[Federal Register Volume 60, Number 245 (Thursday, December 21, 1995)]
[Notices]
[Pages 66329-66333]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-31087]
=======================================================================
-----------------------------------------------------------------------
[[Page 66330]]
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36594; File No. SR-Amex-95-29]
Self-Regulatory Organizations; American Stock Exchange, Inc.;
Order Approving Proposed Rule Change and Notice of Filing and Order
Granting Accelerated Approval to Amendment No. 1 to Proposed Rule
Change Relating to Bond Listing Standards
December 14, 1995.
I. Introduction
On July 19, 1995, the American Stock Exchange, Inc. (``Amex'' 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 to revise its standards for the
listing and delisting of debt securities. On December 12, 1995, the
Amex submitted to the Commission Amendment No. 1 to the proposed rule
change.\3\
\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ 17 CFR 240.19b-4 (1994).
\3\ See letter from Claudia Crowley, Amex, to Glen Barrentine,
Senior Counsel, Division of Market regulation, SEC, dated December
12, 1995. Amendment No. 1 supplemented the proposal by specifying
that (1) the underlying equities of listed convertible debt must be
subject to real-time last sale reporting in the United States, (2)
specialists assigned to municipal debt must comply with MSRB Rule G-
3, (3) municipal securities will not be subject to off-board trading
restrictions, and (4) unrated debt securities of unaffiliated
issuers may be listed if an NRSRO has currently assigned an
investment grade rating to an immediately senior issue by the same
company.
---------------------------------------------------------------------------
The proposed rule change was published for comment in Securities
Exchange Act Release No. 36225 (September 13, 1995), 60 FR 48734
(September 20, 1995). No comments were received on the proposal. This
order approves the proposed rule change, including Amendment No. 1 on
an accelerated basis.
II. Description of the Proposal
Section 104 of the Amex's Company Guide sets forth the current
standards for listing bonds and debentures. Presently, the Amex will
consider listing a debt security if: (1) The company appears to be in a
financial position sufficient to satisfactorily service the debt issue;
(2) the issuer meets the size and earnings guidelines applicable to
issuers listing common stock; \4\ and (3) the issue has an aggregate
market value and principal amount of at least $5 million for issuers
that have common stock listed on the Amex or the New York Stock
Exchange (``NYSE''), or at least $20 million and 100 holders for
issuers that do not have securities listed on the Amex or NYSE. The
Amex presently gives consideration to delisting a bond issue if the
aggregate market value or principal amount falls below $400,000. For
convertible debt, continued listing is dependent upon the underlying
security remaining in compliance with the Amex's numerical criteria for
that security.
\4\ The Amex guidelines provide for the issuer to have
stockholders' equity of at least $4,000,000 and pre-tax income of at
least $750,000 in its last fiscal year, or in two of its last three
fiscal years.
---------------------------------------------------------------------------
The Amex proposes to amend its standards for the listing of debt
securities with a view towards making the Exchange more accessible to
debt issuers and facilitating the listing of such securities.\5\
Specifically, the proposal eliminates the requirements that the issuer
demonstrate that it will be able to satisfactorily service the debt
issue, and that the issuer meet the size and earnings guidelines
applicable to companies listing common stock. The proposal also removes
the requirement that issuers that do not have securities listed on the
Amex or NYSE have at least 100 holders and an aggregate market value
and principal amount of $20 million. Finally, the proposal modifies the
current aggregate market value and principal amount requirement by
stating that the issuer must have at least $5 million in aggregate
market value or principal amount.
\5\ The Commission notes that the new guidelines for listing
debt securities are substantially similar to the NYSE's debt listing
standards, which the Commission approved in Securities Exchange Act
Release No. 34019 (May 5, 1994), 59 FR 24765 (May 12, 1994).
---------------------------------------------------------------------------
In place of the current guidelines, the proposal provides that the
Amex may list an issuer's debt securities if an issuer of an equity
security listed on the Amex or NYSE is in ``good standing'' with the
respective exchange,\6\ and has an aggregate market value or principal
amount of at least $5 million. This standard also will apply to an
issuer that is owned by, or under common control with, an issuer of
equity securities listed on the Exchange or the NYSE (``listed
issuer''); and to an issuer whose debt securities are guaranteed by a
listed issuer.
\6\ A company is in ``good standing'' if it is above the
relevant continued listing guidelines.
---------------------------------------------------------------------------
In contrast, debt securities of an ``unaffiliated'' issuer \7\ will
not be eligible for initial listing on the Amex unless a nationally
recognized securities rating organization (``NRSRO'') has assigned a
certain minimum rating to the bonds (or to other bonds issued by the
same company). Specifically, debt securities of an unaffiliated issuer
will not be eligible for initial listing on the Amex unless:
\7\ An unaffiliated issuer is one that has no equity securities
listed on the Amex or NYSE; is not, directly or indirectly,
majority-owned by, nor under common control with, an issuer of Amex
or NYSE-listed equity securities; and is not issuing a debt security
guaranteed by an issuer of equity securities listed on the Amex or
NYSE.
---------------------------------------------------------------------------
An NRSRO has assigned a current rating to the debt
security that is no lower than a Standard and Poor's (``S&P'')
Corporation ``B'' rating or an equivalent rating by another NRSRO;
or
If no NRSRO has assigned a rating to the issue, an
NRSRO has currently assigned an investment grade rating to an
immediately senior issue,\8\ or a rating that is no lower than an
S&P Corporation ``B'' rating (or an equivalent rating by another
NRSRO) to a pari passu\9\ or junior issue.
\8\ To be investment grade, an issue must be assigned a rating
no lower than an S&P Corporation rating of ``BBB-'' (or another
NRSRO's equivalent thereof). The Amex amended the proposal to
specify that it will apply this standard only to unrated bonds that
are immediately junior to another rated class of securities issued
by the same company. See Amendment No. 1, supra note 3.
\9\ A pari passu issue has equal standing with the debt issue
proposed to be listed.
---------------------------------------------------------------------------
As under its current rules, the Amex will give consideration to
delisting a bond issue if the issuer is unable to meet its obligations
on the listed debt, or if the debt's aggregate market value or
principal amount falls below $400,000. The Amex proposal amends the
delisting standards to clarify that any debt issuer that is unable to
meet its obligation on the listed debt securities may be delisted. In
applying this standard, the Exchange states that it normally will not
delist the debt if there is value in the security and continued
Exchange trading is in the best interests of investors.\10\ However, if
an issuer is unable to meet its financial obligations and there is
minimal or no value in the security, the Exchange will give serious
consideration to delisting the debt issue.\11\ The Exchange states that
it also will consider delisting debt that was listed based on the
issuer being either majority-owned or guaranteed by an Amex or NYSE
issuer when the equity securities of such owner or guarantor are
delisted.\12\
\10\ See Securities Exchange Act Release No. 36225 (September
13, 1995), 60 FR 46734 (September 20, 1995) (notice of this proposed
rule change).
\11\ Id.
\12\ Id.
---------------------------------------------------------------------------
Convertible bonds will be reviewed for continued listing when the
underlying equity security is delisted, and will be delisted when the
related security is no longer subject to real-time last sale reporting
in the United States.\13\ Further, if the underlying equity
[[Page 66331]]
security is delisted due to a violation of the Amex ``corporate
responsibility'' criteria (including, but not limited to, the outside
director, audit committee and shareholder voting requirements),\14\ the
Exchange will delist all debt securities convertible into that equity
security.
\13\ See Amendment No. 1 supra note 3 (specifying that last
trade reporting must be available in the United States).
\14\ See Sections 121-123 of the Amex's Company Guide.
---------------------------------------------------------------------------
The Amex also proposes to simplify the listing process for debt
issuers by reducing the number of documents that an applicant must file
in support of its debt listing application. Specifically, the Exchange
will eliminate the schedule of distribution and the listing resolution.
In addition, the Exchange will no longer require that trustees certify
certain issuer-specific information.
Finally, the Amex is adopting a new rule to permit the listing of
municipal and sovereign debts (i.e., debt issued by foreign
governments, and by American states, localities, or government
agencies).\15\ The Exchange will evaluate whether to list there issuers
on a case-by-case basis and will treat the issuer as an
``unaffiliated'' corporate issuer for purposes of the initial listing
guidelines described above. Municipal debt will be subject to the same
delisting standards as corporate debt. The Amex will assign municipal
securities accepted for listing on the Exchange to specialists that
will trade the securities in accordance with all Amex regulations
otherwise applicable to the trading of securities on the trading
floor.\16\ All Exchange contracts in municipal securities will be
compared, settled and cleared in accordance with the applicable
regulations of the Municipal Securities Rulemaking Board (``MSRB'').
\15\ This does not include debt issued or guaranteed by the
United States Government or agencies thereof that presently may be
admitted to dealings on the Exchange pursuant to Amex Rule 140.
\16\ The Amex intends to require specialist units applying for
appointment and registration in municipal securities to be in
compliance with MSRB Rule G-3 regulations regarding municipal
securities principals and representatives. See Amendment No. 1 supra
note 3. The National Association of Securities Dealers, Inc.
(``NASD'') has authority to enforce MSRB rules for listed municipal
securities. The Amex enforcement in this regard will not preempt or
limit in any manner the NASD's authority to act in this area.
---------------------------------------------------------------------------
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).\17\ Specifically,
the Commission believes the proposal is consistent with the Section
6(b)(5) 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 interest.
\17\ 15 U.S.C. 78f(b) (1988).
---------------------------------------------------------------------------
The development and enforcement of adequate standards governing the
initial and continued listing of securities on an exchange is an
activity of critical importance to financial markets and the investing
public. Listing standards serve as a means for a self-regulatory
organization to screen issuers and to provide listed status only to
bona fide companies with sufficient float, investor base and trading
interest to maintain fair and orderly markets. Once a security has been
approved for initial listing, maintenance criteria allow an exchange to
monitor the status and trading characteristics of that issue to ensure
that it continues to meet the exchange's standards for market depth and
liquidity. For the reasons set forth below, the Commission believes
that the proposed rule change will provide the Amex with greater
flexibility in determining which debt securities warrant inclusion in
its bond trading and disclosure systems, while continuing the
protections that the Exchange's listing standards provide investors.
After careful review, the Commission has concluded that the
proposed initial listing standards should help the Amex to ensure that
only substantial companies capable of meeting their financial
obligations are eligible to have their debt listed on the Exchange. As
before, the proposed rule change will require that the Amex evaluate an
issuer's ability to cover the interest charges on its debt securities.
Although the Exchange currently makes this interest coverage
determination itself,\18\ the amended standards will rely instead on
either the issuer's relationship with the Amex of NYSE, or the debt's
NRSRO rating.
\18\ As noted above, the current listing standards require that
a company appear to be in a financial position sufficient to
satisfactorily service in the debt issue to be listed.
---------------------------------------------------------------------------
The Commission agrees that, to the extent that the Amex and the
NYSE have adequate listing standards for common stock, the Amex
reasonably may assume that listed companies (and certain affiliates
thereof) should not pose a significant risk of defaulting on their
obligations so long as the companies remain in ``good standing'' on the
exchanges. Moreover, debt securities enjoy seniority over equity
securities. Because the Amex (or NYSE) presumably would not have listed
the junior equity issue unless it was satisfied with the quality of the
company, the Commission believes it is reasonable for the Amex to
assume that the senior debt issue also warrants listed status.
For ``unaffiliated'' issuers, the Commission finds that it is not
unreasonable for the Exchange to defer to the expertise of an NRSRO,
rather than conducting its own analysis of the company's financial
condition, as is presently the case. Although the Commission would be
concerned by any potential misuse of NRSRO ratings, the Commission
notes that the NRSROs routinely evaluate interest coverage, among other
things, when they rate bonds. In addition, their methodology
incorporates extrinsic factors, such as characteristics of the issuer's
industry group. The Commission therefore agrees with the Exchange that,
under these circumstances, NRSRO ratings can be relied upon for
determinations about the creditworthiness of issuers.
Moreover, the Commission is satisfied that the distinctions in
NRSRO ratings drawn by the Amex are valid.\19\ According to the S&P
Corporation's debt rating definitions,\20\ bonds rated ``B'' (or
higher) currently have the capacity to meet interest payments and
principal repayments, whereas bonds rated ``CCC'' (or lower) are
dependent upon favorable business, financial or economic conditions to
meet timely payments of interest and repayment of principal. The
Commission also believes that it is logical for the Amex to assume that
an unrated debt issue which is pari passu with (or senior to) an issue
with at least a ``B'' rating would, if rated, receive an equal (or
higher) rating. Finally, to permit the Amex to list unrated bonds that
are immediately junior to an investment grade issue is appropriate
because those bonds generally would be rated no more than one rating
category lower (i.e., a S&P Corporation ``BB'' rating).\21\
\19\ The Commission notes that the NRSRO ratings being adopted
by the Amex are the same standards as the Commission approved for
the NYSE in Securities Exchange Act Release No. 34019, supra note 5.
\20\ See Standard & Poor's High Yield Directions, January 1994.
\21\ Id.
---------------------------------------------------------------------------
As for the other provisions in the proposal, the Commission finds
that they strike an appropriate balance between protecting investors
and enhancing the flexibility of the debt listing process. For
instance, the proposed rule change provides that, to be eligible for
listing, a bond issue must have an aggregate market value or
[[Page 66332]]
principal amount of at least $5 million. This should enable the Amex to
deny listed status to companies whose securities do not have sufficient
liquidity for a fair and orderly market, without infringing upon bona
fide issuers' access to the Exchange's bond trading and disclosure
systems.
Conversely, the Commission does not believe that eliminating the
distribution requirement for unaffiliated issuers will have a
significant adverse effect on investors in the bond market. In the
past, the Commission has recognized that such information may be
difficult to estimate accurately and may be relatively less pertinent
than other factors.\22\ Additionally, the Commission believes that the
proposed elimination of certain documents that the Exchange currently
requires from applicants is reasonable. Specifically, the Exchange is
eliminating the schedule of distribution because distribution is no
longer a listing guideline, and the listing resolution because it is
essentially ceremonial in nature and does not serve any significant
purpose.\23\ The Amex also will cease to require that trustees certify
issuer-specific information. Accordingly, the Exchange only will
require that the certificate show the trustee's acceptance of the
trust.\24\
\22\ See Securities Exchange Act Release No. 32909 (September
15, 1993), 58 FR 49537 (September 23, 1993) (File No. SR-NYSE-93-21)
(approving amendments to Paragraph 703.06 of the NYSE's Listed
Company Manual to eliminate requirement that distribution
information be submitted as supporting document to debt listing
application).
\23\ The Exchange will continue to require an opinion of counsel
that the issuance of the debt has been approved by the company's
board of directors. See Section 213.6(c) of the Amex's Company
Guide. Not requiring a listing resolution is consistent with NYSE
procedures. See Paragraph 703.06 of the NYSE's Listed Company
Manual.
\24\ This is consistent with NYSE requirements. See Paragraph
703.06 of the NYSE's Listed Company Manual.
---------------------------------------------------------------------------
In terms of the delisting criteria, the Commission has concluded
that the revised standards should enable the Amex to identify listed
companies that may have insufficient resources to meet their financial
obligations or whose debt securities may lack adequate trading depth
and liquidity. This, in turn, will allow the Exchange to take
appropriate action to protect bondholders. The Amex delisting
standards, however, do not include a minimum market value for debt
securities. The Exchange states that if an issuer is unable to meet its
financial obligations and there is minimal or no value in the security,
the Exchange will give serious consideration to delisting the debt
issue.\25\ As the Commission discussed in its approval of similar debt
standards for the NYSE,\26\ the Commission expects the Amex to consider
carefully the propriety of continued exchange trading of the securities
of bankrupt or distressed companies,\27\ and expects debt securities
with minimal value to be delisted.
\25\ See Securities Exchange Act release No. 36225, supra note
10.
\26\ See Securities Exchange Act Release No. 34019, supra note
5.
\27\ For example, the Commission believes that the Amex should
delist the debt of companies in bankruptcy that file a plan of
reorganization providing no recovery for debt holders.
---------------------------------------------------------------------------
In addition, the Amex will delist convertible bonds whenever the
underlying equity security is no longer subject to real-time last sale
reporting in the United States.\28\ If the related equity merely moves
from the Amex to another market, it is not inconsistent with the Act
for the Exchange to have discretion to continue listing the convertible
debt. This would not be the case, however, if the underlying security
is delisted because the issuer violated one of the Amex's corporate
responsibility criteria. As a general matter, the Commission would have
serious concerns about any proposal that does not provide for the
delisting of convertible bonds where a company acts to disadvantage its
shareholders. The Amex proposal addresses this concern by including in
its guidelines that the Exchange will delist convertible bonds when the
issuer's equity security is delisted due to a violation of the
Exchange's corporate governance listing standards.\29\
\28\ See Amendment No. 1, supra note 3 (specifying that last
trade reporting must be available in the United States).
\29\ See supra note 14 and accompanying text.
---------------------------------------------------------------------------
Finally, the Commission believes that the Amex's initial listing
and delisting criteria are appropriate for determining whether
municipal debt should be trading on the Exchange. Because municipal
securities will trade under the Amex's existing regulatory regime for
trading securities (which includes specialist obligations, margin
requirements, and surveillance programs), the Commission believes that
adequate safeguards are in place to ensure the protection of investors
in municipal securities.\30\
\30\ The Amex confirmed in Amendment No. 1, supra note 3, that
municipal securities will not be subject to off-board trading
restrictions.
---------------------------------------------------------------------------
The Commission notes that the MSRB's regulatory scheme for the
comparison, settlement, and clearing of municipal securities will
continue to apply to municipal securities listed on the Amex.
Additionally, the Amex will require specialist units applying for
appointment and registration in municipal securities to be in
compliance with MSRB Rule G-3 regarding municipal securities principals
and representatives.\31\ The Commission believes that it is important
that any specialist selected by the Amex for a listed municipal
security be familiar with the characteristics of such security.
\31\ See Amendment No. 1, supra note 3.
---------------------------------------------------------------------------
The Commission finds good cause for approving Amendment No. 1 prior
to the thirtieth day after the date of publication of notice of filing
thereof. Amendment No. 1 clarifies and codifies the intent of certain
language used in the original filing. Finally, the Commission did not
receive any comments on the original proposal,\32\ which was noted for
the full statutory period, nor did it receive comments on a similar
NYSE proposal that was also noticed for the full statutory period.\33\
\32\ See Securities Exchange Act Release No. 36225, supra note
10.
\33\ See Securities Exchange Act Release No. 34019, supra note
5.
---------------------------------------------------------------------------
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 1 to the proposed rule change.
Persons making written submissions should file six copies thereof with
the Secretary, Securities and Exchange Commission, 450 Fifth Street,
NW, Washington, DC 20549. Copies of the submission, all subsequent
amendments, all written statements with respect to the proposed rules
change that are filed with the Commission, and all written
communications relating to Amendment No. 1 between the Commission and
any persons, 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,
450 Fifth Street, NW, Washington, DC 20549. Copies of such filing will
also be available at the principal office of the Amex. All submissions
should refer to File No. SR-Amex-95-29 and should be submitted by
January 11, 1996.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\34\ that the proposed rule change (SR-Amex-95-29), including
Amendment No. 1 on an accelerated basis, is approved.
\34\ 15 U.S.C. 78s(b)(2) (1988).
---------------------------------------------------------------------------
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\35\
\35\ 17 CFR 200.30-3(a)(12) (1994).
[[Page 66333]]
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-31087 Filed 12-20-95; 8:45 am]
BILLING CODE 8010-01-M
