underwriting process. In addition, the timing of the initial trade
and commencement of trading in a new issue entail significant
coordination involving the issuer, the listing exchange, and the
underwriters of the public offering of the security. If competing
exchanges were to allow their members to trade a listed IPO security
before it initially traded on the listing exchange, it could be
difficult to ensure that all the preparation for the IPO had been
completed before public trading in the security commenced.\27\
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\27\ On December 9, 1999, Commission staff issued a no-action
letter to the regional exchanges clarifying the definition of IPO
for purposes of Rule 12f-2. The no-action letter would permit the
regional exchanges to begin trading securities in certain
``technical IPO'' transactions on the same day those securities
begin trading on another exchange on which they are listed. The no-
action letter identifies six examples of offerings that meet the
definition of IPO under Section 12(f) of the Act, but that are not
traditional, first time capital raising efforts. These examples
involve offerings of securities to an existing class of security
holders rather than an initial offering of shares to the general
public in exchange for cash. See letter from Annette L. Nazareth,
Director, Division of Market Regulation, SEC, to Paul B. O'Kelly,
Executive Vice President, Market Regulation and Legal, The Chicago
Stock Exchange, dated December 9, 1999.
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C. Solicitation of Comments
The Commission seeks comment on the one trade waiting period as
proposed. To the extent that commenters believe that the current one
day waiting period should remain unchanged, the Commission encourages
commenters to submit specific data illustrating the need to retain the
current waiting period. In addition, should a commenter believe that a
different interval should be used, the commission encourages commenters
to submit specific data supporting that belief. Relevant data might
include the potential negative effects on the pricing of an IPO. The
Commission also seeks comment on whether any changes to the
consolidated quotation system or trade reporting systems should be made
as a result of reducing the waiting interval from one day to the first
trade on the listing exchange. In addition, the Commission solicits
comment on the possible impact in trading and whether additional
procedures or enhancements may be necessary to ensure that a UTP market
does not commence trading prior to the first trade on the listing
exchange.
III. Costs and Benefits of the Proposed Amendments
The Commission is considering the costs and benefits of the
proposed amendment to the Rule. In terms of potential benefits to
market participants should the proposal be adopted, the proposed
amendment would allow UTP exchanges to compete with the listing
exchange and the third market for order flow on the first day an IPO
starts trading. Investors benefit when more participants offer
liquidity to the market. The proposed amendment would also reduce
compliance costs for UTP exchanges because they would not be required
to analyze transactions to determine which ones are IPOs under the
statutory definition and subject to the current one-day delay. As long
as they wait for one trade on the listing exchange, UTP exchanges would
be free to extend UTP to that security. In addition, issuers would
benefit from wider distribution of IPO securities and greater
opportunities for price discovery.
The proposed amendment could impact the listing exchanges because
they would lose a one-day trading advantage over other exchanges. In
addition, the members of the listing exchange could lose business
because order flow might be lost to other exchanges. The Commission
does not anticipate any other direct or indirect costs to U.S.
investors or other market participants because the rule would impose no
recordkeeping or compliance burdens.
The Commission requests comment on the costs and benefits of the
proposed amendment to Rule 12f-2(a). In particular, the Commission asks
commenters to address what, if any, effect the proposed rule amendment
could have on exchanges and their members and whether the proposed
amendment would generate the anticipated benefits or impose any costs
on market participants. In addition, the Commission asks commenters to
address what, if any, effect the proposed rule amendment could have on
issuers and other market participants.
IV. Initial Regulatory Flexibility Analysis
This Initial Regulatory Flexibility Analysis (``IRFA'') is being
prepared in accordance with Section 3(a) of the Regulatory Flexibility
Act (``RFA'').\28\ It relates to a proposed amendment to Rule 12f-2(a)
\29\ under the Exchange Act. The proposed amendment would permit
exchanges to extend UTP to an IPO security listed on another exchange
after the first trade on the listing exchange is reported to the
Consolidated Tape, rather than waiting one full trading day as
currently required.
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\28\ 5 U.S.C. 603(a).
\29\ 17 CFR 240.12f-2(a).
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A. Reasons for and Objectives of the Proposed Actions
This amendment is proposed to further the purposes of Section
11A(a)(1)(D) of the Exchange Act \30\ by fostering efficiency,
enhancing competition, increasing the amount of information available
to brokers, dealers, and investors, facilitating the offsetting of
investors' orders, and contributing to best execution of those orders.
The proposal would address a barrier to competition that currently
operates as a restriction on trading activity. Under the current one-
day trading delay, exchanges that do not list IPOs are unable to
compete with electronic trading systems and the third market for order
flow. The proposed rule change would facilitate competition among
various markets for order flow and enhance investor options for order
execution. The one-day trading delay does not appear to provide any
significant benefit to the marketplace, but rather appears to create a
barrier to competition. The proposed rule amendment would improve
competition and investor choice.
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\30\ 15 U.S.C. 78k-1(a)(1)(D).
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[[Page 69980]]
B. Legal Basis
Sections 12(f)(1)(C) and 12(f)(1)(D) provide the Commission with
rulemaking authority to prescribe procedures or requirements for
extending UTP to any security. In addition, Section 11A(a)(1)(D) sets
forth objectives for linked markets that the Commission should pursue.
These include fostering efficiency, enhancing competition, increasing
the amount of information available to brokers, dealers, and investors,
facilitating the offsetting of investors' orders, and contributing to
best execution of those orders. The changes to Rule 12f-2(a) are also
proposed under the Commission's authority set forth in Section 23(a) of
the Exchange Act.
C. Small Entities Subject to the Rule
The proposal would directly affect the national securities
exchanges, none of which is a small entity. Paragraph (e) of the Rule
0-10 \31\ states that the term ``small business,'' when referring to an
exchange, means any exchange that has been exempted from the reporting
requirements of Sec. 240.11Aa3-1. Thus there would be no impact for
purposes of the RFA on small businesses.
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\31\ 17 CFR 240.0-10(e).
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D. Reporting, Recordkeeping, and Other Compliance Requirements
The proposal would not impose any new reporting, recordkeeping, or
other compliance requirements on exchanges, or entities indirectly
affected by the proposal.
E. Duplicative, Overlapping or Conflicting Federal Rules
The Commission believes that there are no rules that duplicate,
overlap, or conflict with the proposed rules.
F. Significant Alternatives
The RFA directs the Commission to consider significant alternatives
that would accomplish the stated objectives, while minimizing any
significant economic impact on small entities. In connection with the
proposal, the Commission considered the following alternatives: (1) The
establishment of differing compliance or reporting requirements or
timetables that take into account the resources available to small
entities; (2) the clarification, consolidation, or simplification of
compliance and reporting requirements under the Rule for small
entities; (3) the use of performance rather than design standards; and
(4) an exemption from coverage of the Rule, or any part thereof, for
small entities.
The Commission believes that none of the above alternatives is
applicable to the proposed amendment. The exchanges are directly
subject to the requirements of Rule 12f-2(a) and are not ``small
entities'' because they are all national securities exchanges that do
not meet the definition of small entity. Therefore, the Commission does
not believe the alternatives are applicable in the present proposal.
G. Solicitation of Comments
The Commission encourages the submission of comments with respect
to any aspect of this Initial Regulatory Flexibility Analysis. In
particular, the Commission seeks comment on: (i) The number of small
entities, if any, that would be affected by the proposed rule; and (ii)
the impact that the proposed amendment would have, if any, on such
entities. Such comments will be considered in the preparation of the
Final Regulatory Flexibility Analysis, if the proposed amendment is
adopted, and will be placed in the same public file as comments on the
proposed rules themselves. Comments should be submitted in triplicate
to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450
Fifth Street, N.W., Washington, D.C. 20549-0609. Comments also may be
submitted electronically at the following E-mail address: comments@sec.gov. All comment letters should refer to File No. S7-29-
99; this file number should be included on the subject line if E-mail
is used. Comment letters will be available for public inspection and
copying in the Commission's Public Reference Room, 450 Fifth Street,
N.W., Washington, D.C. 20549. Electronically submitted comment letters
also will be posted on the Commission's Internet web site (http://
www.sec.gov).
V. Paperwork Reduction Act
The Paperwork Reduction Act does not apply because the proposed
amendment does not impose recordkeeping or information collection
requirements, or other collections of information that require the
approval of the Office of Management and Budget under 44 U.S.C. 3501 et
seq.
VI. Effects on Competition, Efficiency, and Capital Formation
Section 23(a)(2) of the Exchange Act \32\ requires the Commission,
when promulgating rules under the Act, to consider the anti-competitive
effects of such rules. Moreover, Section 3 of the Exchange Act,\33\ as
amended by the National Securities Markets Improvement Act of 1996,\34\
provides that whenever the Commission is engaged in a rulemaking and is
required to determine whether an action is necessary or appropriate in
the public interest, the Commission must consider, in addition to the
protection of investors, whether the action will promote efficiency,
competition, and capital formation. The Commission notes that the 1998
Study submitted by the regional exchanges in support of their
rulemaking petition appears to indicate that the rule change would
promote competition.
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\32\ 15 U.S.C. 78w(a)(2).
\33\ 15 U.S.C. 78c.
\34\ Pub. L. No. 104-290, 110 Stat. 3416 (1996).
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The Commission requests comment on any anti-competitive effects the
proposed rule change may have on national securities exchanges,
associations, third markets, order routing firms, investors, issuers,
and other market participants. As stated above, the Commission also
notes that it has received a study that appears to indicate that the
proposed rule change would promote competition. The Commission requests
comment on, and appropriate data regarding the impact of, the proposed
rule change would promote efficiency, competition, and capital
formation.
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996, the Commission is also requesting information regarding
the potential impact of the proposed rule on the economy on an annual
basis. Commentators should provide empirical data to support their
views.
VII. Statutory Authority
The rule amendments in this release are being proposed pursuant to
15 U.S.C. 78 et seq., particularly Sections 11A(a)(1)(D), 12(f)(1)(C),
12(f)(1)(D), and 23(a) of the Exchange Act, 15 U.S.C. 78k-1,
78l(f)(1)(C), 78l(f)(1)(D), 78w(a).
List of Subjects in 17 CFR Part 240
Reporting and recordkeeping requirements, Securities.
For the reasons set out in the preamble, the Commission proposes to
amend Part 240 of Chapter II of Title 17 of the Code of Federal
Regulations as follows:
PART 240-GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
1. The authority citation for Part 240 continues to read in part as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77eee,
77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78j-1, 78k,
78k-1, 78l,
[[Page 69981]]
78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll(d), 78mm, 79q,
79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4 and 80b-11, unless
otherwise noted.
* * * * *
2. Section 240.12f-2 is amended by revising paragraph (a) to read
as follows:
Sec. 240.12f-2 Extending unlisted trading privileges to a security
that is the subject of an initial public offering.
(a) General Provision.--A national securities exchange may extend
unlisted trading privileges to a subject security when at least one
transaction in the subject security has been effected on the national
securities exchange upon which the security is listed and the
transaction has been reported pursuant to an effective transaction
reporting plan, as defined in Sec. 240.11Aa3-1.
* * * * *
Dated: December 9, 1999.
By the Commission.
Jonathan G. Katz,
Secretary.
[FR Doc. 99-32472 Filed 12-14-99; 8:45 am]
BILLING CODE 8010-01-U
